In the last three decades both the utility and financial markets have changed in important ways. On the utility side, the rules have changed substantially. The new conventional wisdom is that progress means deregulating quasi­monopolistic markets and unbundling transmission, distribution and gen­eration so that there is full competition among electricity generators and full choice for customers. While full deregulation, unbundling and competi­tion are not yet established in most countries, this model affects financing considerations for new power plants. Thus the market risk for utilities has changed and will continue to change, even as demand for their product, electricity, continues to grow. Moreover, in liberalized energy markets, investment has become a private sector affair, again with direct implications for finance.

On the financial side, international capital markets have become increas­ingly global and competitive. While the basic types of equity and debt finance have not changed, a variety of new financial instruments and pack­aging schemes have evolved to better mitigate risk exposure, assure returns on investments and attract investors to specific projects. Access to global capital markets can be beneficial for public and private sector utilities alike, though it also has its downsides of being subjected to its short-term whims and market conditions.

An investment in a nuclear power plant will normally be led by a large utility or special-purpose entity. Other utilities, large-scale electricity users, vendors or simple investors may join the venture for different motives. Other utilities may wish to expand their portfolio by taken ownership and selling their share of electricity or gaining experience with nuclear power. Large-scale electricity users may wish to secure long-term (and low-carbon) supplies at predictable costs. Vendors may participate as part of the sales package, thus not only easing finance for the utility but also assuming a role in risk sharing. Straightforward investors provide finance with the objective of earning adequate returns.

Options

There are three basic ways in which a plant construction project can be structured, all of which have been used in the power sector: government (sovereign), corporate (balance sheet) and limited recourse (including project) finance (shielding sponsors’ non-project assets from liability for project obligations). Government finance can come either straight from the annual budget, from government-issued securities (e. g., bonds) or from funds borrowed by the government in national or international capital markets. The terms of any non-budget approach depend on the country’s overall credit rating. The government-owned utility will be the owner (and likely operator) of the plant. Any future operating profit will go to the government budget. Direct government involvement in a nuclear power project, e. g., asset ownership, equity participation, risk sharing and provision of various incentives including loan guarantees, imposes a certain degree of risk on the public sector itself (and thus society at large). The government may also incur indirect or non-finance-related risks, such as obligations to maintain infrastructures or assume the liability for plant and site decom­missioning and spent fuel waste management.

Corporate financing means financing the project from the utility’s (and partners’) own resources, i. e. accumulated undistributed past profits, current revenue and from loans taken against existing assets. All participants (except lenders) will directly own and share the plant as an asset. The lead utility is the likely plant operator but will have to share the net proceeds (or whatever the arrangements foresee) with its partners. From the perspec­tive of lenders, balance sheet finance secures their loans against all the assets of the utility and partners, not just the investment project. Plant owners may be able to exclude a portion of their assets from serving as potential collateral by ring-fencing parts of their corporate structures. But limiting the collateral increases the lenders’ risks and lenders, in turn, will demand higher returns (interest) or decline providing loans at all.

The utility (and co-owners) assume the bulk of the investment risk against their asset base. Any problems with the plant such as construction delays, plant completion, commissioning or operational availability places these assets directly at risk. The financial sector tends to respond to a utility’s nuclear investment decision by downgrading its credit rating, increasing its cost of borrowing across the board. With a likely (nominal) investment outlay of $10 billion to $14 billion for a twin-unit nuclear power station, a complete failure would put most utilities at the brink of bankruptcy.

Limited or non-recourse finance (also known as project finance) involves the foundation of a separate corporate entity for the sole purpose of con­structing a power plant to be either sold after completion or operated for future revenue generation. Participation in the project occurs by putting up equity (i. e., buying shares) in the corporation. The corporation may seek loans for the plant construction from the financial sector or private inves­tors but, given that the collateral is limited to the shares in the corporation itself (in other words the plant), the prospects for loans are generally slim or exquisitely expensive. Shareholders in the corporation, however, only risk the equity they put into the project while their other assets are protected.

Project sponsors do have some options for generating equity among themselves, either as good-faith money or to supplement available invest­ment. One source of equity could be balance sheet financing. Another pos­sibility could be to expand the number of equity partners to include partners who could provide equity in kind, or for principal customers to become major shareholders as a way of assuring security of supply. For Olkiluoto-3 in Finland, this latter approach made possible a 25% equity share. Another mitigating option is for sponsors to recruit local equity financing for local content.

The key differences among them are the ownership pattern they estab­lish, which in turn governs the degree to which they protect the interest of investors and creditors, and the ways in which they allocate risk. Theoretically, any combination of entities, financing schemes and debt and equity could be considered for investment in the electricity industry, or for a nuclear power plant. In practice, this has not been the case. Non-recourse or limited — recourse financing, for example, offers no recourse collateral to lenders except the future income and assets of the project itself, and so tends to be used for renewable energy or less capital-intensive projects with shorter construction times and more flexible assets (e. g. natural gas turbines), rather than for capital-intensive investments like hydro projects and nuclear power plants. Schemes like public-private partnerships (PPP), build-operate — transfer (BOT), build-own-operate (BOO), and their variations, define the ultimate ownership of a project but are not really financing schemes (other than transferring finance obligations from the government-held utility to the private sector entity or partner in the investment venture).