The shift in financing new build

12 September 2014

The nuclear industry is undergoing a major shift – from one where projects were almost exclusively government owned and sponsored to one where private finance is being sought, George Borovas, partner at Shearman & Sterling LLP, said today.

George Borovas addressing at the WNA Annual Symposium (Image: WNA)

Borovas spoke at the World Nuclear Association's 2014 Symposium in London. Shearman & Sterling's nuclear projects group is intertwined with its finance group. Among the projects it is involved with, the firm is advising on the world's largest nuclear arbitration dispute - concerning Finnish utility Teollisuuden Voima Oyj over construction delays and budget overruns at the Olkiluoto 3 nuclear power plant in Finland.

"Today, and what we looking at in the future, are privately owned and sponsored projects, but, in our opinion, they will still require strong government support," Borovas said.

"Obviously, we are in a post-Fukushima environment where the risk profile of new nuclear has been elevated. And everything that is being built now really is first-of-a-kind technology, with a few exceptions. Once you have a few of these projects online then it’s going to be much different because we'll have some proven development and construction projects," he said. "Increasingly, another trend that we're seeing is toward international joint ventures to create these projects and we are looking at a global human resources requirement for the 'turn-key' approach, 'build-own-operate' models and significant operational support – which is particularly significant for emerging nuclear countries because they don't have the resources. New sources of finance are being sought and right now the leadership on that is coming from the export credit agencies."

The challenge for nuclear finance today is that there is no precedent or standard commercial financing model.

"We are starting to see the emergence of certain issues, like the requirement for vendor financing – so vendors are being asked to put equity into these projects, which is not a natural place for them to be because they don't think of themselves as project developers, but that's something we’ve seen in recent times – such as Kepco for Barakah in the UAE, Hitachi for Horizon and Toshiba for NuGen in the UK, and Westinghouse for Kozloduy in Bulgaria. And there's the Mankala model in Finland – but that is not suitable in all situations," he said.

"The focus today is mostly on export credit agency finance – the commercial banks are studying this but the risk profile of nuclear is difficult for them. The one that would be a natural place to see this kind of support is the multi-lateral organizations. Unfortunately most of them, the World Bank and the International Finance Corporation have written and unwritten policies against lending into nuclear. The exception is the European Investment Bank, which can lend with an affirmative decision of the European Commission under the Euratom Treaty. So the question is how are you going to attract other investors - with debt and equity - and what kind finance models are you going to produce to develop this support," he said.

Three approaches

The nuclear industry should take three main approaches to attracting commercial banks to power plant construction projects – engaging with them early on, speaking their language, and identifying solutions to de-risk any given project, Borovas said.

"For all of us in the project space, we need to engage with financial institutions early on. Too many times, and we've seen that with our clients, we have somebody who comes in, develops a project, starts talking about technology choice, starts creating contracts and then, after two to three years, they go to a bank for help with financing. The banker looks at them and says, 'I couldn't possibly finance this', and you have to go back to the drawing board. You need to get a bank's feedback on the project early on," Borovas said.

Potential lenders may also misinterpret the kind of terms commonly used by the nuclear industry, he said. For example, 'latest technology' to a banker can mean 'first-or-a-kind risk', while 'consortium' can mean 'interface risk'. "Speaking their language and not yours is important," he said.

To de-risk a project, project developers need to address two general categories of risk that a bank sees – financial and reputational.

"Financial risk – or 'Will I get my money back?' – is primarily driven by the industry's historical and current experience of project delays and cost overruns; long-term regulatory and power market uncertainty; the need for long-term human resources development; the significant amount of finance and long development and construction periods required; and nuclear liability," Borovas said. "Reputational risk is primarily driven by the 'stigma' associated with nuclear power; political risk and public acceptance issues; heightened sensitivity to nuclear safety in the post-Fukushima Daiichi environment; nuclear non-proliferation; radioactive waste management and disposal; and – as with financial risk - historical and current experience of project delay and cost overruns.

Engagement with financial institutions must occur at the early stage of a project's development, Borovas said, in order to understand and explain the risks of the project, to demystify potential issues, to speak in plain terms about the project, "with no nuke-speak", and to apply a practical perspective on the likelihood and potential impact of the project. The project developer needs to develop management and mitigating solutions "based on lessons learned", he said, and with an explanation of what they will do differently to avoid past challenges. As equally important, is to develop a strong relationship between the exporting and host governments, covering bilateral nuclear cooperation and support, nuclear liability, licensing support and cooperation between regulatory authorities, and human resources development, he said.

De-risking a project also means addressing the issue of delays and cost overruns. That means having a demonstrable safety culture during the construction phase, "because otherwise regulators will delay projects," he said. Other necessities include a recently constructed reference plant using the same supply chain and construction team, "to the extent possible"; an integrated project delivery team with experience in building nuclear power projects and experienced sub-contractor networks, including an understanding of nuclear industry quality assurance standards and safety culture; owner experience in managing large construction projects with clarity of the roles of the owner and contractor, with good communication between the different organizations, including when they are from different countries; contractual clarity as to which party bears the cost and risk of design changes and under which circumstances; clear and established interface mechanisms with the regulator, which must have the required capacity and capability, and cooperation with other regulatory authorities; bilateral nuclear cooperation – government support - on export controls, nuclear liability, industry participation and human resource development; more experienced designers, project managers and qualified equipment manufacturers after the retirement of a generation of experienced experts and to reflect the need for new competencies for new technologies; and a dispute resolution mechanism based on the principles of partnership and cooperation.

Researched and written
by World Nuclear News