financing nuclear projects — a. abdel aziz

Gowlings-OCI Nuclear Supply Chain SymposiumNovember 2015

Financing Nuclear Projects

Ahab Abdel-AzizGlobal Director of Nuclear Power GenerationGowlings LLP

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What Is Nuclear Project Risk?

• Public fear of nuclear accidents • Regulatory intensity and standards• Nuclear projects have suffered from 2 inherently

related types of risks:• Completion Risks: where a reactor never produces electricity

either because the project is too upside down or because of the withdrawal of political support

• Economic Risks: where the project goes upside down - cost exceeds economic return (without accounting for public industrial economic policy returns)

• The overhanging risk has become all important in nuclear power development

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Government Engagement With Nuclear Risk: 3 Models

• Currently, there are three models for the government’s role in nuclear power development and finance

• Complete Engagement:• Complete engagement in proponency, ownership and risk absorption • Those are the world’s most active nuclear programs• Ex: Russia, Korea, China, UAE, India

• Complete Disengagement:• Complete disengagement, hoping to shift the responsibility for proponency,

ownership and risk absorption to vendors or private market actors• Those programs are not proceeding at all• Ex: US (Calvert Cliffs, South Texas), Bulgaria

• Middle Road:• Attempting “middle options” with partial or ambiguous government engagement by

offering to hedge some risk for private capital investment in nuclear projects• Early tally suggests only likely to succeed where the correct risks are effectively

hedged and likely to fail where they are not• Ex: UK’s CfD (Hinkley Point C, Horizon, NuGen), US (Vogtle and VC Summer)

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US “MIDDLE OPTION”

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4 Projects Selected for Loan Guarantees

• License applications for some 33 proposed reactors• US DOE wanted to support a mix of “Project

Financed” and “Rate Based” projects• US DOE selected 4 projects for intense due

diligence:• Constellation Energy’s Calvert Cliffs #3• NRG’s South Texas # 3 and #4• South Carolina Electric & Gas VC Summer #2 and #3• Southern Company’s Vogtle #3 and #4

• Only VC Summer and Vogtle are proceeding

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What’s Working

• VC Summer and Vogtle are under construction• Rate based: utilities are able to obtain both advanced

rate hikes and, after construction approval, pass the cost onto the rates

• This is a public hedge of the nuclear project risk• It is working

• It has a similar impact to a fully engaged government• Capacity to anchor construction risk• These models point to the type of risk hedge that works and the type that

does not

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THE UK EMR, ANOTHER “MIDDLE OPTION”

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How the CfD Mechanism Works: An Illustration

Sources: UK Electricity Market Reform White PaperJohn E Parsons, “The Principles of Finance and Nuclear New Build”

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Summarizing What the EMR Provides Nuclear

• The UK’s CfD is a mechanism for an electricity market price hedge• It is not a project completion risk hedge

• The UK Guarantee is a liquidity enhancement• It is specifically designed to avoid completion risk

absorption by the UK Government• The UK EMR does not hedge project completion

risk • No UK government completion risk absorption• No rate base absorption of schedule delay or

cost overrun

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Hinkley Point C

• For Hinkley Point C, the CfD and UK Guarantee were structured to insulate the UK government from completion risk

• Result: EDF and its equity partner, CGN, have been required to put up a massive contingent equity fund• £8 billion on a £24 billion project

• Even EDF (French government-backed) could not absorb this alone

• The project could only proceed with the Chinese sovereign also stepping up to the risk

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Horizon & NuGen

• Horizon & NuGen are not owned by sovereign-backed shareholders• Toshiba-Westinghouse GDF and GE Hitachi

• The result to expect:• Sponsors will be pushing for contingent equity

participation from the Tier 1 contractors, and they, in turn, from the supply chain behind them

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Brave New World

• Eastern Europe and other smaller economies (Poland, Romania, etc) all intend to copy the UK EMR model

• If that happens, sponsors will have to pass completion risk and contingent equity down the supply chain

• Bottom line: unless governments change tact, supply chain members need to be prepared to participate in the contingent equity requirements• It is pay-to-play and that will have to be factored into

the price

Thank You

montréal · ottawa · toronto · hamilton · waterloo region · calgary · vancouver · beijing · moscow · london

Ahab Abdel-AzizGlobal Director, Nuclear Power GenerationGowling Lafleur Henderson LLPTEL: 416-814-5608EMAIL: ahab abdelaziz@gowlings.com