UK nuclear developers explain private financing approach

04 November 2016

NuGeneration and Horizon Nuclear Power expect the strike price they agree with the UK government for their respective new build projects will be lower than the one agreed for EDF Energy's Hinkley Point C plant.

Tom Samson, NuGen CEO, and David Stearns, Horizon's business development director, spoke in a meeting with British parliamentarians on 1 November. Their evidence to the House of Lords Economic Affairs Committee's inquiry The Economics of UK Energy Policy, followed that of EDF Energy executives, who said the £92.50/MWh strike price they had agreed with government in 2013 was a good deal for electricity consumers.

Consisting of two European Pressurised Reactors (EPRs), 3.2 GWe Hinkley Point C plant will be the first new nuclear power station to be built in the UK in almost 20 years. It is expected to start operations in 2025. EDF Energy has state backing for the project - the majority owner of its parent company, EDF Group, is the French government, and its Chinese partner, China General Nuclear, is state-owned. In contrast, Horizon and NuGen are working on privately backed new build projects.

A joint venture between Toshiba and Engie, NuGen plans to build a nuclear power plant of up to 3.8 GWe gross capacity at Moorside in West Cumbria. NuGen will use AP1000 nuclear reactor technology provided by Westinghouse Electric Company, a group company of Toshiba.

Established in 2009 and acquired by Hitachi in November 2012, Horizon aims to provide at least 5.4 GWe of new capacity across two sites - Wylfa Newydd and Oldbury - by deploying Hitachi-GE UK Advanced Boiling Water Reactors (ABWRs).

Asked for the total cost of their projects and the Contract-for-Difference (CfD) strike price they would require, Samson and Stearns stressed they could only give estimates at this stage.

"NuGen is still in the development, engineering phase and we're hoping to have EPC [engineering, procurement and construction] estimates for the complete project in the early part of next year, so any numbers we have today would be premature to share in specific terms," Samson said. "But roughly £13-15 billion for the cost of the project and our aspiration and goal is to deliver a strike price that's less than Hinkley."

Stearns said: "Hitachi has spent north of £1.5 billion on development, engineering and preliminary site works to ascertain what those costings are most likely to be on a full build-out basis and commercial operations by 2025." He added: "We have four operating ABWRs that have been built on time and to budget in Japan, and one of those plants - Kashiwazaki-Kariwa 6 - is our reference plant. At this point we don't have a number, [but] we believe it will certainly be less than Hinkley, and I say that as well from a strike price perspective."

Both expect to complete the Generic Design Acceptance process for their respective reactor designs with UK regulators early next year and to each make their final investment decision (FID) about two years later.

Public versus private sector roles

Asked for their view on the potential merits of nationalising the UK's nuclear power industry, Samson said: "Certainly the government has a role to play, but I think a nationalisation strategy would be a rather extreme solution to the challenge of delivery capability, which relies on an international marketplace."

Asked whether the private financing model was appropriate, given that the government could borrow at lower rates than a private company could, Samson said government could take a role "in some of the enabling infrastructure". He said: "The National Grid is already funding that through their process, but potentially the common works, the seawater intake, the civil works. But, again, it's a departure from an existing proven model, which is to put the risk into the companies that are going to be required to deliver the project."

Asked whether NuGen is "still going to be around in 60 years" for the decommissioning phase of its project, Samson said: "I certainly hope so and we're factoring that funded decommissioning plan and the associated economics to ensure that the decommissioning burden is fully reflected in the strike price."

Asked if NuGen would be, like EDF Energy, looking to secure government guaranteed bonds, Samson said: "For us the financing challenge is quite unique. We need to build on the technology experience and delivery capability of our consortium, with Westinghouse and Toshiba, and look at ways of, if possible, attracting debt and share that funding burden with sources of capital that might be willing to provide loans or investments against the technology of this nature. Certainly, with export credit agencies that's a viable path to pursue."

He later added: "NuGen's owners are two private based companies and we expect more private based equity, but I would hate to rule out any source of capital, investment, debt or loan to the project at this stage ... Government is an essential stakeholder in any nuclear project."

Stearns said that nationalisation "seems like a fairly radical, revolutionary approach to solving a problem that is actually more practical". He told the committee: "This government, and successive governments for the past ten to 15 years in this country, have worked hard and quite consistently in delivering a framework for delivering low-carbon generation. Nuclear is part of that and Hinkley is maybe the first beneficiary as an investor as well as the end-users.

"I don't see the government's role in energy projects as naturally being that of a developer of the daily heavy lifting of choosing technology, driving it through regulation, raising all of the financing and the public sector taking all of the risk ... The model we have here in UK is quite advanced and leaves quite a material amount of risk with the developer."

He added: "I don't see that government necessarily has a role in financing nuclear - certainly on a post-completion basis. But in a competitive financial market we are faced with a funding gap. We would not exclude anybody, but we are solving what is and what should be a private sector asset."

