IAEA International Atomic Energy Agency

Possible Financing Schemes for

Current and Near Term Nuclear Power

Projects

Workshop on Technology Assessment of Small and Medium-sized

Reactors for Near Term Deployment

IAEA Headquarters, Vienna, Austria, 8 December 2011

Nadira Barkatullah

Department of Nuclear Energy, Planning and Economic Studies Section

IAEA

Nuclear Costs to Rise Following Fukushima Disaster (Energy

Business Daily, April 25th, 2011)

Economics, not public sentiment drives nuclear financing

(Nucleonics Week 23 June 2011)

The economics of nuclear power may deteriorate in comparison

with other generating technologies in the wake of the Fukushima

accident (OECD International Energy Agency, 2011 World Energy

Outlook)

Eurozone: Sovereign Debt Becomes a Credit Crunch (Forbes 25

November, 2011)

U.A.E.’s Nuclear Power Program said to cost $30 Billion (Bloomberg

Business week, 28 November, 2011)

Concerns Persist Over Economic Impact of Bank Liquidity

Contagion Risks in Europe (S&P Capital IQ Lookout Report ,

December 2011)

Key Media News on Nuclear Economics

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Nuclear Power – Current Status

On 6 December 2011, 434 nuclear power plants (NPPs) operated in 30 countries worldwide, with a total installed capacity of 368 GWe

0

50

100

150

200

250

300

350

400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

GW

e

64 NPPs under

construction

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What is Special in Financing of Nuclear

Power Projects

Sources and Types of Financing

Existing and Emerging Financing

Schemes and possible trend

Contractual and Ownership Arrangements

Concluding Comments

Overview

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Relatively low fuel cost: economic competiveness

Price stability

Current fleet performance of nuclear reactors

Long life time

Guarantee for energy supply

Clean source of energy

Economic development: job creation and contribution to national high technologies sector

Complex and highly capital

intensive: high upfront capital

costs, which are difficult to finance

Sensitive to interest rates

Long lead times (planning,

construction, etc)

Long payback periods

Construction cost uncertainty and

completion risk

Regulatory/policy risks (revised

safety measures)

New financing structures required

to attract private investors

Key Challenges to the Nuclear Power

Key Advantages of the Nuclear Power

5

What is Special in Financing of NPP Projects

The Economics of Nuclear

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Complex and highly capital intensive:

high upfront capital costs

Sensitive to interest rates

Long lead times (planning,

construction, etc) and Long payback

periods

Completion risk

Cost uncertainty

Other Financial Risks

Regulatory/policy risks (revised safety

measures)

New financing structures required to

attract private investors

Key Challenges to the Nuclear Power

6

What is Special in Financing of NPP Projects

The Economics of Nuclear

6

Might be less

challenging for

SMRs

Challenging for all

types of reactors -

SMRs and Large

Reactors (LR)

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NPPs overnight capital cost uncertainty

Source: OECD: Current Status, Technical Feasibility and Economics of Small Medium Reactors. June 2011 7

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NPPs overnight capital cost uncertainty

Source: OECD: Current Status, technical Feasibility and Economics of Small Medium Reactors, June 2011 8

Economies of scale challenge

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NPPs overnight capital cost uncertainty

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

2008 (updated Nov 2011)

0

1000

2000

3000

4000

5000

6000

7000

North America Europe Asia

Ov

ern

igh

t co

sts

($/k

W)

28

46

36

All data in 2008 USD

9

For SMR the

cost might be

lower (less than

billion) but

$/kWe might be

the same or

higher

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- 20 40 60 80

4

6

8

10

Interest Share (5%) Interest Share (10%)

Co

nst

ruct

ion

Du

rati

on

Construction and IDC

Construction duration of SMR could be shorter compared to LR resulting in lower IDC % of overnight capital cost

Modular reactors may reduce risk

associated with construction

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Business risk

Sales or Revenue risk

Operating risk

Financial risks

Credit risk (sovereign and corporate)

Market risk (currency, fixed-income,

equity and commodities)

Main Financial Risks

So what are the main financial risks associated with an

investment?

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Major Financial risks: Credit Risk

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

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Foreign exchange risk

What is foreign exchange rate risk? The risk of an investment's value changing due to

adverse movement in the currency exchange rates

Source: Yahoo Finance December 2011

Import NPP equipment value 1.5m MXN at

USD/MXN=15

Financial

crisis

Import NPP equipment value 1m MXN at

USD/MXN=10

IAEA Source: IMF (April 2011)

Commodity prices: Power Plant Construction Cost Index (PCCI) Power plant

construction cost pressure returning (July 2011)

Industrial Input

Metals Index

Average Petroleum Spot

Index

Oct 2008 Financial Crisis

Major Financial risks: Market risks

IAEA 15

Factors that Influence Financing NPPs

• Enhancement of safety and impact on investment cost

• Increased regulatory risk and uncertainty in the regulatory

process

• Negative public perception of nuclear

• Multinational Banks policy on credit availability

• Construction Supply Chain risks

• Deregulated electricity market rules and regulation

• Operational performance risk

• Nuclear liability and insurance on how to cap and allocate the

“extraordinary nuclear occurrences”

• Management of spent fuel and waste, and decommissioning

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What is appropriate financing model

Financing and cost of

finance

What are the sources

and types of finance?

