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May 11, 2023
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While policy support for new nuclear power plants has revived in many countries, recent decades have shown the challenge of investment and financing large new nuclear plants in liberalised power industries. A few of those countries, however, have devised innovative contractual and regulatory frameworks that allow efficient allocation and management of the risks of nuclear power. These developments hold the key to successful business models and third-party financing.
Liberalised Markets Raise Numerous Challenges for Nuclear
A wide variety of industrial structures and market rules prevail in the electricity sector throughout the world. In some countries, part of the electricity market risk affecting plant investors can be shifted to electricity marketers and consumers through long-term contracts and vertical integration when regulation allows. In liberalised electricity markets, investors bear the risk of uncertainties entailed in obtaining construction and operating permits and in construction costs and operating performance. Investors must also assume the market volume and price risks.
These circumstances present substantial hurdles to a potential nuclear power renaissance in liberalised electricity markets given the specifics of the technology and past issues. Four specific risks impede progress:
- Regulatory risk arising from the evolution of safety regulations and design licensing
- Policy risk stemming from changes during electoral cycles could undermine the commitment to nuclear power and the development of nuclear waste disposal facilities
- Construction and operation risks resulting from the necessary industrial ‘relearning’ of the technology
- Electricity price and volume risks originating from the large scale of a nuclear project and the capital intensity of the technology
New Contracting and Regulatory Approaches To Support New Nuclear Investment
Given this background, the key factor in the success of nuclear power in liberalised markets hinges on the power industry’s ability to engage with regulatory and safety authorities, plant vendors and consumers to allocate risks to parties that are best able to manage them. By shifting part of the pre-construction, construction, operating and market risks to other parties (regulators, plant vendors, creditworthy consumers, etc.), electricity producers improve their position to attract potential investors.
Although there have been only a few new nuclear plant orders in liberalised markets over the past decades, they yield useful lessons on the variety of contractual and regulatory arrangements that can support new nuclear investment in liberalised markets. Examples include British, Finnish and French plants under construction. The allocation of the different construction, operating and market risks in these examples has been the key factor defining the selection of the financial arrangements — and ultimately the project costs.
Case Study: The UK Approaches to De-Risking and Making Nuclear Investments Possible
The British project — in fact two projects — provides contrasting approaches to facilitating investment in nuclear by implementing contracts for difference (“CfDs”) and regulated assets base (“RAB”) models. Here is a look at the particulars of each:
Project: Hinkley Point C — funded with a 35-year-term CfD1
The Hinkley Point C CfD guarantees a ‘strike price’ for the duration of the contract. This means that for each megawatt hour (“MWh”) of electricity generated, the developer is paid the difference between the strike price and the market price for electricity sold into the market. The generator will pay back the difference should the market reference price rise above the strike price.
The CfD allows for payments to generators to provide increased certainty around revenue levels to bring forward investment. At the same time, the CfD retains the need and incentive for the generator to sell its electricity in the market and maximize output.
However, CfD-supported projects will only receive revenue payments on successful commissioning of a nuclear plant, which can take a decade or more. Hence, the CfD approach does not solve the issue of the long construction period before investors can start earning revenues. It has also proven difficult to attract sufficient investment in new-build nuclear given the risks associated with such projects — particularly in the early construction and development phases.
Project: Sizewell C nuclear project — eligible for RAB2
The RAB funding model provides for risk sharing between investors, consumers and the state through a regulated approach, with consumers contributing to the construction cost of the nuclear project through their bills. This approach has the advantage of reducing the cost of capital and allowing the plant developer to start earning a remuneration on capital employed whilst the plant is being constructed.
The government anticipates that the new funding model will ultimately bring significant savings for nuclear projects as customers’ initial payments will lower the overall cost of financing and thus the total cost of the project. At the same time, RAB financing is expected to attract investors that usually fund infrastructures by giving them greater certainty of cashflow and a more predictable, stable return. The challenge under the RAB model is to maintain sufficient incentives to ensure proper cost management and operation through an efficient incentive framework.
The main takeaway from these two ongoing projects is that careful definition of the regulatory and contractual framework is essential to support new nuclear economics and financing in liberalised markets. FTI Consulting and Compass Lexecon teams have supported utilities in the UK and across Europe on ongoing nuclear projects, bringing their expertise of the relevant market, regulatory, financing and state aid issues to these projects.
Read the companion article “Taking a Fresh Look at the System Value of Nuclear Power Plants,” on FTI Journal.
Footnotes:
1: “Hinkley Point C: contractual documents.” Department for Energy Security and Net Zero and Department for Business, Energy & Industrial Strategy. Gov.UK. (November 29, 2022). https://www.gov.uk/government/publications/hinkley-point-c-documents
2: “UK Government Takes Major Steps Forward to Secure Britain’s Energy Independence.” Department for Business, Energy & Industrial Strategy, Great British Nuclear, The Rt. Hon Grant Shapps MP. Gov.UK. (November 29, 2022). https://www.gov.uk/government/news/uk-government-takes-major-steps-forward-to-secure-britains-energy-independence
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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May 11, 2023
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