Critics of nuclear power have long been in the ascendancy. Indeed, since the Chernobyl disaster of 1986, it appeared to have been taken off of the agenda in most countries. But, with oil prices high and security of energy supply a growing political issue, nuclear is back on the energy agenda.

The UK is undertaking an energy review that will reconsider the role of nuclear power in the future energy mix. In Asia, several countries are looking at building new nuclear power plants, and China alone is reported to have plans to build up to 30 new reactors.

For many countries, however, building and financing new nuclear power plants (NPPs) will be difficult because the structure of their electricity markets has undergone fundamental change since the last NPPs were built: markets have been liberalised, and vertically integrated state-owned utilities unbundled and privatized.

Previous models – where governments initiated, funded, and took the risk on power projects – are no longer the starting point in most liberalised energy markets. For potential investors in new NPPs this gives rise to a number of issues that need to be addressed.

Making the decision

When the decision as to whether to invest in a new nuclear plant is compared with, for example, the decision as to whether to invest in a fossil fuel plant, the differences are numerous and significant. For example:

The relative roles of investors, financiers, the regulator and governments in building and operating new nuclear plants today are by no means clear in many liberalised energy markets. This compares unfavourably with investment in a combined cycle gas turbine (CCGT) for example, where the relative roles are all well established through recent precedent.

In recent years reactor suppliers have developed a new generation of nuclear reactors. The suppliers claim that this new generation of plants will be cheaper and quicker to build, will be safer to operate through more passive safety systems, and will have enhanced levels of performance. However, there is no commercial operating data to support these claims at present: the European Pressurised Reactor (EPR) currently being built in Finland (under a turnkey contract) will be the first of these plants to be put into commercial operation.

NPPs are typically large – installed capacities of between 600MW and 1,600MW per unit are typical. By comparison, although there are large CCGTs, much smaller units can also be built (e.g. 100MW). The same is not currently true of NPPs (although research into pebble bed reactors, for example, may change this in the future), meaning that it is more likely that any party considering investing in nuclear power will have to give much greater consideration to the demand for power in the wider market rather than just the demands of its own customer base. Increased market exposure could potentially change the risk profile of the company vis-à-vis its competitors.

On top of these factors, there is a basic difference in the economics of nuclear power compared with fossil fuel plants. The likely cashflow profile of a typical NPP is illustrated below:

Nuclear plants have significantly higher construction costs than fossil fuel plants, although they subsequently benefit from lower operating costs. Risk mitigation options that CCGTs have of being mothballed or converted to an alternative fuel source simply do not exist for nuclear power (although an NPP investor owning other plants could partially mitigate this risk by, for example, mothballing a CCGT and keeping the nuclear plant running).

These factors lead us to question whether – even in the event that the economics of nuclear power appear more favourable than fossil fuel plants – the nuclear power investment decision can yet be considered to be comparable with the decision as to whether or not to invest in, say, a CCGT plant.

Is the objective a level playing field?

In the context of a liberalised market, governments are likely to want the private sector to bear most of the risks and rewards of the construction and operation of new nuclear plants, in the same way that the private sector bears these risks for other forms of power generation. However, it remains questionable whether a government's primary objective should be to try and make these decisions wholly equivalent; that is, based on their assessment of the risks and rewards of the opportunity. In the nuclear power sector, decisions taken by the investor/operator can have a significant impact on the government.

Certain risks inherent in nuclear power are likely to remain with the government, and the scale of these risks may be dependent on the number of new reactors built. For example, responsibility for the construction of a deep depository for long-term waste disposal and the long-term management of this waste is likely to remain with the government, and the more NPPs that are built, the greater the size of the depository required.

Although funds for this depository may be accumulated by the operators during the NPPs' operating life, and as such these costs would be paid for by the private sector, there could be a difference between the eventual funds required and the level of funds required. The government is likely to want to indicate how much risk/cost (real or contingent) it is willing to accept rather than simply having to absorb whatever is presented to it by the market – a political as well as an economic decision.

