Innovative ways of funding nuclear power projects

18 February 2016

As governments worldwide face up to the climate change commitments under the COP21 agreement and the need for large - and growing - baseload power, nuclear generation is again being hailed as a real answer to the world's energy problems. However as with all energy solutions, set-up costs can be prohibitively high. Given the tight constraints on national balance sheets, governments and developers are creating new and often innovative funding methods for nuclear plants, writes Fiona Reilly.

Traditionally, nuclear power plants were financed, developed and operated by governments. During the mid-20th century, when a number of countries - notably the UK, France, the USA and Russia - chose to build nuclear power plants, they used direct government funding, partly because it was policy at the time and partly to maintain a high level of control. Later some countries adopted different ownership strategies, such as privatising plants (in the case of the UK) or maintaining their plant as national assets (Slovenia and Croatia).

A further shift in recent years is that government financing has taken on a new cross-border perspective, with Russia and China in particular offering complete solutions for developing nuclear projects in other countries. Under these schemes, the country offering the solution puts together a consortium to deliver the project together with financing from its government, its government export credit agencies (ECAs) and/or national banks.

All in all, we're seeing seven types of nuclear financing used across the world today. Aside from 'traditional' government funding, there are now six alternative methods: corporate balance sheet financing; the French Exceltium model; the Finnish Mankala model; vendor equity; ECA and debt financing; and private financing with government support mechanisms. In practice, projects tend to progress using a mix of these funding mechanisms.

Here's a quick review of each of the six alternative models:

Corporate balance sheet financing

Financing a nuclear plant from a company's own resources is really only an option for the largest utilities and developers. The cost of a large nuclear plant - with two or three reactors - is usually around $20 billion. For even the largest and most established company, it's a huge challenge to carry such a large capital commitment for the average construction period of five to seven years before the plant starts producing revenue.

The French Exceltium model

Between 2005 and 2010, in an effort to address the increase in energy prices, a number of industrial investors - and banks - came together in France to form 'Exceltium'. The purpose was to enter into a contractual arrangement with EDF to help finance its new-build plants in return for cheaper electricity from EDF's portfolio. The payback to the investors - as opposed to the banks - comes over a period of 24 years through agreements to provide electricity to the industrial investors for a mix of fixed and variable pricing. The industrial investors can either use the electricity themselves or sell it to the market.

The Finnish Mankala model

The shareholders in the Mankala are a number of industrialists and utilities, and the Mankala takes a shareholding in the power plant being built. The owners of the Mankala are allowed and obliged to purchase electricity from the power plant equal to their shareholding at a cost price. This electricity can then be used by the investors or can be sold into the market. Other countries are now establishing laws to allow them to follow this model. As well as nuclear power generation plant, the Mankala concept has been used in Finland to help develop various other forms of infrastructure.

Vendor equity

In the late 2000s, it was recognised that reactor technology vendors may be able to support new build projects financially as well as technologically. This realisation gave rise to vendor equity, which helps to finance a project in return for the vendor's technology being deployed in the new facility. However, technology vendors do not have the infinite balance sheets needed to allow them to invest in unlimited projects. In reality, they will only invest in the most advanced projects that are likely to succeed, will allow them to receive a return on their investment in the shortest possible time, and provide an option to exit the project at the earliest possible opportunity.

Export Credit Agencies (ECA) debt and financing

Non-recourse/limited recourse financing, where the lenders have no/limited recourse to the borrower and the only collateral for the loan is the project itself, is seen as the nirvana of nuclear new-build. However in reality this dream scenario still some way off. In the meantime, commercial banks are becoming less reluctant to lend to nuclear projects, and the support of a number of the ECAs has helped this shift to happen. ECAs have provided the backbone of debt lending to a number of projects in recent years through either direct or guaranteed lending to projects. The key is that the lending is there to support the export of goods or services from the ECA's home country.

Private financing with government support mechanisms

For projects seeking private financing, the role of the government is key - and the government support mechanisms that are being made available can be crucial to getting deals underway. These mechanisms can take a number of forms, including a guarantee to support debt coming into a project (such as a sovereign guarantee or Infrastructure UK Guarantee), a revenue support mechanism (such as a Power Purchase Agreement or Contract for Difference), or in some cases both together. Much depends on the country in which the plant is being developed, taking into account a range of factors including its credit rating, financial reserves, electricity market, off-take regime, and the rights and obligations of generators.

Looking across the world, it's increasingly clear that there's no single solution to the challenges of financing nuclear power plants. Yet such is the need for new nuclear capacity that these challenges are being overcome through the wide range of approaches described above - all evolving, and often applied in combination to get projects funded.

Fiona Reilly

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Fiona Reilly is head of nuclear Capital Projects & Infrastructure at PricewaterhouseCoopers.