investment and financing aspects to smr
TRANSCRIPT
Investment and Financing Aspects to SMR
IAEA Technical Meeting Economic Analysis of High Temperature Gas Cooled Reactors and Small Modular Reactors
August 25-28, 2015Vienna, Austria
ByDr. Nadira Barkatullah
OverviewNuclear Investment Cost
Nuclear Investment and Financing Challenges
Nuclear Power Plants Financing
Sources and Types of Financing
Emerging Financing Schemes and Possible Trends
Contractual Arrangements
Is there a Market for SMR?
Financial Risk Management Strategy
Concluding Comments
Inquires on Nuclear Power Projects How much would it cost to build a NPP?
How can we finance NPP?
What are IAEA's cost estimates for NPP?
Why do investment cost differ from country to country?
Why is there a risk premium of x% above other power generation assets leading to a higher interest rate?
Why is the cost of finance for nuclear higher?
What is the localisation rate?
Why such a wide range of NPP cost?
Nuclear Investment Cost Uncertainty for all ReactorsOvernight capital cost range by region (US $/kW)
Note: Data collected from various publications and studies to keep track of nuclear power plants investment costs, since 2008 (updated August 2014), all data in 2013 USD
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
North America Europe Asia Middle East
44
64
8
42
Nuclear Investment Cost: Overnight Capital Cost Uncertainty
Source: OECD: Current Status, Technical Feasibility and Economics of Small Medium Reactors, June 2011
5
SMR and Economies of Scale Challenge
SMR Overnight Cost $2.5/kW billion plus
SMR and LR Unit LUEC (5% discount rate)
Source: OECD: Current Status, technical Feasibility and Economics of Small Medium Reactors, June 2011
6
Nuclear Investment Cost
Less Complex and lower upfront capital costs
Less sensitive to interest rates
Shorter lead times (planning, construction, etc) and shorter payback periods
Base Load and security of supply
Site flexibility
Fit to smaller grids
Suitable for non-electric applications - desalination
Key Advantages
7
7
Nuclear Investment CostKey Challenges
Completion risk
Cost uncertainty
Other Financial Risks
Regulatory/policy risks (revised safety measures)
New financing structures required to attract private investors
Economies of scale SMR vs LR
Total Overnight Cost SMR $1-2bLR $6b -10b
Dol
lars
per
kW
5%
10%
Interest During Construction (% of OC)
- 5 10 15 20 25 30 35 40 45
2
3
4
6
Nuclear Investment Cost
Years
Interest
9Source: IMF World Economic Outlook, April 2014
Overnight capital cost quoted for a typical 1000MW nuclear plant range from $2 - $10 billion, therefore it is a significant investment commitment
0
10
20
30
40
50
60
70
80
90
1002 8 14 20 26 32 38 44 50 56 62 68 74 80 86 92 98 104
110
116
122
About 50% countries have GDP below $25 billion
Gross Domestic Product (GDP) in $2012 billions
SMR Overnight Cost $1-2 billion
Nuclear Investment Cost
10
Approximate market capitalisation of the leading EU, US and Asian utility companies
10
Country Utility Market capitalisation (USD billions)
EU GDF SUEZ 50
EU EDF 46
EU Enel 45
US Duke Energy* 55
US Southern Company 40
US Exelon Corporation 29
Asia Korea Electric Power Corporation 27
Asia Tokyo Electric Power 6
*Duke Energy merged with Progress Energy in July 2012 to form the largest US utility(Updated October 2012 )
Source: www.forbes.com , August 2015
Nuclear Investment Cost
Credit rating pressure
Toughto
borrow:higher
interest rates
Fitch Standard & Poors Moody's
AAA AAA AaaAA+ AA+ Aa1AA AA Aa2AA- AA- Aa3A+ A+ A1A A A2A- A- A3
BBB+ BBB+ Baa1BBB BBB Baa2BBB- BBB- Baa3BB+ BB+ Ba1BB BB Ba2BB- BB- Ba3B+ B+ B1B B B2B- B- B3
CCC+ Caa1CCC CCC Caa2
CCC- Caa3CC CC CaC C CD D C
Inve
stm
ent G
rade
Sp
ecul
ativ
e G
rade
Def
ault
Easier to
borrow:lower
interest rate
Nuclear Investment Cost
12
Nuclear Investment and Financing Challenges
• Other Challenges• Foreign Exchange Risk • Commodity Price Escalation • Operational performance risk • Uncertainty in the Regulatory process• Construction Supply Chain risks• Deregulated electricity market rules and regulation• Multinational Institutions policy on credit availability• Negative Public Perception of nuclear• Nuclear liability and insurance on how to cap and allocate the
“extraordinary nuclear occurrences” • Management of spent fuel and waste, and decommissioning
Financing More Challenging!
