What is Special in Financing Nuclear Power Projects?

What is Special in Financing Nuclear

Power Projects?

Energy Finance in the Middle East: Uncertainties and Opportunities

American University of Beirut

January 22, 2016

Beirut, Lebanon

By

Dr. Nadira Barkatullah

Inquires on Nuclear Power Projects

How much would

it cost to build a

NPP?

How can we

finance NPP?

What are

IAEA's cost

estimates for

NPP?

Why do

investment cost

differ from

country to

country?

Why is there a risk

premium of x% above

other power

generation assets

leading to a higher

interest rate?

Why is the cost

of finance for

nuclear higher?

What is the

localisation

rate?

Why such a

wide range of

NPP cost?

Relatively low fuel cost

Price stability

Performance of nuclear reactors

Long life time

Guarantee for energy supply

Security of Supply

Clean source of energy

Economic development: job creation, industrial development, etc

Complex and highly capital

intensive

Sensitive to interest rates

Long lead times (planning,

construction, etc)

Long payback periods

Construction cost uncertainty

Deregulated electricity market

or despatch risk

Regulatory/policy risks

Key Challenges to the Nuclear Power

Key Advantages of the Nuclear Power

3

The Economics of Nuclear

New

financing

structures

required to

attract

private

investors

Nuclear Power Plants Financing

Key Challenges

4

Fukushima

Event - 2011

Global slowdown as IMF reduced the

World Growth by 0.3% due to decline in

the commodity prices

Cost structures of different generating options

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nuclear Coal Natural gas

Capital

Challenge: Highly capital intensive

6

Source: IMF World Economic Outlook, October 2015

Overnight capital cost quoted for a typical 1000MW nuclear plant range from $2 - $8 billion, therefore it is a significant investment commitment

Gross Domestic Product (GDP) in $2014 billions


0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

2 8

14

20

26

32

38

44

50

56

62

68

74

80

86

92

98

10

4

11

0

11

6

12

2

About 45% countries

have GDP below $20

billion

About 40%

countries in

Middle East

have GDP

below $50

billion


Government Gross Debt (Percent of GDP)

Source” IMF, World Economic Outlook Database, October 2015

0 20 40 60 80 100 120 140

Saudi Arabia

Oman

Kuwait

UAE

Iran

Qatar

Iraq

Bahrain

Yemen

Jordan

Egypt

Lebanon

above

50%!

8

Approximate market capitalisation of leading utility companies with nuclear assets

8

Country Utility Market capitalisation

(USD billions)

EU GDF SUEZ 50

EU EDF 46

EU Enel 45

EU Iberdrola 42

US Duke Energy* 55

US NextEra Energy** 47

US Southern Company 40

US Dominion Resources 43

US Exelon Corporation 29

Asia Korea Electric Power Corporation 27

Asia China Huaneng Group Corporation 21

Asia Tokyo Electric Power 6

*Duke Energy merged with Progress Energy in July 2012 to form the largest US utility

**Includes Florida Power Light Source: www.forbes.com, January 2016


Credit rating pressure

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


Challenge: NPP investment cost uncertainty

Note: Data collected from various publications and studies to keep track of nuclear power plants investment costs, since

2008 (updated December 2015), all data in 2014 USD

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

North America Europe Asia Middle East

46

708

48

Overnight capital cost range by region (US $/kW)

So why do we

worry about

construction

risk?

Challenge: Construction risk

Do

llars

per

kW

Challenge: Investment cost

Interest During Construction

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Europe/Middle East North America Asia

+2yrs

5% 10%OC

+2yrs

+2yrs

+2yrs

+2yrs

+2yrs

6Yr6Yr

13

Challenge: Construction risk

13Source: World Nuclear News, Nucleonics and other publications, 2008-2015

Investment cost over time by Site ($/kW) - 2013 prices

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Angra 3 Flamanville 3 Hongyanhe Olkiluoto-3 Taishan 1-2 Vogtle Watts BarUnit 2

Mochovce 3-4

Initial cost Additional cost Second addition Third addition Fourth addition

Key Media News on Construction Delays

South Korea: Shin Kori 3 (APR1400) a 3 year delay (WNN, 5 January

2016)

US: Vogtle 3 (AP1000) construction reshedule about 3 years delay and cost

overrun of about $3 billion (Nucleonics, March 2015)

Finland: Olkiluoto 3 (EPR) startup pushed back to 2018 (9 years delay)

and cost overruns of $5 billion (WNN, 1 September 2015 )

France: Flamanville EPR delayed by 5 years and cost overruns of more

than $ 5 billion (WNN, 3 September 2015)

15

Challenge: Credit downgrades

Source: Moody’s Investors Service: September 2013

New construction on nuclear power plants is generally credit negative

Why?

