Equity and debt are the basic elements of capital finance. Equity finance means taking ownership, i. e., raising capital by selling shares of ownership in a venture. Sponsors may buy shares themselves (internal equity) or sell shares (external equity). Equity owners are attracted by the potential for profit (from electricity sales) compared to other investment opportunities. Equity is completely at risk should the venture fail. Higher risk exposure and different income tax implications than loans make equity more expen­sive than debt to attract. Equity thus raises the WACC and hence the project cost, but is needed to establish project credibility, especially if the sponsors have poor records at cost control or low credit ratings, or the plant is the first of a kind or first in a country. Hence utilities are usually expected to channel significant equity into nuclear power plant investments.

Debt is borrowed money. Creditors are attracted by the creditworthiness of the project (potential for repayment) and the price (the cost of the loan and the risk-return ratio of the interest income offered to the creditor). The price or interest rate is commensurate with the perceived risk of the loan as well as with the presence of, and potential recourse to, collateral assets of the utility. If a creditworthy government or other entity guarantees the debt, the risk of non-payment and hence the cost of debt both fall signifi­cantly. Creditors by law have priority over owners in case of project failure. The fact that most loans involve contractually agreed interest rates and repayment schedules which are independent of plant performance further reduces the risks to lenders (NEA, 2009).

Proper conditions and incentives for attracting these elements would include assurances that the project is viable. This means that revenues will cover costs (which presumes careful market analysis); that profitable return of and on investment is assured (i. e., no cost overruns that reduce returns over the life of the project, and a regulatory and fiscal climate that is rea­sonably stable and not expropriative); that profits can be repatriated, if this is applicable; that debt repayment is guaranteed; and that risks are properly allocated and managed. Any viable financing scheme must include an effi-

cient and proper allocation of costs, risks, rights and responsibilities among the responsible parties. A project structure that imposes serious discipline in cost and risk management is a sine qua non of successful financing, what­ever arrangements are made with regard to debt and equity.

For any sizable project, some combination of debt and equity is generally required; for multi-billion dollar projects like nuclear power plants, 100% equity or internal financing is highly unlikely. Debt will be preferred by project sponsors: the financing costs of attracting debt are lower than the costs of attracting equity, and debt puts someone else’s money at risk. Lenders to the project will prefer a high equity component, to reduce their own exposure, and as a measure of credibility and project sponsor confi­dence or good faith. The split between equity and debt in the structure of any financing scheme will depend inter alia on the nature and financial position of the project sponsors, on local conditions where the plant is to be built, and on the viability, structure and evolution of the electricity sector in which the plant will operate. Many financing considerations are the same regardless of whether a plant’s sponsors are state-owned companies or governments or private sector companies. However, the risks can be quite different.

Financing a nuclear power plant requires the commitment of large amounts of capital over extended periods of time. Payback periods of 30 years or more are substantially longer than those of most other generation technologies. Expenditures commence up to 10 years and more before the first revenue is obtained. Only a few private sector utilities or large institu­tional investors are willing and able to deal with the inherent uncertainties associated with such long payback periods (demand, market structures, prices, regulatory changes or policy interventions).