Plant construction completion on time and on budget is by far the largest financial risk faced by investors in nuclear power. With a financial exposure of several billion dollars per plant, even small cost overruns or slippages in completion can adversely affect a utility’s equity value. The negative exam­ples of the cost overruns of an estimated 75% and completion delay of three to four years as experienced by the Olkiluoto project in Finland (NW, 2010a; KPMG, 2010) and the 50% over budget and two years behind schedule of the Flamanville-3 plant in France (NW, 2010b) led many financial analysts to conclude that the ‘economics of nuclear say no’ to new nuclear build (CITI, 2009; Moody’s, 2009). Clearly, such cost overruns can only be shoul­dered by the largest utilities such as TVO or EDF. Both entities are special in their ownership structures, which differ greatly from other utilities around the world and have helped avoid otherwise likely economic and financial

troubles. TVO, though a privately held company, sells its electricity exclu­sively to the owners at cost, which eliminates some uncertainties such as demand and market risks and also allows passing through unexpected higher generating costs. EDF is largely government owned (84.5%) and thus better bolstered for events like Flamanville than privately held utilities operating in competitive markets.

The track records of Olkiluoto and Flamanville are worrisome indeed, but one has to put them into the perspective of a FOAK situation and the lessons learned for future projects. Many potential nuclear power undertak­ings in Europe and North America are likely to encounter some kind of FOAK flavour simply because of lack of recent construction experience. This and the fact that, historically, many nuclear-building utilities suffered downgrades in their credit ratings during the construction phase (Moody’s, 2009), reflecting the risk profile of nuclear power investments, are argu­ments used by finance institutions in their pessimistic outlook on new nuclear build.

One suggested hedge for containing construction cost overruns is phased financing. This approach, already implemented in China and proposed for new plants in the US, involves financing a project in tranches, starting with construction. The cost of capital for each phase will reflect the risks only of that phase, so that the high costs of construction risks are not carried over throughout the project. During construction, the main risk is completion on time and within budget. As construction proceeds and completion risks diminish, the cost of capital can also fall. Once completed, investor risks are essentially reduced to operational and market risks (revenue stream). Different financing phases may also have different capital structures: for example, shareholders would generally be at risk for the construction phase, but non-recourse financing might be introduced with the onset of commer­cial operations. Phased financing is deemed to be especially effective with a phased asset transfer and, where applicable, a phased sell-out of govern­ment interests. Phased financing may thus facilitate government participa­tion in a private sector project, since a government could choose to finance or guarantee only a part of the project and then privatize its share of the plant. The concept of phasing may also help to manage supply bottlenecks and the need for trained personnel, regulators and other project inputs.

The same concept of phasing applies on a broader scale to the start of a nuclear programme. The first unit will carry a higher risk of successful com­pletion — and higher costs — than subsequent units. However, once a few units are built and operating successfully, the financing model can change, with revenue from operating units being used to finance new build.

But it can confidently be expected that, with regained knowledge and build experience, construction schedules will be met and cost overruns minimized as demonstrated elsewhere: neither the limited European construction experience nor the nuclear power history of North America is representative globally. There are numerous nuclear power plants in Asia that have been completed on time and on budget. One can only move down the learning curve with repeated plant construction over short time inter­vals. Construction times of just 48 months or four years have been demon­strated in the Republic of Korea, Japan and China — these three countries alone account for more than 70% of all nuclear power construction activity since 1990.

However, in most industrialized countries new construction of power­generating plants has generally been limited and has lacked technological diversity. In the last decade, the majority of new generating plant con­structed in non-Asian OECD countries has been either gas (especially combined cycle gas turbines) or new renewables, especially onshore wind (NEA and IEA, 2010). So new coal power plants, especially if equipped with CCS, share the issue of construction cost uncertainty with nuclear power.

15.4.2 Market rates

Irrespective of the actual market structure — liberalized or regulated — the cash flow and profitability of a utility depend on its operating efficiency and the price at which it can sell its electricity in the marketplace. The high fixed costs and low operating costs of new nuclear power plants require higher revenue per kWh to break even than most competing alternatives. It is questionable if private sector entities involved in nuclear power projects are willing to take on the price risk. In regulated markets of developing countries, social considerations of delivering affordable electricity to the poor are often enforced upon utilities to sell electricity below costs. Their economic survival then hinges upon government subsidies. In either situa­tion, the price risk serves as a barrier for private sector finance of new nuclear build.

Market risks can be mitigated with long-term power purchase agree­ments with large-scale electricity customers such as electricity-intensive industries and larger communities. It has been argued that with long-term power purchase agreements in place, lending institutions would be satisfied with an expected rate of return of 5% to 10%. The same plant operating in a merchant market with no underpinning contracts would be confronted with rates of 10-12% (Bulleid, 2005) with direct implications for WACC and IDC.

Generally, once operating and with plant completion risks eliminated, the economics of nuclear power plants are viewed favourably by ratings agen­cies and investors alike. The longer-term outlook is even better, when plants are more and more amortized and the capital portion of operating costs approaches zero.

