POLICY & FINANCE | FINANCING NUCLEAR balance-sheet financing. The units were able to be placed


into the utility’s rate base upon completion as ‘used and useful’, were able to be designated by the utility as ‘must run’, and the utility’s captive customers provided the credit support for financing. Similarly, the Darlington small modular reactor (SMR) in


Ontario, Canada is also being built on a regulated basis. The plant is fully owned by the government and the government has assumed revenue risk including operation of the plant as a “must run” unit. While the Ontario Province has undergone some deregulation with respect to non-nuclear generation, it retains “carve-outs” for its nuclear programme and, as such, the Ontario market is not deregulated with respect to nuclear power. The Hinkley Point-C is also moving forward, but not on


a deregulated basis. For starters, it has a 35-year price guarantee (Contract for Difference) with a fixed price that was set by and guaranteed by the UK government. The Contract for Difference eliminates the exposure to price competition from future power plants and it eliminates the exposure to price volatility. It also takes care of the ‘must run’ problem as it ensures baseload operation for the full term of the contract. Like the Ontario province, the UK has undergone some deregulation with respect to non-nuclear generation, but it treats the nuclear market separately and, as such, the UK market is not deregulated with respect to nuclear power. Vogtle, Darlington, and Hinkley Point are each an example


of the “sovereign form” of financing, and therefore not subject to the increased revenue risks that arise from deregulation. Without some form of assistance where the government agrees to assume some or all of the revenue risk, or the government passes the risks on to captive retail customers, no nuclear power plant in any country has successfully secured financing anywhere in the world. There’s a chance, albeit small, this may change. Recently,


a SMR developer announced tentative plans to address deregulation’s greater revenue risks through a long-term offtake contract with a large retail electricity purchaser. On the surface, the purchaser’s electricity requirements match well with the nuclear units’ baseload output requirements and the long-term contracts could remove price volatility risk. From a financing standpoint, however, this arrangement is problematic for lenders. It is essentially asking to replace the long-term Contract for Difference, backed by the full faith and credit of the UK government, with a similar long-term contract backed by the credit of the customer. Clearly, there is a difference in credit risk – the question is how much? Long-term contract prices can, and often do, become


“out of market” over time, and this is why it is difficult to purchase an electric price hedge contract from a credit- worthy counterparty beyond a six-month term, let along the duration of a typical twenty-year mortgage. Furthermore, contractual take-and-pay obligations to ensure baseload operation may not remain consistent with the purchaser’s ability to use and/or re-market the electricity over time, and this creates new revenue risks. According to the annual report of the purchasing


company, the equipment used by the purchaser in its business has a life of six years, far less than the term of the electricity offtake contract. Thus the company will need to continually purchase replacement equipment with the latest technology on an ongoing basis, as a minimum, to


40 | November 2024 | www.neimagazine.com


maintain market share (and thus maintain electric demand) throughout the life of the contract, which also assumes the company wants to and can remain in that business for the full term of the contract and/or that the business model for their product continues to exist as we presently know it.


Using previous lender requirements involving natural


gas combined cycle projects as precedent, the D:E ratios mandated by the banks increased significantly for those projects without regulatory-approved long-term offtake contracts as would be the case here, thus resulting in a significant reduction in the investors’ ROE and their ability to attract capital. Using previous lender requirements involving oil and gas purchase agreements as precedent, the purchaser will need to demonstrate and maintain sufficient hard assets that could be liquidated if needed as credit support equal to the projected value of the electricity to be sold over the term of the agreement. Investment bankers, still wary over the Enron debacle where too few hard assets provided credit support for the company’s long-term contracts, will take a close look at the difference between the purchaser’s hard assets and its market capitalization, which is relevant here based on the annual report of this purchaser, and a hard look at the purchaser’s hard assets versus the sum of all its long-term contract obligations. Few companies are willing to wear these long- term handcuffs, let alone are capable, especially when other options to purchase electricity exist. To summarize, there is additional risk to be addressed relative to other power plant investment opportunities including regulated nuclear opportunities, and as such, there should be little expectation of obtaining the requisite financing to construct many new nuclear units based on the credit support of a long-term offtake contract with a single customer. Given the choice to finance a new nuclear plant within a regulated framework versus one within a deregulated framework, the lenders’ fiduciary obligations will likely cause its limited supply of funds to flow in the direction of the regulated opportunity due to the difference in credit risk.


Advanced reactor strategy shift required At the end of the day, the issue facing the financial community is not whether a technology provides firm vs. interruptible power, or where it fits into the dispatch queue. For project-financed projects within deregulated markets, the issue boils down to the IRR:WACC ratio. Debt and equity investors will continue to prudently pour money into wind and solar projects (and any other forthcoming technology) that have higher IRR:WACC ratios. Unless nuclear power can increase its IRR:WACC ratio on par with other technologies, either by lowering revenue risk to lower its WACC or by lowering its capital costs to increase its IRR, nuclear power will not succeed in attracting private investment within competitive deregulated markets. Deregulation is here to stay in those markets that


have been deregulated. Given that there are multiple technologies, and more to come, to combat greenhouse gases, there isn’t the political appetite to rescind the successes of deregulation. Today’s designers of advanced modular reactors may want to adjust their marketing plans to exclude deregulated markets and focus on regulated markets where there isn’t the competition for funds against other technologies having higher IRR:WACC ratios. ■


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