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IAEA International Atomic Energy Agency
Possible Financing Schemes for
Current and Near Term Nuclear Power
Projects
Workshop on Technology Assessment of Small and Medium-sized
Reactors for Near Term Deployment
IAEA Headquarters, Vienna, Austria, 8 December 2011
Nadira Barkatullah
Department of Nuclear Energy, Planning and Economic Studies Section
IAEA
Nuclear Costs to Rise Following Fukushima Disaster (Energy
Business Daily, April 25th, 2011)
Economics, not public sentiment drives nuclear financing
(Nucleonics Week 23 June 2011)
The economics of nuclear power may deteriorate in comparison
with other generating technologies in the wake of the Fukushima
accident (OECD International Energy Agency, 2011 World Energy
Outlook)
Eurozone: Sovereign Debt Becomes a Credit Crunch (Forbes 25
November, 2011)
U.A.E.’s Nuclear Power Program said to cost $30 Billion (Bloomberg
Business week, 28 November, 2011)
Concerns Persist Over Economic Impact of Bank Liquidity
Contagion Risks in Europe (S&P Capital IQ Lookout Report ,
December 2011)
Key Media News on Nuclear Economics
2
IAEA
Nuclear Power – Current Status
On 6 December 2011, 434 nuclear power plants (NPPs) operated in 30 countries worldwide, with a total installed capacity of 368 GWe
0
50
100
150
200
250
300
350
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
GW
e
64 NPPs under
construction
IAEA
What is Special in Financing of Nuclear
Power Projects
Sources and Types of Financing
Existing and Emerging Financing
Schemes and possible trend
Contractual and Ownership Arrangements
Concluding Comments
Overview
4
IAEA
Relatively low fuel cost: economic competiveness
Price stability
Current fleet performance of nuclear reactors
Long life time
Guarantee for energy supply
Clean source of energy
Economic development: job creation and contribution to national high technologies sector
Complex and highly capital
intensive: high upfront capital
costs, which are difficult to finance
Sensitive to interest rates
Long lead times (planning,
construction, etc)
Long payback periods
Construction cost uncertainty and
completion risk
Regulatory/policy risks (revised
safety measures)
New financing structures required
to attract private investors
Key Challenges to the Nuclear Power
Key Advantages of the Nuclear Power
5
What is Special in Financing of NPP Projects
The Economics of Nuclear
5
IAEA
Complex and highly capital intensive:
high upfront capital costs
Sensitive to interest rates
Long lead times (planning,
construction, etc) and Long payback
periods
Completion risk
Cost uncertainty
Other Financial Risks
Regulatory/policy risks (revised safety
measures)
New financing structures required to
attract private investors
Key Challenges to the Nuclear Power
6
What is Special in Financing of NPP Projects
The Economics of Nuclear
6
Might be less
challenging for
SMRs
Challenging for all
types of reactors -
SMRs and Large
Reactors (LR)
IAEA
NPPs overnight capital cost uncertainty
Source: OECD: Current Status, Technical Feasibility and Economics of Small Medium Reactors. June 2011 7
IAEA
NPPs overnight capital cost uncertainty
Source: OECD: Current Status, technical Feasibility and Economics of Small Medium Reactors, June 2011 8
Economies of scale challenge
IAEA
NPPs overnight capital cost uncertainty
IAEA: Data collected from various publications and studies to keep track of nuclear power plants investment costs, since
2008 (updated Nov 2011)
0
1000
2000
3000
4000
5000
6000
7000
North America Europe Asia
Ov
ern
igh
t co
sts
($/k
W)
28
46
36
All data in 2008 USD
9
For SMR the
cost might be
lower (less than
billion) but
$/kWe might be
the same or
higher
IAEA
- 20 40 60 80
4
6
8
10
Interest Share (5%) Interest Share (10%)
Co
nst
ruct
ion
Du
rati
on
Construction and IDC
Construction duration of SMR could be shorter compared to LR resulting in lower IDC % of overnight capital cost
Modular reactors may reduce risk
associated with construction
IAEA
Business risk
Sales or Revenue risk
Operating risk
Financial risks
Credit risk (sovereign and corporate)
Market risk (currency, fixed-income,
equity and commodities)
Main Financial Risks
So what are the main financial risks associated with an
investment?