What are the different

financing models

employed in the nuclear

industry?

IAEA

So what is Financing? Providing necessary capital

through issuance and sale of debt and/or equity

Financing

Cost of debt:

Interest paid

Cost of capital:

return on

capital

Shareholder

Local banks international financial institutions export credit agencies Suppliers international development organizations Capital markets

Debt Financing Equity Financing

Local and foreign investors

Capital markets: like IPO

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Financing: Cost of finance

In simple case weighted average cost of capital (WACC)

is:*

WACC = Debt

Debt +Equity

Rd + Equity Re

Where:

Rd is the cost of debt

Re is the cost of equity

* Without any tax adjustment

Debt +Equity

Generally, for nuclear the cost of finance is higher – with risk

premium of x% above other power generation assets added to

the interest rate

IAEA

Government

State Budget (like, tax revenue)

Equity ownership

Government incentives (like, loan guarantee,

construction delay insurance, guaranteed long

term power purchases agreements)

Export credit

Long-term Infrastructure bonds issuance

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Types of Financing

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Government Financing

Traditional Government financing: take all risks

and costs

Utilities (Generators) borrow on balance sheet

Who finally pays for all the costs?

Essentially 100% risk on the

customer: All costs: construction and operations passed on to

the customer!

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Government Financing

Traditional Methods of Financing

Government

Budget

Public Utility

Nuclear Power Project

Official Borrowing

Multilaterals

Commercial

Banks

Export Credit

Agency

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Nuclear: Traditional Financing Model

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:

ECA Commercial

Banks

Customer

Credit

Insurance

Credit

Repayment

Foreign Buyer

Exporter Lending Bank Payment on Delivery

Letter of Undertaking

How does it works?

ECA

Cover

IAEA

Governments seeks private sector participation

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Types of Financing

Industry financing

Corporate finance or balance sheet finance

Project Finance (non or limited recourse): Long

term finance based on the projected cash flow of

the project (In nuclear pure project finance is still

not applied but some combination of corporate

finance and project finance…hybrid finance

Co-operative finance or hybrid financing

Innovative financing methods

IAEA

Corporate finance or balance sheet finance: borrowing or raising

equity against the assets of the company as a whole. A bank or bond holder

which provides funds to the company has a claim against the company’s

whole cashflows, unless the loan is secured against a particular asset, as is

common for mortgages. Risk of that investment is borne by all providers of

capital to that company – Example EDF, Enel, RWE, E.On GDF SUEZ..

Applicable for SMR

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Industry Financing

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Industry Financing: New trends emerging

Characteristics of

hybrid financing

(corporate/project

finance):

The project financed

on the balance sheet

of TVO (Finland Private

Power Company)

Part of equity and

loan is provided by the

large customers

A long-term PPA with

large customers

ensuring future stable

revenue stream from

the project

Leverage

characteristics similar

to project finance

Export credit

guarantee by the

French and Swedish

Government

Co-operative model or hybrid financing :Olkiluoto 3 or Finnish Model:

Expanding equity partners to diversity risk

TVO

Debt

Financing

Equity

6

Shareholders

Other power

off-takers

(about 60)

External

Market

75%

25% Power use in

own operation Power use in

own operation

Shareholders:

•Equity injection

•shareholder loan

• no dividends

Debt

holders:

•Market rate

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Industry Financing: New trends emerging

Project Finance: Some trend emerging as new partnerships are formed to diversity risk

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Industry Financing: New trends emerging

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Equity Investment by vendors: the

new market trend? the extend of

investment will depend on the structure

of project

Partnerships: Partnership between

Babcock & Wilcox and Bechtel - has

signed a letter of intent with the

Tennessee Valley Authority (TVA) which

defines the project plans for constructing

up to six small modular reactors

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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

Models

Project Finance

Combination of

models proposed

and already

in use

Combination of

models emerging and

likely to be widely

used

Combination of

models widely used

Financing trends emerging

IAEA

Contractual Arrangements

Basically there are the following main types of contractual approach that have been applied for NPP projects:

Turnkey contract: a single contractor or a consortium of contractors takes the technical responsibility for the whole NPP project.

Split-package: the overall responsibility is divided between a relatively small number of contractors, each building a large section of the work.

Multi-contract: the owner or its architect-engineer assumes overall responsibility for engineering and managing the NPP project, issuing a large number of contracts.