Cost overruns more frequent vs other technology types!!

What do rating

agencies and

financiers

seeks?

More plants built on time and

within budget !

Some

success

stories

Impact: adds to the risk premium and the cost of finance

Some plants in Asia built on time: like the three recent

reactors in China (Nyangjiang3 Changjang 1, and

Fangchenggang 1) to start after 5 years of construction!

16

Major Challenges to Financing NPP

Other Challenges

• Longer payback period

• Foreign Exchange rate risk

• Deregulated electricity market rules and regulation

• Multinational Institutions policy on credit availability

• Uncertainty in the Regulatory process

• Revised safety measures to enhance investment cost

• Construction Supply Chain risks

• Operational performance risk

• Negative Public Perception of nuclear

• Nuclear liability and insurance on how to cap and allocate the “extraordinary nuclear occurrences”

• Management of spent fuel and waste, and decommissioning

• International agreements regarding peaceful use of nuclear (like NPT, including safeguard agreements)

Construction: Total 67 reactorsOperational: Total 441 reactors

Current Status of NPPTotal Reactors by Region

Source: IAEA/PRIS Database, January 2016

Nearly half of

those in China

AfricaS.America 1%

Middle East/S.Asia 2%

Europe (Central/Eastern)13%

Asia (Far East) 25%

Europe (Western)

29%

N. America

29%

S.America 2%Europe (Western) 5%

N.America8%

Middle East/ S.Asia 15%

Europe (Central/Eastern) 17%

Asia (Far East) 52%

Life Extension of NPPTrend

Emerging?

Full asset

utilization!

US: Turkey Point 3- 4 life extension beyond 60 year?

South Korea: Wolsong -1 life extension

of 10 year to 2022 ($505m)

US: NRC had extended the licences of 81 reactors (77 still operating)

to have 60-year lifetimes…and considering licence renewal applications

for 13 further units.

Bulgaria: Kozloduy-5 and 6 life

extension of 20 year to 2027 and 2039

Source: World Nuclear , Nucleonics and other (2014-2015)

France:: EDF plans to invest around €55 billion by 2025 to invest French

nuclear fleet as long as 60 years (including 2011 Fukushima event safety

measure)

Source: Climate Change and Nuclear Power, IAEA 2015

Total electricity generation cost

by the type of generation

NuclearCoal

Gas

CCGT

Solar

LG

Solar

CR

Solar

RR

Wind

Onshore

Wind

Offshore

Hydro

Geothermal

Nuclear Power Plants Financing:

The Types of Financing

20

Government Financing

Industry Financing

21


Loan guarantee

Government Financing and

support

State Budget

(like, tax

revenue)Govt. Equity

Ownership

Guaranteed

Long term

PPA

Long-term

Infrastructure

bonds issuance

Export Credit


Sovereign Loan Guarantee

For Vogtle NPP of $6.5

billion (February, 2014)

UK Government cooperation

agreement with Hitachi and Horizon

Nuclear Power To promote external

financing for Wylfa NPP ( WNN 4

December 2013)

Initial UK Government Guarantee for

Hinkley Point C of £2 billion (WNN 21

Sep,2015)

Government Equity Ownership

US Department of Energy Loan

Guarantee

UK Guarantee Scheme

UK: Hinkley Point C, EDF 66.6%,

China General Nuclear Cooperation

will have 33.5%.

Sizewell C: C,EDF 80%, China

General Nuclear Cooperation will have

20%. (WNN, 23 October 2015)

EPR


23

Very important for the bankability of a

nuclear power project

Long-term

Attractive fixed interest rates

High loan amount (85% of good

exported)

Low total cost

Key

features

Most Export Credit Agencies like Coface, US-EXIM, KEXIM, JBIC,

NEXI, etc., support their domestic companies

• 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:

Governments seeks private sector participation

24

Types of Financing

Industry financing

Corporate finance or balance sheet

finance

Investor Finance or Co-operative

finance or hybrid financing

Project Finance or non recourse

finance

New financing trends

Corporate finance or balance sheet finance: borrowing or

raising equity against the assets of the company as a whole

Industry Financing

France

Flamanville 3 project in France, by EDF (Areva PWR 1650MW)

Original cost estimate of € 3.3 billion (2005 values) in 2007

Revised project cost of €10.5b (Sep 2015)

Operational: 2018?

