Splitting the (financial) atom: how public backing produces cheaper nuclear power
By Robert Seiler
It’s official: nuclear is back in Wales.
After weeks of discussions over the risks of investing in large-scale energy projects, the British government proposed to become an equal investment partner in the new Wylfa Newydd nuclear plant.
Under a tripartite financing structure, London is going to take a £16 billion stake in the plant, signalling that it has learned its lessons from past failures.
Both in Wales and further east in Europe, a public stake plays a critical role in facilitating large-scale, low carbon energy projects.
Warning bells and lessons learned
Any discussion of the planned Wylfa Newydd project is obliged to give a cursory nod to Hinkley Point C, the first and only nuclear power station to be built in the UK since 1995. When complete, Hinkley Point will produce the most expensive electricity compared to all power stations bar none. Globally.
The irony is that this is largely due not to the installation costs (admittedly somewhat higher than competition) but to its financing model. The House of Commons Committee of Public Accounts frets that with “estimated costs to the consumer having risen five-fold” since the project’s go-ahead, the deal struck on Hinkley Point locks Brits into footing the bill for the government’s lack of nous when negotiating the ‘strike price’ for electricity produced at the facility.
Housed within a ‘Contract for Difference’ (CfD) – contracts used by the UK to secure procurement of low carbon energy – a strike price is the guaranteed rate the government agrees to pay a low carbon generator per unit of power. If the market price for a unit produced falls below the strike price, the government pays the generator the difference (and vice versa).
With either scenario guaranteeing the generator a steady revenue stream, the CfD theoretically helps reduce the risk of investment and financing costs of large-scale, low carbon energy projects in the UK. Why only theoretically? Because without the comfort blanket of cheap debt and underwritten risk that government investment brings, generators are incentivised to negotiate elevated strike prices to hedge against sovereign and political risks.
Private investors demand a premium for taking these risks, which can range from shifting policies towards nuclear energy from the standard issues facing major infrastructure projects. There are numerous precedents of construction projects that were already underway when political considerations forced them to be scrapped, leaving billions in investment wasted. There are also project implementation risks associated with all large-scale infrastructure projects. Infrastructure is always risky and projects are often plagued with delays and cost overruns, be they airports, railroads or baseload energy. That’s why even privately-funded infrastructure projects typically get some kind of public support to hedge the risks taken by private investors.
In the case of Hinkley Point, the National Audit Office estimates the government could have almost halved the strike price agreed in the CfD had it taken a 50% equity stake in construction. As a tripartite investor in Wylfa Newydd, the guaranteed price for the new plant’s electricity is likely to run around £15 cheaper per unit than Hinkley’s.
Applying lessons Europe-wide
While progress in the Wylfa Newydd negotiations suggests the British government has heeded the warning of its spending watchdog, the EC has had to take on similar questions concerning nuclear projects in Bulgaria and Hungary as well.
Bulgaria appears intent on finding a private investor to take on its Belene project, even though foreign direct investment (FDI) has fallen 34% compared with last year. The cabinet in Sofia maintains that any private investor in Belene will have to build the plant with neither state contributions to construction nor guarantees of long-term procurement deals. A bold move, considering growing risk aversion in the region. In the real world, Bulgaria’s stance at best runs the risk of scrapping the project altogether.
Bulgaria’s other solutions aren’t glaringly obvious. The government’s capacity to leverage debt is bridled by a feeble credit rating, yet failing to find a private investor will render the £1.4 billion the Bulgarians have already spent unrecoverable.
A potential answer to the conundrum might be found in nearby Hungary, where an expansion of its Paks nuclear plant – built by Russia’s Rosatom – is being financed with a vendor-arranged intergovernmental credit line. In short, Moscow told Budapest they would build the plant, providing Hungary banked with them too. Raising debt in a country the nuclear corporation of which is constructing your facility does offer an important advantage, in that it provides an extra level of security to investors where short-term risks run high and returns on investment are slow.
Sweetening the deal
For Bulgaria to find a strategic investor for Belene before its self-imposed October deadline, it will need to find its own way to ‘sweeten the deal’ for private investors. ‘Paks vs. Belene’ illustrates that using the public purse to shoulder some slab of the financial risk can play a vital role in stimulating private investment in nuclear energy generation, at a time when stakes are high and rising across Europe in the form of EU ETS sanctions on CO2 emissions.
As seen with Hinkley Point, policies aimed at keeping large-scale nuclear projects off a government’s balance sheet merely lead to expensive deals, high project costs and elevated prices at consumption. Were the Bulgarian government to treat money spent as an investment and open the possibility of contributing further – as opposed to posturing with the private sector – the prospects of Belene finally seeing the light of day would be enhanced. It took Britain the Hinkley experience to accept investing directly in Wylfa Newydd; the Bulgarians may be better served referring to the same case study instead of reproducing one for themselves.