In the scenario where nuclear power is clearly more economic than other forms of power generation, a number of investors may decide to build their own NPP simultaneously. In such a circumstance, each investor could decide to use different reactor designs. This could again have cost implications for the government.

A question of scale

A further complexity in structuring any investment in nuclear power is the issue of whether to build a single NPP or a fleet of new NPPs. Nuclear suppliers have indicated that savings on subsequent plants can be between 10-40% of the cost of the first plant, creating a significant incentive for an investor to commit to building more than a single reactor.

This level of savings is due to, inter alia:
• First Of A Kind (FOAK) costs. Assuming that a reactor of a particular design has been built somewhere else in the world (and this is not true of all the new reactor designs), the global market for reactor supply today means that FOAK costs are likely to be limited to design changes that are required in the local market to obtain licensing approval. Nonetheless, this could remain a significant cost, and could act as a deterrent to any investment.
• Economies of scale. These extend beyond the typical economies of shared management and purchasing savings during the construction and operation phases that might be achieved on bulk purchase of any asset, to include savings at the licensing (and potentially permitting) stage and at the decommissioning and waste disposal stage.
• Risk transfer. It is possible that increased risk could be transferred to a reactor supplier if a commitment was made to purchase a number of reactors, as the reactor supplier would also be able to spread its risk premium on the first reactor over a number of plants. As a consequence this might increase the opportunity, for example, for more favourable contracts to be agreed with the reactor suppliers.

A major electricity generating company is likely to be able to carry the investment cost of a new NPP on its balance sheet. However, building a fleet of new reactors – even with economies of scale – would not only be a much larger sum to carry on its balance sheet, the procurement of several thousand MW of additional capacity from a single generating source would change the generating mix of any of the investor vis-à-vis its competitors (although this may be considered across the company's total generating base rather than just its assets in any one country). In addition, such significant capacity procured over a short enough time scale to benefit from any economies of scale offered by the reactor supplier would also mean that there would be limited opportunity for the new capacity to be absorbed by the company's own customer base.

These factors could potentially change the market's assessment of the risk profile of this investor relative to its competitors, and this could potentially have an adverse impact on the company's share price. As in any other investment decision, companies are unlikely to take investment decisions that have a significant likelihood of having an adverse impact on their share price.

And so, put simply, to benefit from economies of scale, co-ordination of the stakeholders is required. What party is best able to deliver this co-ordination?

Market participants?

From a structuring perspective, it might be thought that the simplest solution for procuring a fleet of new NPPs would be for a major generating company to finance and operate a fleet of new NPPs on its own balance sheet.

An investor considering building a fleet of NPPs could reduce the risk of market exposure for the significant levels of power that it is not able to supply to its own customer base by entering into long-term off-take agreements with third parties. The government could support this approach by requiring suppliers buy a percentage of their power from low-carbon emission sources.

The above solution does not, however, address the risk that the market may apply a risk premium to the shares of any generating company that is significantly more exposed to nuclear power than its competitors. Rightly or wrongly, nuclear power is often considered by the market to be higher risk than other forms of power generation. And since the risk of adverse market perception increases as the quantity of nuclear power generated by any one company relative to its competitors increases, this risk works against the objective of trying to maximise returns by maximising economies of scale.

Commercial structures designed to address this risk begin to challenge common perceptions of how the market should operate. For example, a possible solution could be for two or more competitors in the generating market to form a consortium to establish a special purpose vehicle (SPV) jointly to own and operate a fleet of NPPs, to be procured over an extended time period.

The public sector?

An alternative approach would be for a government-led nuclear investment programme. Such a solution appears to be inconsistent with the market-based structure of many electricity markets. Government has historically taken the lead in new nuclear investment, as it often did for fossil fuel-fired capacity, but has gradually stepped back from involvement in developing new capacity.

A return to this role would be a possible structuring option, but it is at one end of the spectrum of potential options that involve the government. It is already noticeable from other countries that are considering new investment in nuclear generating capacity that, while government support in these countries remains a critical corner stone of the development of these projects, public financing is no longer the default solution. New financing schemes are being tested in markets such as Romania and Bulgaria.