Environmental policy is another uncertain element influencing the market price of electricity. Nuclear power has a small greenhouse gas (GHG) footprint per kWh, thus its competitiveness (along with other low GHG-emitting technologies) would benefit from policies targeted at miti­gating climate change. Electricity demand prospects themselves are a source of uncertainty. The emergence and market penetration of smart grids, including real-time pricing, may flatten the load profile — a positive aspect for the baseload technology nuclear power — but also better integrate inter­mittently available renewables, thus improving their competitiveness against nuclear power. Efficiency improvements at the level of electricity use spurred by government policy could substantially dampen future demand growth while a large-scale advent of electric vehicles might even result in accelerated growth.

15.4.3 Operational

Operational risks relate primarily to operational unreliability due to unplanned outage. High fixed costs combined with unit sizes often counted in multiples of fossil and renewable plant capacities make the unavailability of a nuclear generating station a costly affair. In addition to lost revenues, utilities that sold their electricity under long-term power purchase agree­ments may be forced to provide high-cost replacement power from other generators. Operational risks are generally less an issue for utilities with a sufficiently large portfolio of generating capacities.

Plant operating safety is a non-negotiable prerequisite for a profitable nuclear power plant. A plant that is found to be not in compliance with operating safety regulations will be shutdown by the national regulatory authority and a shutdown plant does not earn revenues. Moreover, regula­tory oversight and, if necessary, intervention also protects the utility’s revenue generating asset from potential serious damage and long-term unavailability. An operational risk exists, however, if regulatory interven­tion is politically motivated and not exclusively safety related.

15.4.4 Waste and decommissioning

Private sector investors shy away from unknown or unknowable liabilities. Spent fuel and nuclear waste management, as well as plant decommission­ing at the end of a service life of 60 or more years, are factors with no practi­cal or commercial evidence (except for decommissioning) regarding their eventual costs. It is also unknown under what kind of regulatory environ­ment waste management and decommissioning will take place, e. g., to what level will plant sites have to be decommissioned beyond plant demolition, decontamination and debris removal. In order to cope with long-term liabilities, most jurisdictions assess a levy on nuclear power plant operators for every kWh produced to be paid into an escrow fund (or equivalent) to be used for waste management and decommissioning. Whether or not the escrow funds accumulate funds sufficiently large to cover all post-closure cost remains to be seen but their existence limits the risk exposure of investors.

15.3 Conclusions

Generally, the economic prospects of nuclear power look promising, and generating costs on a life-cycle basis are competitive against alternatives in many markets. But nuclear power is capital intensive with long amortization periods and capital requirements that amount to several billion dollars per unit — overstretching the comfort levels of many investors. Finance, there­fore, is one of the major barriers for nuclear power. In liberalized markets only very large utilities can finance a nuclear power project.

The economics of nuclear power embrace more than the life-cycle gen­erating costs and include energy supply security, reliability and price stabil­ity considerations as well as environmental policy objectives. Nuclear power is a technology with the lowest externalities — as most externalities have already been internalized. Nuclear power is an effective and efficient GHG mitigation technology. Where energy security and protection of the environ­ment are national policy objectives, a quasi-internalization of externalities may warrant some form of financial support or guarantee for private sector investment in new nuclear plants. A level playing field with clear and uniform performance criteria for all generating options reduces overall uncertainty and raises the probability that electricity market prices over the plant’s lifetime will provide an adequate return on investment.

At the minimum, unambiguous and sustained government policy support is required for nuclear power to unfold its economic potential. Such a policy in support of national nuclear power programmes as an integral part of a national energy strategy is paramount for investor and lender confidence and public acceptance of the technology.

Future international GHG reduction schemes may also recognize the mitigation potential of nuclear power and thus increase its attractiveness to investors and lenders, particularly schemes that award emission credits for environmentally benign investments abroad.[100] But even here, economic viability is inescapable; no-one is likely to invest in a financial black hole, nor to build nuclear power plants for environmental reasons, unless they are demonstrably profitable and among the most cost-efficient solutions.

The global financial community is still attributing a deterring risk/reward ratio to nuclear power. International organizations and governments alike need to join hands in enhancing the community’s ability to assess the invest­ment risks involved in nuclear power projects so that it can provide suitable finance packages for such investments, especially for countries currently without active nuclear power programmes. Newcomer countries will depend on the assistance of technology holders in launching their national nuclear programmes. Nuclear infrastructure and human resource development fol­lowed by financing are key in this regard.

The capital costs of nuclear power are expected to further improve as the number of plant orders increase and FOAK conditions decrease. The cost reduction potential for technology learning but also for design standardiza­tion is substantial.

Planning and construction times of nuclear power plants are longer than for most alternatives, excluding nuclear power from quick-fix solutions. Nuclear power is not a quick-fix solution to a country’s energy problems. But as an integral part of a long-term energy strategy, nuclear energy can contribute to a country’s sustainable energy development objectives.