New Nuclear Development – Corporate Risks
Citigroup Global Markets, 9 November 2009
https://www.citigroupgeo.com/pdf/SEU27102.pdf
The Five Risks
There are five substantial areas of risk faced by developers of new nuclear
power stations. Three of those risk areas are so big and significant that if
they go wrong, the developer (even the biggest utilities) could be financially
damaged beyond repair. These risks can be classed as Corporate Killers.
The [U.K.] government today announced measures to limit Planning risk,
which while important in encouraging developers to bring forward projects,
is actually the least significant risk financially. The government is still asking
the utility companies to take on the three major risks — Construction, Power
Price, and Operational. Indeed, at no time, anywhere in the world, has a
utility built a new nuclear power station and taken the full Construction,
Power Price, and Operational Risk.
The five risk areas are:
1. Planning:
Nuclear power remains controversial and opposition to new developments
often results in extended planning procedures. In a lot of countries, planning
can take five years or more. The UK government’s action today is designed
to limit this time frame, reducing the risk faced by developers.
However, while an expiated planning process is essential in encouraging
developers to bring forward projects, it is in fact the least risky element in
the development process from a financial perspective. Developers will have
spent some money acquiring a site (which could probably be used to build
a conventional power station if planning consent for a new nuclear plant
is refused) and will commit time and a few ¢G10m’s to the planning
process. While annoying for the developers if this turns out to be wasted
time and money, in no way would a failed planning application threaten the
financial integrity of a utility company.
2. Construction:
Below we give the latest data on the current and future costs of building a
new nuclear power station. The latest evidence suggests a cost range of
€2,500/kW to €3,500/Kw. For a 1,600MW unit, that means a construction
cost of up to €5.6 bn. We see very little prospect of these costs falling and
every likelihood of them rising further.
The cost of the TVO plant in Finland has increased from €3.0 bn to €5.3 bn
since construction started. It has also proven to be very difficult to predict
how long a new plant will take to build. The TVO plant is also running three
years late. Cost overruns and time slippages of even a fraction seen by
TVO would be more than enough to destroy the equity value (and more)
of a developer’s investment unless these costs can be passed through
somehow.
Given the scale of these costs, a construction programme that goes badly
wrong could seriously damage the finances of even the largest utility
companies.
3. Power Price:
Nuclear power stations have very high fixed costs and relatively low
variable costs. Their cash flows and profitability are therefore particularly
sensitive to the price that they sell their power.
As we show later, even at the low end of the build cost estimates, we
calculate that a new nuclear station will require €65/MWh (¢G58.5/MWh)
in real terms year in/year out to hit its break-even hurdle rate. As we show
in Figure 5, the UK has only seen prices at that level on a sustained basis
for 20 months of the last 115 months. It was a sudden drop in power
prices that drove British Energy to the brink of bankruptcy in 2003.
No nuclear power station has ever been built to our knowledge where the
developer takes the power price risk.
4. Operational:
Because of their high fixed cost base, nuclear stations are also very
vulnerable to shortfalls in output due to operational unreliability. A
six-month breakdown can cost ¢G100m’s in direct costs and lost output,
particularly if the output has been pre-sold. This risk is too great for a
single project to bear, in our view, and at the very least needs to be
spread across a portfolio of assets.
5. Decommissioning / Waste:
Nuclear plant operators set aside money in order to pay for
decommissioning and the disposal of waste. Estimates of these costs
can jump around by many ¢Gbn’s depending on what discount rates
are used, etc.
The UK government is proposing adopting the “pay as you go”
approach used successfully in the USA amongst other countries.
Basically a tax will be paid on each MWh produced (probably as little
as ¢G1/MWh). This would effectively limit the risk faced by the
developers.
In our view, it is extremely unlikely that private sector developers will
be willing or able to take on the Construction, Power Price, and
Operational risks of new nuclear stations. The returns would need to be
underpinned by the government and the risks shared with the taxpayer
/ consumer. Minimum power prices (perhaps through capacity payments),
support for financing, and government-backed off-take agreements may
all be needed to make new nuclear viable.