5 yrs behind schedule

€4 billion or more over budget!

25

Moody's downgrades EDF to

A1 from Aa3; negative outlook

(16 April 2015)

Risk diversification: shared ownership and partnerships are important to curtail

credit pressure

Example: EDF

Share price

drop of 50%

over the last

year! (Reuters

15 Jan, 2016)

Industry Financing Trends: Investor Finance Model

26

EPC

Contractor

6

Shareholders

Lenders

Technical and

safety

licensing and

regulation

Price

regulation

Completion

risk

Construction

contract

Equity

Rights to Electricity

produced

Operational cost

and debt service

Completion

risk mitigation

DebtDebt Service

Mankala

Company

Mankala Model

Large industrial

customers (about 60)

Regulator/sFinland:Olkiluoto-3

Project and

proposed Hanhikivi

project

Some other countries

in Europe also want

to adopt this model

as it promotes risk

diversification

Industry Financing Trends: Vendor Financing

Continues…

27

Vietnam: Ninh Thuan 1,200 MWe

VVER loan by Rosatom to EVN of $8

billion (WNN, Aug 2015)

Bangladesh: Roastom to provide

finance Rooppur Nuclear Power

Plant, 90% of $12.65 billion (WNN,

29 Dec 2015)

Examples

Bulgaria: Kozloduy-7 equity of

30% by Westinghouse and

70% by Bulgarian Energy

Holding (WNN, 7 April 2015)

AP1000

Industry Financing Trends: New Trends

28

Examples

Jordan: Financing of $10 billion: Rusatom

Overseas will be strategic partner and

operator of the plant. Russia to contribute 49%

of the project's cost, with the Jordanian

government providing the remaining 51%

(WNN, 25 Mar 2015)

Strategic Partners

Turkey: A consortia of vendor group Mitsubishi and

Itochu, and France's Areva and GDF Suez 65% equity

stake and 35% for EÜAŞ, Turkey Sinop Atmea 1

reactors (12 May 2015)

Further risk diversification……..

Will this be similar to the

Akkuyu nuclear power

project? Rosatom BOOT

(Built Own and Operate

Scheme) a contractual

arrangement

Industry Financing: New emerging trend

Tapping the capital markets

Issuance of bonds/shares

29

Owners and investors looking towards the capital markets

Equity: Initial Public OfferingDebt: Issue of Bonds State-owned China

Guangdong Nuclear Power

Holding (CGNPH)

completed the sale of its

first offshore yuan bond,

raising CNY1.5bn ($240m)

via a three-year bond at

3.75%..rated A+/A3 -Fitch

& Moody’s (Nuclear

Business, Nov 2012)

Romania’s Nuclearelectrica listing

raises EUR 63 million (Business

Review 23 September 2013)

China Nuclear Construction Company

plans to raise $289 million as IPO

(NW May 29 2014)

China National Nuclear Power, the

country’s largest nuclear power

producer, IPO approved for $3.89

billion (WNN 14 May 2015)

Korea Hydro and Nuclear Power, which has

issued $750 million in bonds in Sep 2012, $500

million in September 2013 $300 million in June

2015(em.cbonds.com)

Tepco to seek $2 billion in private-placement

bonds from lenders (Reuters 19 November,

2013)

China General Nuclear Power Corp in January

2016 issued $600 million in bonds

(em.cbonds.com)

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

or investor

finance

Models

Project

FinanceCombined models

proposed and

already

in use

Combined models

emerging and likely

to be widely used

Combined models

widely used

Financing Models Trend

30

Government

Support

Vendor

financing

Strategic

Partners

Concluding CommentsGovernments have a critical role with explicit long-term commitment

Wide range of overnight capital cost challenging for newcomers

Financing and construction duration key influencing factors to impact total

investment cost

The Fukushima accident has lead to additional safety measures, which has an

impact on the cost of NPPs

Government financing still dominate the industry and ECA support is vital and

ensures bankability of the project

Vendor financing of both or either debt and equity is very much in demand

Owners tapping into the capital markets to raise capital

Strict financial industry regulation, like Basel III to impact liquidity and more

vigilance of large scale risky projects

Financing NPP is challenging but viable with new financing trends emerging to

support nuclear new built

Construction risk is rated no 1 – to gain confidence of investors –”more

projects on Schedule and within Budget”31

32

Thank You!

Documents

What is Special in Financing Nuclear Power Projects?