At the other end of the spectrum of government co-ordinated programmes is a range of public private partnership approaches. This could see, for example, the government running a competition to award a concession for the design, construction, financing and operation of a defined number of new NPPs using a single reactor technology. The government could potentially ensure that FOAK costs are spread across a number of new NPPs whilst maximising the level of competition by running a series of smaller concession (e.g. one or two units) and making commitments itself to the key reactor suppliers on the total number of units to be procured.

Structuring investments in new NPPs in the future could well require new financing solutions that include a combination of corporate financing and project financing techniques.

When it comes to nuclear power there needs to be a party that can act as the backstop for managing some key risks: it is not possible for an owner/operator to walk away from an NPP without creating unacceptable public health and security risks. Regardless of whether a market-based approach or a government-driven programme is adopted, risk allocation between the public and private sector will be required to develop a bankable solution.

But nuclear projects also carry a broad range of risks which are typically encountered in other large-scale power or infrastructure investment projects. It is possible to determine which risks are inherent to nuclear projects and which risks are common to both NPPs and other major infrastructure projects, and to begin to allocate each risk to the party best able to manage the risk.

Our analysis suggests that most of the risks unique to NPPs are risks that the public sector is likely to have to carry, or at least share. By contrast, the great majority of non-nuclear specific risks are capable of being transferred to the private sector (that is, they can be evaluated and priced), and in many cases the private sector is best able to manage these risks.

An emerging structure?

The experience emerging in some countries (e.g. Finland, Romania, Bulgaria) suggests that the previous model, where governments were required to lead and finance investments in nuclear power, is no longer required to be the starting point. The private sector is willing to participate in structuring new NPPs.

Yet it needs to be remembered that, for the time being, the private sector's investment decisions regarding nuclear power are not the same as the decisions regarding other forms of power generation.

Whether driven by the private sector or the public sector, structuring investments in new NPPs is likely to lead to complex co-financing arrangements, and may require the development of innovative vehicles and commercial and financing structures. Models and structures used ten years ago for financing IPPs, arguably combined with a higher level of recourse to the shareholders in the SPV, are likely to be sources of inspiration.

But having recognised that structuring investments in new NPPs will be highly complex in any scenario, do we need to go further and develop the structure?

We believe that if governments and major generating companies both decide to pursue investment in new nuclear plants, then a suitable commercial structure will emerge as the scope of the project and the allocation of project risks is agreed between the stakeholders (including shareholders, suppliers, financiers, customers and the Government). Given the unique nature of some specific nuclear risks, the resultant commercial structure may well also be unique – designed for the specific requirements of the project. Given this – and the number of variables that remain outstanding (e.g. how many reactors are to be built? what will be government's role?), we do not consider there is any advantage in trying to predict what this structure will be.

But if we cannot yet answer the question as to the optimal project structure, we can identify several issues that need to be addressed if new nuclear plants are to be built:
• Even once the relative economic performance of NPPs has improved, when compared with fossil fuel plants, it should not be assumed that the decision-making process for investments in new nuclear plants will be the same as for other types of generating capacity.
• Decisions made by the private sector could have a significant impact on the level of cost and/or risk borne by the public sector. The government may wish to be more actively involved in any market-led solution than it would be for other power generation technologies, as it would be in a PPP project.
• There appear to be significant economies of scale advantages to procuring a fleet of new reactors rather than a single reactor. Designing a structure that benefits from economies of scale may, however, require either some of the market's leading participants to act in consort or for the Government to drive the process.

It remains questionable whether the private sector will invest heavily in developing business plans for NPPs before the economics of nuclear power are improved relative to other generating sources and the roles and responsibilities of stakeholders, including the government, are clearer. And the private sector can only make limited progress at addressing these barriers on its own. Governments need to make their policies regarding nuclear power clear, and then need to engage as a future key stakeholder with potential investors in the debate as to optimal risk sharing and corporate and financing structures.