new build nuclear: who takes completion risk?
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New Build Nuclear: Who takes completion risk?. Platts Nuclear Energy – Opportunities for Growth & Investment in Europe by Milton Caplan President, MZConsulting Inc. 2006 May 8. Outline. The return of nuclear power Risks and Realities of Nuclear Power Examples Moving forward. - PowerPoint PPT PresentationTRANSCRIPT
New Build Nuclear:Who takes completion risk?
Platts Nuclear Energy –
Opportunities for Growth & Investment in Europe
by
Milton Caplan
President, MZConsulting Inc.
2006 May 8
2
Outline
• The return of nuclear power
• Risks and Realities of Nuclear Power
• Examples
• Moving forward
3
It’s Cool to be a Nuke!
• France to build at Flamanville
• UK considers new nuclear
• Finland commits to Olkiluoto 3
• Germany to do energy review
• Sweden supports ongoing nuclear operations
• Canada considers nuclear
• US supports nuclear energy
• G8 supports nuclear power as part of the mix
• Bush reopens nuclear cooperation with India
• Environmentalists now supportive
4
Nuclear Advantages
• Environmental – no GHG emissions
• Security of Supply
• Economic
• Excellent performance of existing fleet
5
What are the Alternatives?
• Fossil fuels falling from favour– Coal is dirty, new clean coal technology on the way
– Gas prices volatile and increasing
• Renewables increasing in use – Acceptance that it can’t do it all
• Nuclear is the only large scale generation option available for baseload requirements
6
Is it time to Celebrate?
Maybe its still too soon.
7
Making it happen!
• Support for nuclear is only the beginning
• Is the infrastructure in place to enable new build projects to succeed?
BIG RISK
Governments support new build, but do not create the criteria for success!!
8
Nuclear Issues
• Large capital
• Long project schedule
• Low variable cost of operations
• Complex regulatory regime
9
Project Risk Triangle
Market
Construction Operations$ + $
= $
Generator
•Evolving markets•De-regulated/liberalized
• Fixed risk (PPA)• Merchant Plant
•Low variable cost•Strong performance •Much M&A experience•Confidence is High
•High Capital Cost•Poor performance in past•New Improved Designs•Confidence is building
10
What is Completion Risk?
• The total cost of the completed plant including – Engineering
– Equipment
– Construction and erection
– Commissioning
– Fuel
– Financing costs
– Regulatory approvals
– etc
11
Old Model
• Vendors built on cost plus basis• Utilities (Generators) borrowed on balance sheet• All costs both construction and operations passed
on to the customer
Essentially 100% risk on the customer
Many projects had long delays and significant overruns
12
The Market Fights Back
Generator
Market
Vendor
Lenders
Project Finance
Turnkey
PUSH
13
Vendors Listen
• Vendors have now taken a more product oriented view i.e. develop new products considering all the risks associated with its implementation
• Modern designs such as EPR, AP1000, ESBWR and ACR-1000
• Worked with regulators to improve processes and governments to improve planning approvals
• Results are lower costs and lower risks
14
Criteria for a Successful Project
• Well designed economic plants• Stable regulatory regime• Risk sharing amongst all project stakeholders• Strong project team • Extensive Project Planning
Confidence
15
Generator Risk Models
Generator
Turnkey
Scope B
Scope A
Scope F Scope E
Scope CScope D
• There is a limit to the risk that vendors will take
• Exclude circumstances beyond their control
• Consequences commensurate with role and responsibility
• No consequential damages
Generator cannot lay off all of the risk!
16
New Build Nuclear Reality #1
Generators have the completion risk
17
Financing
• Projects– Large Capital– Long schedules– Risk profile varies from construction to operations
• Lenders will require– Strong debt coverage (large equity)– Overrun funds in place (stand by facilities)– Date certain for start of repayment
• Project Financing is not ideal and high cost• On balance sheet creates EPS dilution issues
18
New Build Nuclear Reality #2
Generators have the financing risk
– Credit risk
– Funds to complete
19
Plan for Success
• Well planned and managed project• Structure to assure successful project completion• Completion risk is real
– Assess the risk– Mitigate the risk– Manage the risk
• Low risk, high consequence• Economics not robust enough to price it in• Generators cannot risk bankruptcy on one project
20
New Build Nuclear Reality #3
Generators will not bet the company on a new build nuclear project
21
Recent Projects
• Finland Olkiluoto 3 Project– Turnkey supply of EPR from Areva– Customer owned utility– Deliver power to customers at cost
• Canada Bruce Units 1&2 Restart– Multiple contracts managed by independent
project manager– Shared risk of overruns with government
22
USA
• Government programs to support new build include:– Delay insurance for regulatory and litigation risk– Loan guarantees for 80% of project cost– Production tax credit of 1.8 cents / kWh
23
Let’s get real!
New Build Nuclear Realities1) Generators have completion risk
2) Generators have financing risk
3) Generators will not bet the company on a new nuclear project
24
Business Models that Work
• Large utility with multiple units• Well structured project that places
significant risk with vendors• Strong project management• On balance sheet financing• Risk sharing with the market
– Regulated, or PPA with some overrun risk sharing
25
Making it Happen!
• More work to be done to create well structured projects that can proceed
• Requires committed stakeholders to work together to develop details of workable models
• Different markets will have different solutions
26
Objective is Clear
Well managed successful new build nuclear projects!!
It’s cool to be a Nuke!!
Thank You
Milton CaplanMZConsulting [email protected]+1.647.271.4442