POLICY & FINANCE | FINANCING NUCLEAR


Right: Led by state-owned OPG, Canada’s Darlington NPP is set to feature four new small modular reactors


technology that can sell electricity at a lower price. The


ISO may sequence the new technology to run each day ahead of the older technology. When this occurs, the new technology will push the older plant ‘up the dispatch curve’ which will result in a shortfall of total revenue for the older technology and affect its ability to make payments to lenders and investors. Prior to deregulation, power plant owners were able to


eliminate this long-term price risk based on the previously noted Supreme Court decisions which established the ‘used and useful’ doctrine for regulated monopoly utilities. Under this doctrine, once a power plant is deemed to be used and useful by the appropriate regulatory body, then the prudently incurred costs, including the plant’s fixed capital and the variable fuel costs, plus a reasonable rate of return, continue to be included in the electric rates charged to customers. Today, under deregulation, this ability no longer exists.


Another financing concern is price volatility. Each power plant within an ISO region competes with each other based on price. Daily prices quotes are submitted to the ISO, much like a limit order for the sale of stock on a stock exchange. The submitted electric prices are combined with the estimated daily market demand by the ISO to create the daily dispatch curve. The actual interaction of supply and demand, as it changes throughout the day, determines the actual wholesale prices paid and the quantity of electricity sold that day by each power plant. The supply and demand curves for electricity are inelastic, and because of the continually changing interaction of supply and demand throughout the day, electricity prices determined by the market can be more volatile than regulated prices. Downward price swings can affect the ability to meet debt and equity obligations. Prior to deregulation, power plant owners were able to


eliminate this price volatility through the above-noted ‘used and useful’ doctrine by which this volatility, as seen by the investor, was smoothed out by the periodic rate-making process. Today, under deregulation, this process no longer exists. Lenders and equity investors are also concerned about


long-term output quantity certainty for all types of power plants. One concern is that a power plant is unable to generate power at full output for technical reasons, such as the historical need for many nuclear plants to plug leaking steam generator tubes, which reduces output. Prior to deregulation, power plant owners were able to eliminate this long-term output quantity risk based again on the ‘used and useful’ doctrine so long as the owner took


38 | November 2024 | www.neimagazine.com


reasonable efforts to repair the problem. As a general rule, the prudently incurred repair costs would also get to be included in the rates charged to customers. Today, under deregulation, this ability no longer exists. Another long-term financing concern relating to output quantity is the ability of a power plant to maintain a market for its output. Prior to deregulation, all of a utility’s retail customers were captive – they could not switch electric providers no matter how high the regulators set the electric rates or how volatile. From the viewpoint of the lenders and investors, these captive customers provided the ultimate credit support for the utility’s construction plans. Today, under deregulation, this ability no longer exists, and electricity customers are now able to choose based on price among competing electricity suppliers. It is evident from the above that the underlying basis that


supported the financing of all power plants has changed due to the transition from cost-of-service regulation to deregulation. To summarise, we have the following changes


to revenue risk: ● An exposure to baseload output quantity uncertainty due to ISO dispatch rules which include the elimination of “must run” designation,


● An exposure to price competition from existing and future power plants located within the same ISO region,


● An exposure to price volatility amplified by the inelasticities of the electricity supply and demand curves,


● An exposure to output quantity uncertainty as retail customers, who are no longer captive, can switch electric suppliers thereby leaving a power producer with excess ‘inventory’, and,


● An exposure to future changes in law and regulation regarding the sale of electricity


The above changes in risk exposure, individually and/or in combination, have increased price risk and output quantity risk as seen by lenders and investors. Consequently, they have negatively impacted debt and equity parameters.


Impact on debt Globally, non-regulated electric power projects all use project-financing to obtain the requisite funds for construction. Project financing can be defined as a separable capital investment owned by a special purpose company in which the lenders look to the cash flow of the project to service their loans, as well as to provide the return on, and return of, the participants’ equity


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