IAEA
Major Financial risks: Credit Risk
Tough
to
borrow:
higher
interest
rates
Fitch Standard & Poors Moody's
AAA AAA Aaa
AA+ AA+ Aa1
AA AA Aa2
AA- AA- Aa3
A+ A+ A1
A A A2
A- A- A3
BBB+ BBB+ Baa1
BBB BBB Baa2
BBB- BBB- Baa3
BB+ BB+ Ba1
BB BB Ba2
BB- BB- Ba3
B+ B+ B1
B B B2
B- B- B3
CCC+ Caa1
CCC CCC Caa2
CCC- Caa3
CC CC Ca
C C C
D D C
In
vestm
en
t G
rad
e S
pecu
lati
ve G
rad
eD
efa
ult
Easier
to
borrow:
lower
interest
rate
IAEA
Foreign exchange risk
What is foreign exchange rate risk? The risk of an investment's value changing due to
adverse movement in the currency exchange rates
Source: Yahoo Finance December 2011
Import NPP equipment value 1.5m MXN at
USD/MXN=15
Financial
crisis
Import NPP equipment value 1m MXN at
USD/MXN=10
IAEA Source: IMF (April 2011)
Commodity prices: Power Plant Construction Cost Index (PCCI) Power plant
construction cost pressure returning (July 2011)
Industrial Input
Metals Index
Average Petroleum Spot
Index
Oct 2008 Financial Crisis
Major Financial risks: Market risks
IAEA 15
Factors that Influence Financing NPPs
• Enhancement of safety and impact on investment cost
• Increased regulatory risk and uncertainty in the regulatory
process
• Negative public perception of nuclear
• Multinational Banks policy on credit availability
• Construction Supply Chain risks
• Deregulated electricity market rules and regulation
• Operational performance risk
• Nuclear liability and insurance on how to cap and allocate the
“extraordinary nuclear occurrences”
• Management of spent fuel and waste, and decommissioning
15
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What is appropriate financing model
Financing and cost of
finance
What are the sources
and types of finance?
What are the different
financing models
employed in the nuclear
industry?
IAEA
So what is Financing? Providing necessary capital
through issuance and sale of debt and/or equity
Financing
Cost of debt:
Interest paid
Cost of capital:
return on
capital
Shareholder
Local banks international financial institutions export credit agencies Suppliers international development organizations Capital markets
Debt Financing Equity Financing
Local and foreign investors
Capital markets: like IPO
IAEA
Financing: Cost of finance
In simple case weighted average cost of capital (WACC)
is:*
WACC = Debt
Debt +Equity
Rd + Equity Re
Where:
Rd is the cost of debt
Re is the cost of equity
* Without any tax adjustment
Debt +Equity
Generally, for nuclear the cost of finance is higher – with risk
premium of x% above other power generation assets added to
the interest rate
IAEA
Government
State Budget (like, tax revenue)
Equity ownership
Government incentives (like, loan guarantee,
construction delay insurance, guaranteed long
term power purchases agreements)
Export credit
Long-term Infrastructure bonds issuance
19
Types of Financing
IAEA
Government Financing
Traditional Government financing: take all risks
and costs
Utilities (Generators) borrow on balance sheet
Who finally pays for all the costs?
Essentially 100% risk on the
customer: All costs: construction and operations passed on to
the customer!
IAEA 21
Government Financing
Traditional Methods of Financing
Government
Budget
Public Utility
Nuclear Power Project
Official Borrowing
Multilaterals
Commercial
Banks
Export Credit
Agency
IAEA
Nuclear: Traditional Financing Model
Export Credit Agency (trade finance): Provides financing services such as
guarantees, loans and insurance to domestic companies for their
activities in order to promote exports in the domestic country:
ECA Commercial
Banks
Customer
Credit
Insurance
Credit
Repayment
Foreign Buyer
Exporter Lending Bank Payment on Delivery
Letter of Undertaking
How does it works?
