POLICY & FINANCE | FINANCING NUCLEAR Deregulated finance
Fundamental changes to market structures and risk profiles following deregulation of the world’s electricity markets have left nuclear financing options adrift
By Dr Stephen Dansky
WHEN THE ‘ON’ SWITCH WAS thrown at the first electric power plant, Thomas Edison was not there celebrating with his team of scientists and engineers. Rather, he was celebrating quite a distance away on Wall Street with the bankers who financed his endeavour. Throughout his prolific career, he understood that a great new design is nothing more than an academic exercise unless the banking community is willing to provide the requisite funds for construction. Today’s nuclear engineers may want to consider that moment in history. The designs for the next generation of nuclear power imply greater safety, and modular construction may improve costs. They may also help countries meet their greenhouse gas targets. Nonetheless, recent research has demonstrated that within deregulated electricity markets, such as those that comprise two-thirds of the US electric market, there should be little expectation of obtaining the requisite financing to construct these new designs.
Market evolution Much has changed about electricity markets over the last few decades. Previously, all utilities in the US that owned nuclear power plants operated within a regulated cost-of- service framework. These long-standing cost-of-service regulations extend back to several US Supreme Court decisions including Smyth v. Ames and Hope Natural Gas v. Federal Power Commission which led to the ‘used and useful’ doctrine for regulated monopoly utilities. Moreover,
all retail customers within the geographic boundaries of a utility’s service territory were legally captive – they could not switch electric providers no matter how high the regulators set the electric rates following placement of a new nuclear plant into the rate base, or how volatile due to an oil embargo. From the viewpoint of lenders and investors, these captive customers provided the ultimate credit support for a utility’s construction plans. Under a regulated monopoly utility framework, the revenue and cost risks of owning a nuclear plant were reduced to a point sufficient to satisfy the financiers. This regulatory framework supported the financing of
more than 90 GW of nuclear capacity in the US. Globally, it supported the financing of over 400 nuclear power plants in 32 countries, and every one of these nuclear plants was financed under some form of government regulation. Referred to as the “sovereign form” of financing by the International Atomic Energy Agency, either the government agreed to assume some or all of the revenue and cost risks, or the government passed the risks on to captive retail customers. Without some form of sovereign assistance, no nuclear power plant in any country has successfully secured financing anywhere in the world. Within the US, electricity deregulation began with the
passage of the Public Utility Regulatory Policies Act of 1978, followed by the Energy Policy Act of 1992, and then by various Federal Energy Regulatory Commission (FERC) rulings. These rulings included Orders 888, 889, 1000, and 2000 to further promote competitive economic efficiencies
Above: Vogtle units 3 & 4 are the first reactors to be completed in the US in decades but are not in the deregulated electricity sector
36 | November 2024 |
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