States are best-placed to value new nuclear, says lawyer

28 July 2020

Only governments can properly value the benefits of nuclear power and their support is therefore necessary to secure financing for new-build projects, George Borovas, partner and head of nuclear at law firm Shearman & Sterling, said today. Borovas was speaking during an OECD-Nuclear Energy Agency webinar on its newly published Policy Brief, Unlocking financing for nuclear energy infrastructure in the COVID-19 economic recovery.

George Borovas, partner and head of nuclear at law firm Shearman & Sterling (Image: WNN)

"We often hear that government support is necessary, but it's important to understand why it's necessary," Borovas said. "The reason why you do nuclear in this day and age is that the benefits of nuclear energy are what I call sovereign in nature; only governments can properly value them."

Societal benefits

Such benefits include, he said: energy security; energy diversification; climate change mitigation; industrial development; promoting higher education and highly trained workforces; promoting research and development; sustainability; and long-term benefits.

"You can't put these benefits into the economics of a specific project. A banker doesn’t say, 'I'm going to get energy security and therefore can make more money', so it's governments and society in general that benefit from the development of a nuclear project," he said.

Nuclear financing is thus a "unique investment model", he said.

"Nuclear power employs many of the same sources of financing as traditional project financings, with a combination of debt and equity, some commercial banks, investment funds and export credit agencies. However, the unique risk profile of nuclear power projects restricts the use of limited or non-recourse funding as a significant model for investment." he said.

Nuclear financing also requires "alignment" among a variety of stakeholders, such as industry, environmental groups, the public and various other advocacy organisations.

"State support is really the key factor in obtaining sufficient capital to fund a nuclear project, requiring financial, regulatory, legal, social and environmental investments," he said. The US International Development Finance Corporation's recently announced policy change towards nuclear projects is a "major development", he said, which should help facilitate a "renewed discussion" among other development finance institutions and multilateral development banks.

"A lot of organisations we've seen in the past have policies against nuclear, sometimes understandable, sometimes not understandable, but at least there has to be a discussion about why the policy is there. It can't just be, 'Well we just don't do nuclear'. It's an important issue where you're looking at climate change, at pollution and at the post-COVID world. These infrastructure projects that are looking at societal benefits are specifically the kind of projects that these multilateral development banks are there to support and fund."

Minimising risk

Investors in infrastructure projects normally look at two categories of risk, he said.

The first, financial risk, is primarily driven by: historical/current experience of project delay and cost overruns; long-term regulatory and power market uncertainty; the need for long-term human resources development; a significant amount of finance and long development/construction periods; and nuclear liability.

The second, reputational risk, is primarily driven by: social perceptions associated with nuclear power; political risk and public acceptance issues; post-Fukushima environment and nuclear safety concerns; nuclear non-proliferation; radioactive waste management/disposal and historical/current experience of project delay and cost overruns.

To attract investors, the risks of a new nuclear project need to be minimised.

"There has to be a demonstrable safety culture or regulators will delay a project," he said. "There needs to be a complete detailed design with a recently constructed reference plant using a proven supply chain and construction team. The proper approach is not to go for ‘the newest’, or ‘the best’, but to go for something you know works and then try to replicate it as much as possible."

Another risk that can be minimised is vendor management, which means having an integrated project delivery team with key personnel experienced in building nuclear power projects and experienced sub-contractor networks.

"You don't want people doing things for the first time; you want to know the people who will be leading the project have done this before, that they've built the technology before and will replicate their previous experience. And also you want them to be using the same supply chain to the greatest extent possible," he said.

The project owner's experience in managing large construction projects is also important. "A lot of countries are excited about new nuclear and you look at their experience of handling large infrastructure projects is not there sometimes and that’s a big problem," he said. "Sound project management is the best way to minimise risk. That means a project is implemented by the vendor with 'hands off' leadership by the owner. You have to allow the vendor to do what they know best."

This approach leads to an "owner-vendor partnership", he said, whereby "a good contract should be your guide and not a manual for filing claims".

There must be clear and established interface mechanisms with the regulator, which has to have the required capacity and capability, as well as ability to cooperate with other regulatory authorities.

There need to be host government and export government supporting structures, including bilateral nuclear cooperation on export controls, nuclear liability, industry participation and human resource development.

Transitional approach

The industry must think less in terms of 'newest is best' and instead consider a gradual journey to the next generation of reactor technology, he said.

"When we look at the fact that we’ve spent the last 15 years developing Gen III reactors, all the time that went into that, all the lessons learned, and now finally we have EPRs, AP1000s, VVERs and ABWRs [in operation], it seems crazy to me that we’re not making more of this. We just need to repeat them over and over again because the savings from replication are tremendous."

Borovas said he was "increasingly optimistic" for the industry thanks to the growing number of governments around that world that are considering nuclear power.

"Some have revisited it in the past and some had a post-Fukushima debate. I'm seeing now that things are changing rapidly and I think there’ll be an increased appetite for nuclear," he said.

Government support for new nuclear projects will encourage multilateral banks to provide financing and to help that process the nuclear sector should see itself as a "repeat industry" by replicating its successes and by looking at the current situation rather as a transition to the next generation of technologies, he said.

Researched and written by World Nuclear News