ECA
Cover
IAEA
Governments seeks private sector participation
23
Types of Financing
Industry financing
Corporate finance or balance sheet finance
Project Finance (non or limited recourse): Long
term finance based on the projected cash flow of
the project (In nuclear pure project finance is still
not applied but some combination of corporate
finance and project finance…hybrid finance
Co-operative finance or hybrid financing
Innovative financing methods
IAEA
Corporate finance or balance sheet finance: borrowing or raising
equity against the assets of the company as a whole. A bank or bond holder
which provides funds to the company has a claim against the company’s
whole cashflows, unless the loan is secured against a particular asset, as is
common for mortgages. Risk of that investment is borne by all providers of
capital to that company – Example EDF, Enel, RWE, E.On GDF SUEZ..
Applicable for SMR
24
Industry Financing
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IAEA
Industry Financing: New trends emerging
Characteristics of
hybrid financing
(corporate/project
finance):
The project financed
on the balance sheet
of TVO (Finland Private
Power Company)
Part of equity and
loan is provided by the
large customers
A long-term PPA with
large customers
ensuring future stable
revenue stream from
the project
Leverage
characteristics similar
to project finance
Export credit
guarantee by the
French and Swedish
Government
Co-operative model or hybrid financing :Olkiluoto 3 or Finnish Model:
Expanding equity partners to diversity risk
TVO
Debt
Financing
Equity
6
Shareholders
Other power
off-takers
(about 60)
External
Market
75%
25% Power use in
own operation Power use in
own operation
Shareholders:
•Equity injection
•shareholder loan
• no dividends
Debt
holders:
•Market rate
IAEA
Industry Financing: New trends emerging
Project Finance: Some trend emerging as new partnerships are formed to diversity risk
26
IAEA
Industry Financing: New trends emerging
27
Equity Investment by vendors: the
new market trend? the extend of
investment will depend on the structure
of project
Partnerships: Partnership between
Babcock & Wilcox and Bechtel - has
signed a letter of intent with the
Tennessee Valley Authority (TVA) which
defines the project plans for constructing
up to six small modular reactors
IAEA
Ris
k tr
ansf
erab
ility
fro
m p
ub
lic t
o p
riva
te
Ownership transferability from public to private
Government
Financing
Corporate
Finance
Co-operative
Models
Project Finance
Combination of
models proposed
and already
in use
Combination of
models emerging and
likely to be widely
used
Combination of
models widely used
Financing trends emerging
IAEA
Contractual Arrangements
Basically there are the following main types of contractual approach that have been applied for NPP projects:
Turnkey contract: a single contractor or a consortium of contractors takes the technical responsibility for the whole NPP project.
Split-package: the overall responsibility is divided between a relatively small number of contractors, each building a large section of the work.
Multi-contract: the owner or its architect-engineer assumes overall responsibility for engineering and managing the NPP project, issuing a large number of contracts.
29
IAEA
Ownership and Contractual Arrangements
Public Private Partnership Options
Broad
Category
Main variants Ownership of
capital
assets
Responsibility
of investments
Assumption of
risk
Duration of
contract (years)
Supply and
Management
Contracts
Operational/
Maintenance
Management
Public Public (O)
Public/Private (M)
Public (O)
Public/Private (M)
1-5
Lease Lease Public Public Public/Private 3-20
Concession** BOT* Public/Private Public/Private Public/Private 15-30
Private
Ownership of
Assets
BOO Private Private Private Indefinite
• Build-Operate-Transfer (BOT) has many other variants such as Build-Transfer-operate (BTO), Build-Own-Operate-Transfer
(BOOT) and Build-Rehabilitate-Operate-Transfer (BROT).
• **Franchise contracts are also a type of concession arrangements with 3-7 years of durations.