13
Fukushima Event
Less Complex and lower upfront capital costs
Less sensitive to interest rates
Shorter lead times (planning, construction, etc) and shorter payback periods
Base Load and security of supply
Site flexibility
Fit to smaller grids
Suitable for non-electric applications - desalination
Key Advantages
14
14
The Economics of SMR and FinancingKey Challenges
Completion risk
Cost uncertainty
Other Financial Risks
Regulatory/policy risks (revised safety measures)
New financing structures required to attract private investors
Economies of scale SMR vs LR
New financing structuresrequired toattract private investors
Nuclear Power Plants Financing
15
So what is Financing? Providing necessary capital through issuance of debt and/or equity
Financing
Cost of debt: Interest paid
Cost of capital: return on capital
Shareholder
Local banksInternational financial institutions
Export credit agenciesSuppliers
International development organizations
Capital markets: like bonds
Debt Financing Equity Financing
Local and foreign investors
Capital markets: like IPO
16
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 debtRe is the cost of equity
* Without any tax adjustment
Debt +Equity
17
Financing: Cost of Finance
Generally, for nuclear the cost of finance is higher – with risk premium of x% above other power generation assets added to the interest rate
WACC Other +Risk premium for nuclear = WACC Nuclear
18
How to attain finance?
What are the different financing models employed in the nuclear industry?Government Industry
19
20
Types of Financing
Loan guarantee
Government Financing and
support
State Budget (like, tax revenue)
Govt. Equity Ownership
Guaranteed Long term PPA
Long-term Infrastructure bonds issuance
Export Credit
TRADITIONAL
Government Financing
JV between CGNPC* (70%) and EDF (30%) to co-own and operate two nuclear reactors at
Taishan
Sovereign Loan Guarantee
*CGNPC = China Guangdong Nuclear Power Company
For Vogtle NPP of $6.5 billion (February, 2014)
UK Government cooperation agreement with Hitachi and Horizon Nuclear Power To promote external financing for Wylfa NPP ( WNN 4 December 2013)
Government Equity Ownership
US Department of Energy Loan Guarantee
UK Guarantee Scheme
Government Financing
*CGNPC = China Guangdong Nuclear Power Company
Government funding
$217 million over 5 years
Government FinancingExport Credit Agency
• 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
CustomerCredit Insurance
Credit
Repayment
Foreign Buyer
Exporter Lending Bank Payment on Delivery
Letter of Undertaking
How does it works?
ECACover
23
Government FinancingExport Credit Agency Finance
24
French Export Guarantee support to AREVA for Olkiluto-3 EPR (Finland)
Very important for the bankability of a nuclear power project
Long-term Attractive fixed interest rates High loan amount (85% of good
exported) Low total cost
Key features
Example
Other Export Credit Agencies like US-EXIM, KEXIM, JBIC, NEXI, etc., have also supported their domestic companies
Governments seeks private sector participation
25
Types of Financing
Industry financing Corporate finance or balance sheet
finance
Co-operative finance or hybrid financing or investor finance
Project Finance or non recourse finance
New financing trends
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
Industry Financing
EDF, Enel, RWE, E.On GDF SUEZ..
26
Corporate finance or balance sheet finance: borrowing or raising equity against the assets of the company as a whole
Industry Financing
France Flamanville 3 project in France, by EDF (Areva PWR 1650MW)
Construction cost €6b (Jul 2010)
Operational: 2016? 4 yrs behind schedule More than € 2 billion over
budget estimated cost at €8.5 billion or more?