Regarding the "appetite" in debt markets for nuclear new build projects, Stearns said: "These are new assets, new projects, new risks for lenders, for potential bond holders, for export credit agencies. I wouldn't say they're not keen, they need to understand, and I think that they are prepared to, and we have found that there is a market that is willing to listen."

Samson added: "You've got to have a deal structure that is bankable if you've going to look for debt. And that requires you to have a contracting structure in place with an EPC consortium that you can allocate some risk to and hold them accountable to deliver against. That's slightly different to the Hinkley model where there isn't a single EPC entity; that's a difference that allows us then to structure the deal differently and present something that's more attractive to potential lenders and investors.

"This is not a traditional commercial, financeable venture where you go and talk to the likes of Barclays or Citibank and ask them to give you money, but you do have conversations with export credit agencies where there is content and strategic rationale for supporting the export of technologies, and you do look to build on that with a confident delivery plan to attract other investors. So, it's incumbent on us to deliver that narrative and to secure that participation and those are conversations that we've begun and need to complete over the next 12 to 18 months."

Asked for the percentage of public sector involvement in reactors built so far, Samson said of the eight AP1000 units under construction, four are in China and four are in the USA. In China, these projects are funded by the Chinese government, while the US projects are funded by customers in a regulated asset base, he added.

Stearns said that the four operating ABWRs in Japan were "financed in a regulated environment, through the rate base very similar to the US model, but on the balance sheet of investor owned utilities, such as Tepco and Chubu".

Part of the strike price analysis that "gets lost" in criticism of the cost of nuclear new build in the UK, Samson said, is "the GDP impacts". These are: "The jobs, the scale of the effort, the 60-year nature of its life, the significant money spent over the plant's lifecycle, as well as the supply chain opportunities and industrial potential that can be realised to regenerate the nuclear industry in the UK."

Diversity of technology

Asked about the "French policy of buildings tens of reactor to a similar design compared with different contractors building different models in the UK", Samson said there are benefits to having "diversity of technology in a market place".

He said: "If you look at some of the largest nuclear markets in the world, the US or Canada, they have quite a diverse fleet. We think that the track record of delivering each technology is clearly the important element here. We're going to be the nth of a kind - 17th, 18th and 19th - AP1000 unit in the fleet. There are currently eight under construction and there will be eight more under construction when we begin in Moorside. And I think the delivery certainty and the confidence comes from taking the lessons learned from that global experience and building it into a UK mindset for delivery in this country."

He added: "We tend to focus heavily on the EPR challenges in Olkiluoto and Flamanville, but there are many other technologies that have been delivered on time and on budget - in Japan, South Korea, the UAE. There are examples of successful delivery. They are not necessarily technology dependent; they are delivery dependent."

Stearns noted that Hitachi has been involved in 20 new build projects beyond the four operating in Japan.

Asked whether the "controversy with Hinkley" made their own projects more difficult, Stearns said: "It seems to me that Hinkley and the controversy around it has simply been a victim of its own specificities - the time it took to get to FID, the nature of the financing, of the shareholders, the amount of government support. They are absolutely unique to Hinkley."

He added: "We don't consider ourselves comparable really at all with Hinkley: this is a technology we have built before and that our shareholder has taken and delivered and which is licensed in three different countries. It's very difficult for us to compare ourselves to Hinkley, but we do appreciate there will be a comparison because £92.50/MWh is a very material price-tag for that [plant] once it's switched on. We're prepared to be compared, but we believe we have a fundamentally more competitive supply chain and ability to deliver, and that will reflect in our risk allocation, the financing that we've got and, we believe, in the strike price."

Market issues

Samson described the CfD devised by the UK government as "a solution to a market challenge". The "true cost" of carbon emissions isn't reflected in wholesale electricity markets or in economic comparisons of nuclear with renewables. "That is right now an intangible in terms of what are the consequences of not delivering another generation of nuclear in the UK. We've benefitted from 60 years of nuclear and we should as a country benefit from another 60 years of nuclear, from both a stability, but also from an emissions perspective."

Some 10% of the world's power comes from nuclear, but 40% of the world's carbon abatement comes from that 10% of nuclear, he noted.

"So nuclear is a meaningful way to make a difference to climate change. How the government values that component is a subjective discussion. Certainly, renewables are part of that and it would be a folly for me as a nuclear proponent to argue against renewables. We want a mix that benefits from renewables because when it runs its not consuming fuel and it's providing power, so it's a valuable source."

Stearns added: "There are a lot of things that the market is not pricing. The day-ahead electricity market today is quite depressed. Is that a reflection of the tightness of supply that we read about in the newspapers every day? Somehow there seems to be a disconnect. There's the economics of energy and there's the sociology of energy. What do we feel about security of supply and how do you price that? How do we price a megawatt and a tonne of carbon avoidance? None of that is being properly factored into the wholesale market prices. Those signals do not exist."

Researched and written
by World Nuclear News