FAQ

How are new build nuclear projects financed?

Answer

While existing nuclear power plants are highly economic with predictable operating costs and excellent profitability, the financing of new nuclear plants is more challenging for investors seeking to balance risk and return. Governments have to decide on nuclear power plant construction: it is a political decision and involves a long term commitment of around a century, as part of their national energy mix. One of the most important considerations, and a crucial government responsibility, is the need for efficient and rational electricity pricing. Political risk is a major concern for investors and lenders in developed and developing countries alike.

Background

Nuclear power plants are acknowledged to be capital intensive, which by itself is not a problem for financing. But high capital intensity carries with it consequent high capital costs, and especially a high level of sensitivity to interest rates, to construction delays, cost overruns or to inflation, all of which can quickly multiply financing costs. Financial analysts and investment bankers tend to consider investment in the nuclear sector as no different from investing in any other large up-front capital cost project, as evidenced, for example, by the creation of nuclear investment funds.
Risks are attributable variously to regulatory concerns, unknown costs, lack of experience, licensing uncertainties, long construction times, concerns about public opinion or public acceptance, and legal conditions in some countries (which is the risk of the contractor/vendor). Commercial capital participation requires a rigorous assurance of returns. Government guarantees are not the only source of such assurances. Providing assurance of returns (through cash flow certainty or loan guarantees, for example) is a major aspect of a business plan, an important prerequisite for successful financing.
To obtain financing, new build projects need to boost confidence that plants will be built to budget and schedule and will yield the expected economic performance. This is achieved through effective communication, the assurance of government commitment, thorough identification of risks; the correct allocation of risks and responsibilities among stakeholders; well designed plants in terms of safety and performance; and strong project management.
One of the most important considerations, and a crucial government responsibility, is the need for efficient and rational electricity pricing. Political risk is a major concern for investors and lenders in developed and developing countries alike.
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