27
Risk diversification: shared ownership and partnerships are important to curtail credit pressure
Example EDF
Industry Financing Trends: Investor Finance Model
28
EPC Contractor
6 Shareholders
Lenders
Technical and safety licensing and regulation
Price regulation
Completion risk
Construction contract
Equity
Rights to Electricity produced
Operational cost and debt service
Completion risk mitigation
DebtDebt Service
MankalaCompany
Mankala Model
Large industrial customers (about 60)
Regulator/s Finland:Olkiluoto-3 Project and proposed Hanhikiviproject
Some other countries in Europe also want to adopt this model as it promotes risk diversification
Industry Financing Trends: Vendor Financing
29
Vietnam: Ninh Thuan 1,200 MWeVVER loan by Rosatom to EVN of $8 billion (WNN Aug 2015)
UK: Hinkley Point C, AREVA 10% equity, EDF 45-50%, China General Nuclear Cooperation and China National Nuclear Corporation will have 30-40% and other (WNN, 21 October 2013)
Pakistan: Karachi Coastal power project 1 and 2 (2200 MW), China National Nuclear Cooperation loan of $9-10 billion (July 2013) Turkey: Rosatom Built
Own and Operate Scheme (a contractual arrangement) for Akkuyunuclear power project to build Russian design VVER 1200MW – 4 units. Main stakeholders: Russian Federation and the Republic of Turkey
BOO/BOOT
Industry Financing: New Trends Emerging
30
Owners and investors looking towards the capital marketsEquity: Initial Public OfferingIssue of Bonds
State-owned China Guangdong Nuclear Power Holding (CGNPH) completed the sale of its first offshore yuan bond, raising CNY1.5bn ($240m) via a three-year bond at 3.75%..rated A+/A3 -Fitch & Moody’s (Nuclear Business, Nov 2012)
IPO is issued by the China National Nuclear, (The Wall Street Journal, 20 Aug, 2012)
Romania’s Nuclearelectrica listing raises EUR 63 million (Business Review 23 September 2013)
China Nuclear Construction Company plans to raise $289 million as IPO (NW May 29 2014)
China General Nuclear Power, the country’s largest nuclear power producer, has filed for an IPO of $2 billion (Reuters 3 September 2014)
Korea Hydro and Nuclear power, which has issued $750 million in bonds in Sep 2012 and another $500 million in September 2013 (em.cbonds.com)
Tepco to seek $2 billion in private-placement bonds from lenders (Reuters 19 November, 2013)
Risk transferability from
pub
lic to
priv
ate
Ownership transferability from public to private
Government Financing
Corporate Finance
Co-operative or investor
finance Models
Project FinanceCombined models
proposed and alreadyin use
Combined models emerging and likely to be widely used
Combined models widely used
Financing Models Trend
31
Government Support
Vendor financing
Existing 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.
New Contractual Arrangements Built Own Operate scheme: A contractual arrangement whereby
a project company is authorized to finance, construct, own, operate and maintain an infrastructure.
The project company is 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.
Example: Akkuyu NPP Project in Turkey Russian design: VVER 1200MW –
4 units Main stakeholders: Russian
Federation and the Republic of Turkey
Project Company: Russian government companies affiliated with Rosatom to BOO the NPP
Construction likely to starts in 2014
Is There a Market for SMR?It is expected that over the next decade SMR
deployment would generally take place in deregulated markets with loan guaranteeThose who want to built small plants (single/multi units) Need factory fabricated units Remote – floating reactors Small GridsHave less up front capitalClean Power
The financiers what to see some SMR built!Plus what is the potential market and can this generate income to pay the debt/return on equity to investors?
Is There a Market for SMR?
Source: SMR feasibility Study, National Nuclear Laboratory, December 2014
Niche Market or the Target Market?
Feasibility Studies
Is There a Market for SMR?
Source: WNN 14 August 2015
Niche Market?
Financial Risk Management To attain finance requires development of “Financial Risk
Management Strategy Framework”
Identify, Assess and Estimatefinancial risks
Allocate risks–who takes on the responsibility?
based on the financing model & contractual/ownership structure
Develop Risk MitigationStrategy
Includes construction and operational cost risks
37
Risk allocation strategy – risk matrixRisk allocation and identification in financing An example: Construction Phase
38
Name of risk Riskassessment Allocation Mitigation
Construction delay Medium Owner/Contractor
Credit risk High Owner/Lender
Foreign Exchange/Currency Medium Owner/Lender
Interest Medium Owner
Qualified third party contractors/PMC
Fixed rate/ECA
FX hedging strategy
Well defined loan agreement
A Strategic Financial Risk Management Strategy is a must!
Concluding CommentsGovernments have a critical role with explicit long-term commitmentWide range of overnight capital cost challenging for newcomersFinancing and construction duration key influencing factors to impact total investment
cost The Fukushima accident foreseeable risk might lead to additional safety measures,
which might increase the cost of NPPsGovernment financing still dominate the industryECA support is vital and ensures bankability of the projectPrivate financing - JV among utilities with robust balance sheets and hybrid financingRisk diversification and meticulous Financial Risk Management Strategy imminentStrict financial industry regulation, like Basel III to impact liquidity and more vigilance
of risky projectsFinancing NPP is challenging but viable with new financing trends emerging to
support nuclear new builtConstruction risk is rated no 1 – so to gain confidence of investors…”more
projects on Schedule and within Budget”
39
40
Thank You!