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Slides by Edward Kee at 16 Nov 2010 conference on Nuclear Power Investment and Finance - discussion of the US industry structures and risks
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Market and Regulatory Risk
Nuclear Investment and Project Finance Nuclear Energy Insider 16 November Washington DC
Edward KeeVice President
16 Nov 2010 Nuclear Investment and Project Finance 2
Disclaimer
The slides that follow do not provide a complete record of this presentation and discussion.
The views expressed in this presentation and discussion are mine and may not be the same
as those held by NERA’s clients or my colleagues.
16 Nov 2010 Nuclear Investment and Project Finance 3
NRC DC & COL approval process
US new nuclear timeline
Nuclear procurement and construction
Complete NRC ITAAC review; load fuel, startup and testing; begin commercial operation
0 1 2 3 4 5 6
Capacity planning; state regulatory process
-1- 2
Financial commitment; EPC Final Notice to Proceed
Procure long-lead components; negotiate EPC contracts; site preparation
- 3- 4- 5- 6
16 Nov 2010 Nuclear Investment and Project Finance 4
US first and second wave
US COL & DC filings
First US COL approvals
First new US project COD
US First Wave construction start
UAE selects APR1400
China, Finland
& France building
20102008 2020
OL-3 EPR COD?
First UAE unit COD
Sanmen (first Chinese AP1000) COD
Flamanville EPR COD
2015
US Second Wave construction starts?
Many risks and uncertainties about new nuclear plants resolved by about 2020 –
lowering risk for second wave
CC3 pulls out of LG process
16 Nov 2010 Nuclear Investment and Project Finance 5
New nuclear build not easy
Very large capital investment; long development period
Asset with operating life of 60 years or longer
Bet-the-company commitment for most US utilities
Industry history suggests concern:
–
Contentious rate cases and disallowances in 1980s
–
Electricity industry more complicated now
–
Large stakes and complex issues
–
Likely resurgence of legal and regulatory disputes
16 Nov 2010 Nuclear Investment and Project Finance 6
Life cycle adds problems
Concept Mature
Conceptual cost
estimates
Actual cost first unit
Uni
t Cos
t
Years
Detailed engineering & licensing
EPC contracts
Learning on additional units
reduces time and cost
Long production lines for standard unit components
FOAK Learning
First Wave Buyers Later BuyersSecond Wave Buyers
16 Nov 2010 Nuclear Investment and Project Finance 7
Nuclear – three tracks in US
Merchant–
Project returns from market revenue; in regions with electricity markets (e.g., Texas, Mid-Atlantic, New York)
Regulated–
Nuclear plant in regulated rate base; each state has unique process; in regions that did not restructure the electricity industry (e.g., the Southeast)
Public Power–
Rights to recover costs from customers/members (e.g., TVA, Oglethorpe, MEAG, Santee Cooper)
16 Nov 2010 Nuclear Investment and Project Finance 8
1 - Merchant nuclear plants
South Texas Project (Texas/ERCOT market)
Calvert Cliffs 3 (Maryland/PJM market)
16 Nov 2010 Nuclear Investment and Project Finance 9
1 - Merchant nuclear plants Project structure
Operate in electricity markets–
Limited market history (compared to plant life)
–
Volatile prices & competition
Traditional project finance approach strained by–
High capital intensity
–
Large project size
–
Long development period
–
Long asset life
–
Lack of long-term revenue certainty
16 Nov 2010 Nuclear Investment and Project Finance 10
1 - Merchant nuclear plants Market risk AND project risk
Market risks (over years 10 to 70 from today)–
Carbon regime –
might raise market prices
–
Demand –
future electricity and capacity use
–
Supply -
new entry, including forced renewables
–
Fuel costs -
natural gas, often marginal, is important
–
Technology shifts -
new generation technology
Nuclear project risk and outcomes–
FOAK capital costs, unproven regulatory process
–
Cost overruns and delays before operational
–
Project interruptions / prolonged outages
16 Nov 2010 Nuclear Investment and Project Finance 11
1 - Merchant nuclear plants US DOE Loan Guarantee
Up to 80% of project cost at low interest rates
Close after NRC COL license issued (even though significant costs incurred to get there)
Subsidy Fee–
Unlike renewables, this is not paid by government
–
Collected prior to closing, not part of project costs
–
Calculated by OMB to remove risk from taxpayers
–
Calvert Cliffs 3 showed that this fee can be large
16 Nov 2010 Nuclear Investment and Project Finance 12
2 - Regulated nuclear plants
Vogtle 3 & 4 (Georgia Power)
Summer 2 & 3 (SCE&G)
16 Nov 2010 Nuclear Investment and Project Finance 13
2 - Regulated nuclear plants Regulation ≠
risk-free
Project risks and market risks may mean less than full recovery of costs (i.e., disallowance)
Experience in 1980s remains relevant–
State regulators faced unprecedented rate increases
–
Prudence reviews and disallowances
–
Large negative impact on utilities and the industry
16 Nov 2010 Nuclear Investment and Project Finance 14
2 - Regulated nuclear plants Prudence review lessons
Prudence cases from 1980s asked:–
Were decisions made at appropriate level in utility?
