In the last article in this series we looked at the design and deployment basics of Small Modular Reactors (SMRs). In this piece we will be looking at SMR financing and in particular the prospect of them being deployed in the UK.
Background to SMR Financing
As a generality, new nuclear power plants (NNP) are highly capital intensive even before they start generating, and the financing for new projects is perhaps their greatest challenge, perhaps even more so than gaining public acceptance. The payback time is very long compared to more conventional investment opportunities, meaning there is little or no appetite for the more “conventional” financial markets to become involved.
Nuclear preconstruction activities are a significant cost component, and can take many years to achieve. These include regulatory engagements (design assessment and licensing), the siting and planning process (including Environmental Impact Assessment and stakeholder engagement) and initial site preparation. The major cost, of course, is the actual construction, not just of the station itself, but also of the associated infrastructure and the cost of the first load of fuel. Decommissioning and long-term waste management is also taken into account at this stage with many countries, including the UK, requiring funding arrangements to be established before a licence is issued.
SMR’s are attractive from the financial perspective as they are somewhat cheaper than the larger commercial reactors. For example, the latest published cost estimate for the UK’s new 3,260MW(e) Hinkley Point C is £22.5bn ($28bn, 2019 m.v.), whereas in our previous article we mentioned that Rolls-Royce had said they would get the cost of their 440 MW(e) reactor design to £1.5bn. This would give respective construction costs of £6.9m per MW(e) and £3.5m per MW(e), albeit such comparisons are in practice much more complicated than that.
Financial risk is also an important factor to consider, and in particular how this would be shared between the various stakeholders: government, the reactor vendor, other investors, the operating utility and last, but not least, the ultimate consumer. New NNP projects, like many large infrastructure projects, are renowned for cost and schedule overruns. SMRs have yet to be deployed in earnest but have the benefit of lower production costs, shorter construction periods and better construction certainty, with modules built in the factory rather than on site, but still there are many unknowns in producing first-of-a-kind (FOAK) versions.
Other financial risks to consider would be those arising during the operational period such as accidents (nuclear or non-nuclear) which may permanently close the plant and mean no further income, either for the utility and/or investors, which would also lead to a shortfall in the decommissioning and waste management funds.
The electricity market may be influenced by other cheaper forms of generation leading to lack of competitiveness for nuclear; older plants were financed and constructed when regulated markets were in place, but many countries today have de-regulated markets. Political factors may change nuclear policy, as we have seen happen in many countries following the Fukushima-Daiichi accident, and there could be other risks, such as changes in safety regulations which may be too onerous to implement, or the utility may become bankrupt.
Each of the abovementioned risks can be mitigated to a greater or lesser extent and on balance it is thought SMR’s are a more favourable investment opportunity than the larger scale products. There are many financing models associated with new NNPs and they are often a combination of debt and equity. Debt financing is typically a conventional loan from a bank or other lender which is repaid with interest; equity involves the investor taking a stake in the project and at the same time taking on the commercial risks and rewards associated with that. Self-evidently, the model chosen will have an impact on the overall economics of the project concerned.
The Operational Period of any Reactor
In simplistic terms, the preconstruction and construction costs and interest have to be paid for during the operational period of the reactor, when it is earning income. The income received also pays for the ongoing operating and maintenance costs and the cost of new fuel. In addition, decommissioning, spent fuel and radioactive waste management has to be taken into account. The utility itself will be looking to make a profit and all of these components will be factored into the ultimate cost of the electricity generated and the price paid by the consumer.
However, if the market price of electricity falls, the financial return may not be sufficient and so at the outset of the project, the utility may negotiate a Contract for Difference. In this case the difference between the “strike price” (what the utility needs the price of electricity to be to make a margin) and the market price is met by, say, the government (and consumers) if the difference is negative; if the difference is positive then the utility will credit consumers. These types of contracts are also applicable to other low-carbon power generation projects.
The CfD model was used for Hinkley Point C, but other financing models exist such as Power Purchase Agreements (PPAs), whereby there is a long-term agreement too but at a fixed price which may or may not be guaranteed by the respective government. This has been used in Turkey for the Akkuyu project.
A further approach which is being considered in the UK for new nuclear is the Regulated Asset Base (RAB) model. These are typically used for funding monopoly infrastructure and involve an economic regulator who grants a licence to a company to charge a regulated price to users of that infrastructure. The government says RAB-funded infrastructure has attracted significant investment from private sector capital over the last 20-30 years, with total value of RAB assets in 2018 of c.£160bn. They conclude: “a RAB model has the potential to reduce the cost of raising private finance for new nuclear projects, thereby reducing consumer bills and maximising value for money for consumers and taxpayers”.
The Findings of the Expert Finance Working Group
We don’t have the space here to go into the details of all the various models for financing new NPP projects. But what would be the most appropriate for an SMR new build project? The UK government set up an Expert Finance Working Group (EFWG) in January 2018 comprising experts from the finance community with input from academia and the supply chain, and government (BEIS) observers. Inter alia, one of its roles was to explore a range of potential financial models for SMRs which the government said could “engender market confidence, especially from private sector investors/financiers.”
The EFWG concluded that the UK could be well placed to develop First of a Kind (FOAK) “small reactor projects with overnight costs of less than GBP 2.5 billion by 2030”. They looked at nine potential finance models. Of these, four were derivations of a Project Finance approach (reliance on cash flow for repayment of equity/debt), while others were models/structures previously employed to finance nuclear around the world. They concluded that four potential models/structures could be adapted for financing SMRs in the UK and how the government could potentially feature in each of these. On this they concluded:
“For technologies capable of being commercially deployed by 2030, HMG should focus its resources on bringing FOAK projects to market by reducing the cost of capital and sharing risks through:
- assisting with the financing of small nuclear through a new infrastructure fund (seed funded by HMG) and/or direct equity and/or HMG guarantees; and
- assisting with the financing of small nuclear projects through funding support mechanisms such as a Contract for Difference (CfD)/ Power Purchase Agreement (PPA) or potentially a Regulated Asset Base (RAB) model while maintaining the supply chain plans required for larger low carbon projects.
For NOAK [nth of a kind] projects the market should be self sustaining having learnt the lessons of the large nuclear plant and the small nuclear projects that will have gone before.”
Advanced Modular Reactor Feasibility and Development Project (AMR F&D)
In September 2018, the UK Government announced the Advanced Modular Reactor Feasibility and Development Project (AMR F&D) in which BEIS would invest £44million in Advanced Modular Reactors (those being GEN IV reactors as opposed to GEN III SMRs). Phase 1 consisted of a £4m feasibility study with up to £40 million in Phase 2 which would take forward development activities. Under Phase 1, eight organisations were awarded contracts, but no Phase 2 money has yet been awarded, not helped by the current Covid-19 situation. Additionally, in 2017 the UK nuclear regulators, the Office of Nuclear Regulation and the Environment Agency were awarded £5 million and £2 million respectively to support the regulation of advanced nuclear technologies (i.e. AMRs and SMRs). Further, in October 2019 both regulators and Natural Resources Wales announced new Generic Design Assessment guidance which covered ANTs. The UK government expects all future designs will go through this process.
As previously reported, new SMR developments have been announced in other countries. In the UK the Rolls-Royce consortium is making headway with its reactor development. We wait to see what progress will be made in the future when the current Covid-19 situation eases.
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