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Ownership and Contractual Arrangements

Public Private Partnership Options

Broad

Category

Main variants Ownership of

capital

assets

Responsibility

of investments

Assumption of

risk

Duration of

contract (years)

Supply and

Management

Contracts

Operational/

Maintenance

Management

Public Public (O)

Public/Private (M)

Public (O)

Public/Private (M)

1-5

Lease Lease Public Public Public/Private 3-20

Concession** BOT* Public/Private Public/Private Public/Private 15-30

Private

Ownership of

Assets

BOO Private Private Private Indefinite

• Build-Operate-Transfer (BOT) has many other variants such as Build-Transfer-operate (BTO), Build-Own-Operate-Transfer

(BOOT) and Build-Rehabilitate-Operate-Transfer (BROT).

• **Franchise contracts are also a type of concession arrangements with 3-7 years of durations.

IAEA

Ownership and Contractual Arrangements

Built Own Operate and Transfer Type Explanation

Build-operate-and-transfer (BOT) A contractual arrangement whereby the project company undertakes the construction, including financing, of

a given infrastructure facility, the operation maintenance thereof. The project company:

- operates the facility over a fixed term

- charge facility users (customers) appropriate tolls, fees, rentals, etc

- the charges do not exceeding those proposed in its bid or as negotiated

- to recover its investment, and operating and maintenance expenses

- at the end of the fixed term, transfers the facility to the government

Build-own-and-operate (BOO) A contractual arrangement whereby a project company is authorized to finance, construct, own, operate and

maintain an infrastructure. The project company:

- allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by

collecting tolls, fees, rentals or other charges from facility users.

Build-and-transfer

A contractual arrangement whereby the project company undertakes the financing and construction of a

given infrastructure . The project company:

- upon completion turns the asset to the government

- Government pays the company on an agreed schedule its total investments expended on the project, plus a

reasonable rate of return

Build-lease-and-transfer A contractual arrangement whereby a project company is authorized to finance and construct an

infrastructure. The project company:

- upon its completion turns the asset over to the government concerned on a lease arrangement for a fixed

period after which ownership of the facility is automatically transferred to the government

Build-transfer-and-operate A contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to

a private entity such that the contractor builds the facility on a turn-key basis, assuming:

- cost overrun, delay and specified performance risks

- once the facility is commissioned satisfactorily, title is transferred to the implementing agency/LGU

- The private entity, however, operates the facility on behalf of the implementing agency/LGU under an

agreement.

IAEA

Contractual/Ownership Arrangements:

New trends emerging

For a first time a ‘build-own-operate’ (BOO) contact, where Rosatom will BOO the VVER nuclear units at Akkuyu, in Turkey

Project Company

Obtaining of all necessary licenses and permits

Project management

Funding engagement

Contracting

Decommissioning & waste management

Project company legal entity incorporated in Turkey

Founders:5 Russian government companies affiliated with Rosatom

Russian Party to retain majority stake during the whole lifetime of the Project (51%-100%)

Turkish Party hasn’t intended to finance equity of the Project Company

Turkey

TETAS,

Turkish utility PPA

Site

Project support

guarantees

EPC-contractor

Atomstroyexport

NPP Operator

Rosenergoatom

Nuclear Fuel Supplier

TVEL

Electricity Trading Company

INTER RAO UES

O&M contract

EPC contract

Fuel Supply contract

Agency agreement Advisory Service

(Legal and Financial) Consulting service

(Architect Engineer)

IAEA

Concluding Comments

Firm government commitment and support - imminent

Pure project finance is still challenging for nuclear: more difficult due to

Fukushima accident, foreseeable risk is unnecessary safety measures

might increase the cost of NPPs – adding to higher premium

October 2008 global financial crisis and strict financial industry

regulation will impact liquidity and make financing tough for investors,

like Basel III, that will force banks to increase the capital reserve and to

be vigilant regarding risky projects, like NPPs

Governments also urging multilateral financial institutions like World

Bank, EBRD, to assist with the financing of NPPs

Private financing will be in the form of JV among utilities with robust

balance sheets and financial risk management strategy

Construction risk is rated no 1 – so to gain confidence of investors the

industry needs more projects on Schedule and within Budget

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Thank you for your attention!

IAEA…atoms for peace.

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Nuclaer power - construction starts

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40

50

no

. of

con

stru

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tart

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Nuclear: Traditional Financing Model

OECD Arrangements and some features:

Scope of export

credit

ECA funding

cost *

Crucial funding

source for new

builds

Export credit

advantage

Constrains on

ECA support

Financing of up to

85% of the off-shore

portion

Banking fees

Without guarantee

commercial banks are

cautions of lending

Loan Term – 18 yrs

repayment period

Ability to finance ECA

premium and IDC

ECA support limited

by export content

Support for local

content is 15-30% of

the off-shore portion

Interest

rate:LIBOR/EURIBOR

+bank margin

(depends on country

risk assessment)

State involvement

brings significant

funding capacity

Flexible repayment

structure:

- Straight line or

levelised (mortgage

style) payment

schedule

- Possible

postponement of

starting payment

Sovereign debt

capacity

* The ECA funding cost levels depend on country category for some countries that fall in high risk

category fees can be very high, as risk premium is added.