IAEA
Ownership and Contractual Arrangements
Built Own Operate and Transfer Type Explanation
Build-operate-and-transfer (BOT) A contractual arrangement whereby the project company undertakes the construction, including financing, of
a given infrastructure facility, the operation maintenance thereof. The project company:
- operates the facility over a fixed term
- charge facility users (customers) appropriate tolls, fees, rentals, etc
- the charges do not exceeding those proposed in its bid or as negotiated
- to recover its investment, and operating and maintenance expenses
- at the end of the fixed term, transfers the facility to the government
Build-own-and-operate (BOO) A contractual arrangement whereby a project company is authorized to finance, construct, own, operate and
maintain an infrastructure. The project company:
- allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by
collecting tolls, fees, rentals or other charges from facility users.
Build-and-transfer
A contractual arrangement whereby the project company undertakes the financing and construction of a
given infrastructure . The project company:
- upon completion turns the asset to the government
- Government pays the company on an agreed schedule its total investments expended on the project, plus a
reasonable rate of return
Build-lease-and-transfer A contractual arrangement whereby a project company is authorized to finance and construct an
infrastructure. The project company:
- upon its completion turns the asset over to the government concerned on a lease arrangement for a fixed
period after which ownership of the facility is automatically transferred to the government
Build-transfer-and-operate A contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to
a private entity such that the contractor builds the facility on a turn-key basis, assuming:
- cost overrun, delay and specified performance risks
- once the facility is commissioned satisfactorily, title is transferred to the implementing agency/LGU
- The private entity, however, operates the facility on behalf of the implementing agency/LGU under an
agreement.
IAEA
Contractual/Ownership Arrangements:
New trends emerging
For a first time a ‘build-own-operate’ (BOO) contact, where Rosatom will BOO the VVER nuclear units at Akkuyu, in Turkey
Project Company
Obtaining of all necessary licenses and permits
Project management
Funding engagement
Contracting
Decommissioning & waste management
Project company legal entity incorporated in Turkey
Founders:5 Russian government companies affiliated with Rosatom
Russian Party to retain majority stake during the whole lifetime of the Project (51%-100%)
Turkish Party hasn’t intended to finance equity of the Project Company
Turkey
TETAS,
Turkish utility PPA
Site
Project support
guarantees
EPC-contractor
Atomstroyexport
NPP Operator
Rosenergoatom
Nuclear Fuel Supplier
TVEL
Electricity Trading Company
INTER RAO UES
O&M contract
EPC contract
Fuel Supply contract
Agency agreement Advisory Service
(Legal and Financial) Consulting service
(Architect Engineer)
IAEA
Concluding Comments
Firm government commitment and support - imminent
Pure project finance is still challenging for nuclear: more difficult due to
Fukushima accident, foreseeable risk is unnecessary safety measures
might increase the cost of NPPs – adding to higher premium
October 2008 global financial crisis and strict financial industry
regulation will impact liquidity and make financing tough for investors,
like Basel III, that will force banks to increase the capital reserve and to
be vigilant regarding risky projects, like NPPs
Governments also urging multilateral financial institutions like World
Bank, EBRD, to assist with the financing of NPPs
Private financing will be in the form of JV among utilities with robust
balance sheets and financial risk management strategy
Construction risk is rated no 1 – so to gain confidence of investors the
industry needs more projects on Schedule and within Budget
33
IAEA
Thank you for your attention!
IAEA…atoms for peace.
34
IAEA
Nuclaer power - construction starts
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30
40
50
no
. of
con
stru
ctio
n s
tart
s
IAEA
Nuclear: Traditional Financing Model
OECD Arrangements and some features:
Scope of export
credit
ECA funding
cost *
Crucial funding
source for new
builds
Export credit
advantage
Constrains on
ECA support
Financing of up to
85% of the off-shore
portion
Banking fees
Without guarantee
commercial banks are
cautions of lending
Loan Term – 18 yrs
repayment period
Ability to finance ECA
premium and IDC
ECA support limited
by export content
Support for local
content is 15-30% of
the off-shore portion
Interest
rate:LIBOR/EURIBOR
+bank margin
(depends on country
risk assessment)
State involvement
brings significant
funding capacity
Flexible repayment
structure:
- Straight line or
levelised (mortgage
style) payment
schedule
- Possible
postponement of
starting payment
Sovereign debt
capacity
* The ECA funding cost levels depend on country category for some countries that fall in high risk
category fees can be very high, as risk premium is added.
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