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Financing New Nuclear Power Stations : 

Financing New Nuclear Power Stations Andrew Porter Fuel for Thought, Nuclear Congress 2005 6-7 July 2005, Caerleon

Financing New Nuclear Power Stations: 

Financing New Nuclear Power Stations Approach of financiers in general Approach to nuclear in particular Market context and experience Reasons for success in Finland Possible ways forward

General Approach : 

General Approach

General Approach: 

General Approach Economics Rationale and Feasibility Return on Investment Competitiveness Risks Underlying How addressed Remaining Contracts Capability Enforceability Creditworthiness Financing Risk cushion Completion assurance Realistic horizon Greater risks mean higher cost of capital that can damage economics

What is Project Finance? - Definition: 

What is Project Finance? - Definition Where lenders can look solely to the cashflow generated by the project for repayment The assumptions used to forecast the cashflow can be independently verified Risk analysis can demonstrate that there is a very high probability of repayment (> 95%) and so that

It is Cashflow Based: 

It is Cashflow Based Real debt interest rate = 6% pa Base case: Project IRR 20% Cushion

It Can Absorb Risk: 

It Can Absorb Risk 25% cost overrun; Oil Price falls from 20$ to 15$; Project IRR 10% Cushion used Cushion remaining

Risks and Contracts: 

Risks and Contracts Three classes of risk: Technical Commercial Political Banks prepared to take all of these, if the cushion is sufficient If not, then risks must be addressed through contracts But contracts do not eliminate risk, only mitigate it to the extent: Party is capable and competent Party is willing to perform and contract can be enforced Party has financial strength to absorb the risk All these risks higher for nuclear and contracts more likely to be tested

Approach to Nuclear : 

Approach to Nuclear

Capital cost factors By horizon and cover ratio: 

Capital cost factors By horizon and cover ratio $/MWh Longer horizon Lower risk 1400 MW CCGT 500 $/kw

New Nuclear v CCGT 25 $/t carbon; 20 year horizon; 1.50 cover ratio: 

New Nuclear v CCGT 25 $/t carbon; 20 year horizon; 1.50 cover ratio $/MWh

New Nuclear v CCGT 5 $/t carbon; 40 year horizon; 1.75 cover ratio: 

New Nuclear v CCGT 5 $/t carbon; 40 year horizon; 1.75 cover ratio $/MWh

Conclusions Economics: 

Conclusions Economics New nuclear power plants potentially competitive with CCGT Depends on, for CCGT, impact on energy component of: Gas price Carbon price And for new nuclear: Capital cost Capitalisation effects of investment horizon and risk (cover ratio) Low fuel/high capacity cost structure gives relative cost certainty Only non-carbon power not requiring carbon-based backup But large investment required in face of great uncertainty

Risks: 

Risks Financing Commercial Political Technical

Market Context and Experience : 

Market Context and Experience

The Paradigm Shift: 

The Paradigm Shift

The Paradigm Shift: 

The Paradigm Shift

The Paradigm Shift: 

The Paradigm Shift

The Paradigm Shift: 

The Paradigm Shift

What is an IPP? The Contract Cradle: 

What is an IPP? The Contract Cradle

Reasons for Success in Finland : 

Reasons for Success in Finland

FIN5/Olkiluoto Critical Success Factors: 

FIN5/Olkiluoto Critical Success Factors Positive technical experience with very high availability Long-term waste storage solution agreed, implemented, and funded Broadly favourable public opinion Proper political process, winning vote in parliament Untidy nature of electricity supply industry Stable and committed organisation, management, and shareholders Finland joined Euro Background

FIN5/Olkiluoto Critical Success Factors: 

FIN5/Olkiluoto Critical Success Factors Functions as a consumer-owned generation utility Consumers concerned about both security of supply and competitiveness Operates cf upstream oil joint operating agreement: Shareholders take their share of “physical” electricity Shareholders must meet their several share of all TVO’s costs, including debt Debt effectively guaranteed collectively by consumers of power Diverse set of shareholders: Major industrial consumers Distributors Municipalities TVO Enabling Factors

FIN5/Olkiluoto Critical Success Factors: 

FIN5/Olkiluoto Critical Success Factors Embedded value of existing power station Financial strength of main shareholders Export credits potentially available Financing in Euro Low real interest rates High bank liquidity Favourable rating treatment of TVO and its shareholders Able to compete suppliers/designs/scope Favourable Factors

Possible ways forward: 

Possible ways forward

Conclusions Financing: 

Conclusions Financing New nuclear power plants readily project financeable in principle Need higher cover ratio than traditional IPPs to cover technical risks: Construction overrun – underlying risk together with target cost contracts Regulatory impact on outages due to safety cases and potential type faults But then the project shows resilience to price risk: The higher cover ratios arising from the technical risk The low fuel/variable costs enable continued price capture at low prices This in turn enables offtake contracts to be structured attractively… …minimising credit concerns regarding the offtakers… …and thereby encouraging a very long-term financing horizon.

However… Preconditions: 

However… Preconditions Need to create similar favourable environment as in Finland: Long-term political support for nuclear Public acceptability Clear long term waste disposal policy Streamlined planning and licensing processes Some recognition for carbon-free generation with long term certainty And similar commercial arrangements: Major consumers signing up to offtake Major portfolio energy suppliers Competition means that they are likely to move together Will they want to balance their portfolio across Europe?

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