–
Was procurement based on competitive bids?
–
Did contracts have incentive/penalty mechanisms?
–
Were schedules and reporting systems in place?
–
Was construction effectively monitored?
–
Was project budget monitored?
–
Did managers properly respond to project changes?
16 Nov 2010 Nuclear Investment and Project Finance 15
2 - Regulated nuclear plants Excess capacity lessons
Long planning horizon–
Key issue is excess capacity at commercial operation date
–
May be 10+ years from start to commercial operation
–
Electricity demand 10 years from now is uncertain
Off-ramps (i.e., cancel or delay if conditions change) are important, but failure to use them can be imprudent
Certificate of convenience and necessity lowers risk of excess capacity disallowance
Regulator approval/endorsement of capacity planning approach lowers risk, even if excess capacity is result
16 Nov 2010 Nuclear Investment and Project Finance 16
2 - Regulated nuclear plants Canceled plant lessons
Some canceled plants totally disallowed
In some cases, prudent costs were recovered:–
Was a certificate of public convenience and necessity in place?
–
Was decision to begin construction reasonable at the time?
–
Were costs incurred prior to cancellation prudently incurred?
–
Was decision to cancel the project timely and reasonable?
–
Was utility prudent in not cancelling the project earlier?
Key lesson - all actions taken (and those not taken) will be examined for prudence
16 Nov 2010 Nuclear Investment and Project Finance 17
2 - Regulated nuclear plants Impact of disallowances
Bankruptcies and financial distress
Utilities became wary of large capital projects
Regulatory & industry reform–
Better rules for large baseload investments
–
Integrated Resource Planning (IRP)
–
Electricity industry restructuring & markets
16 Nov 2010 Nuclear Investment and Project Finance 18
2 - Regulated nuclear plants Regulatory reforms reduce risk
Integrated Resource Planning (IRP) –
All supply and demand options
–
Minimize long-term costs to ratepayers
–
Reflects uncertainty and risk
–
Regulated utility “own-build”
options includedHigher assurance of cost recovery if selected, butImplicit or explicit cap on cost recovery
Up-front prudence review if nuclear option selected
Early recovery of costs (i.e., return on CWIP)
16 Nov 2010 Nuclear Investment and Project Finance 19
3 - Public Power
Vogtle 3 & 4 (OPC & MEAG)
Summer 2 & 3 (Santee Cooper)
South Texas Project (CPS Energy)
16 Nov 2010 Nuclear Investment and Project Finance 20
3 - Public Power Public Power ≠
risk-free
Politics and government involved in decisions
Power and cost passed from–
Wholesale entity to members via contracts
–
Members to customers via rate setting authority
Some past defaults–
Public power involved in troubled nuclear projects
–
Financial stress due to delays and cost overruns
–
Some defaults on debt
16 Nov 2010 Nuclear Investment and Project Finance 21
3 - Public Power A few big defaults
Energy Northwest - formerly Washington Public Power Supply System (WPPSS) - defaulted on $2.25B of revenue bonds related to WPPSS 4 & 5 in 1983
Wabash Valley Power Association, rural electric G&T cooperative in Indiana - defaulted on $671M in REA loans related to Marble Hill in 1985
Cajun Electric Power G&T Cooperative in Louisiana; defaulted on $4.2B in RUS debt related to River Bend in 1994
16 Nov 2010 Nuclear Investment and Project Finance 22
3 - Public Power Risk mitigation
Long-term contracts (WPPSS)–
All-requirements contracts with members
–
Terms and conditions structured to withstand legal challenges
–
Term at least as long as loan repayment period
Avoid state utility regulation (Wabash & Cajun)
Co-signatures from members
State laws controlling end-user utility switching
16 Nov 2010 Nuclear Investment and Project Finance 23
Summary
Each approach to new nuclear plants involves risk
Market risk
–
Faced directly by merchant projects
–
Faced indirectly by regulated and public power projects
Market risk combined with high capital costs and high project risk make nuclear plants difficult to build in US
When (if) capital cost and project risk are lower (i.e., in Second Wave), may be easier to build nuclear projects
US commercial approach is somewhat unique
16 Nov 2010 Nuclear Investment and Project Finance 24
Global nuclear build Gen II+, III, III+ by country
0 20 40 60 80 100 120 140 160
Vietnam
Turkey
UAE
Japan
ROK
USA
India
Russia
China
In operation Under construction Planned Proposed
Non-government utilities
16 Nov 2010 Nuclear Investment and Project Finance 25
Role of Government
State Capitalism
China
Russia
Electricity markets
UK
US market regions
India
Mixed
US regulated states
Japan
US public power
South Korea
France
16 Nov 2010 Nuclear Investment and Project Finance 26
State Capitalism
Strategic and long-term state domination of markets
National Corporations & State-Owned Enterprises
Strategic goals above profits
Inside & outside host country
China and Russia leading examples
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©
Copyright 2010National Economic Research Associates, Inc.
All rights reserved.
Edward KeeVice PresidentWashington, DC+1 (202) [email protected]