This document summarizes the risks involved in new nuclear power plant investment and construction in the United States. It discusses the three main approaches - merchant plants, regulated utilities, and public power - and highlights risks like high capital costs, long development periods, regulatory and market uncertainties. It also reviews lessons learned from past nuclear projects that experienced cost overruns, cancellations or defaults. Overall, new nuclear plants face both market risks and high project risks that make them difficult to develop commercially in the US.

1. Market and Regulatory Risk
Nuclear Investment and Project Finance
Nuclear Energy Insider
16 November
Washington DC
Edward Kee
Vice President

2. Disclaimer
The slides that follow do not provide a complete
record of this presentation and discussion.
The views expressed in this presentation and
discussion are mine and may not be the same
as those held by NERA’s clients or my
colleagues.
16 Nov 2010 Nuclear Investment and Project Finance 2

3. US new nuclear timeline
Capacity planning; state regulatory process
NRC DC & COL approval process
Procure long-lead components;
negotiate EPC contracts; site preparation
Financial commitment;
EPC Final Notice to Proceed
Nuclear procurement and construction
Complete NRC ITAAC review; load fuel, startup
and testing; begin commercial operation
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
16 Nov 2010 Nuclear Investment and Project Finance 3

4. US first and second wave
US COL & DC filings US Second Wave
US First Wave
construction
construction starts?
First US COL
approvals start
CC3 pulls out First new US
of LG process project COD
2008 2010 2015 2020
OL-3 First UAE
EPR unit COD
China,
Finland COD?
& France Flamanville
building EPR COD
Sanmen (first Many risks and uncertainties
UAE selects Chinese about new nuclear plants
APR1400 AP1000) COD resolved by about 2020 –
lowering risk for second wave
16 Nov 2010 Nuclear Investment and Project Finance 4

5. New nuclear build not easy
Very large capital investment; long development period
Asset with operating life of 60 years or longer
Bet-the-company commitment for most US utilities
Industry history suggests concern:
– Contentious rate cases and disallowances in 1980s
– Electricity industry more complicated now
– Large stakes and complex issues
– Likely resurgence of legal and regulatory disputes
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6. Life cycle adds problems
First Wave Buyers Second Wave Buyers Later Buyers
Concept FOAK Learning Mature
Actual cost
first unit
EPC
contracts
Unit Cost
Learning on
Detailed additional units
engineering reduces time and
& licensing cost
Conceptual
cost
estimates
Long production
lines for standard
unit components
Years
16 Nov 2010 Nuclear Investment and Project Finance 6

7. Nuclear – three tracks in US
Merchant
– Project returns from market revenue; in regions with
electricity markets (e.g., Texas, Mid-Atlantic, New
York)
Regulated
– Nuclear plant in regulated rate base; each state has
unique process; in regions that did not restructure the
electricity industry (e.g., the Southeast)
Public Power
– Rights to recover costs from customers/members
(e.g., TVA, Oglethorpe, MEAG, Santee Cooper)
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8. 1 - Merchant nuclear plants
Calvert Cliffs 3
(Maryland/PJM market)
South Texas Project
(Texas/ERCOT market)
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9. 1 - Merchant nuclear plants
Project structure
Operate in electricity markets
– Limited market history (compared to plant life)
– Volatile prices & competition
Traditional project finance approach strained by
– High capital intensity
– Large project size
– Long development period
– Long asset life
– Lack of long-term revenue certainty
16 Nov 2010 Nuclear Investment and Project Finance 9

10. 1 - Merchant nuclear plants
Market risk AND project risk
Market risks (over years 10 to 70 from today)
– Carbon regime – might raise market prices
– Demand – future electricity and capacity use
– Supply - new entry, including forced renewables
– Fuel costs - natural gas, often marginal, is important
– Technology shifts - new generation technology
Nuclear project risk and outcomes
– FOAK capital costs, unproven regulatory process
– Cost overruns and delays before operational
– Project interruptions / prolonged outages
16 Nov 2010 Nuclear Investment and Project Finance 10

11. 1 - Merchant nuclear plants US
DOE Loan Guarantee
Up to 80% of project cost at low interest rates
Close after NRC COL license issued (even
though significant costs incurred to get there)
Subsidy Fee
– Unlike renewables, this is not paid by government
– Collected prior to closing, not part of project costs
– Calculated by OMB to remove risk from taxpayers
– Calvert Cliffs 3 showed that this fee can be large
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12. 2 - Regulated nuclear plants
Summer 2 & 3
(SCE&G)
Vogtle 3 & 4
(Georgia Power)
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13. 2 - Regulated nuclear plants
Regulation ≠ risk-free
Project risks and market risks may mean less
than full recovery of costs (i.e., disallowance)
Experience in 1980s remains relevant
– State regulators faced unprecedented rate increases
– Prudence reviews and disallowances
– Large negative impact on utilities and the industry
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14. 2 - Regulated nuclear plants
Prudence review lessons
Prudence cases from 1980s asked:
– Were decisions made at appropriate level in utility?
– Was procurement based on competitive bids?
– Did contracts have incentive/penalty mechanisms?
– Were schedules and reporting systems in place?
– Was construction effectively monitored?
– Was project budget monitored?
– Did managers properly respond to project changes?
16 Nov 2010 Nuclear Investment and Project Finance 14

15. 2 - Regulated nuclear plants
Excess capacity lessons
Long planning horizon
– Key issue is excess capacity at commercial operation date
– May be 10+ years from start to commercial operation
– Electricity demand 10 years from now is uncertain
Off-ramps (i.e., cancel or delay if conditions change) are
important, but failure to use them can be imprudent
Certificate of convenience and necessity lowers risk of
excess capacity disallowance
Regulator approval/endorsement of capacity planning
approach lowers risk, even if excess capacity is result
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16. 2 - Regulated nuclear plants
Canceled plant lessons
Some canceled plants totally disallowed
In some cases, prudent costs were recovered:
– Was a certificate of public convenience and necessity in place?
– Was decision to begin construction reasonable at the time?
– Were costs incurred prior to cancellation prudently incurred?
– Was decision to cancel the project timely and reasonable?
– Was utility prudent in not cancelling the project earlier?
Key lesson - all actions taken (and those not taken)
will be examined for prudence
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17. 2 - Regulated nuclear plants
Impact of disallowances
Bankruptcies and financial distress
Utilities became wary of large capital projects
Regulatory & industry reform
– Better rules for large baseload investments
– Integrated Resource Planning (IRP)
– Electricity industry restructuring & markets
16 Nov 2010 Nuclear Investment and Project Finance 17

18. 2 - Regulated nuclear plants
Regulatory reforms reduce risk
Integrated Resource Planning (IRP)
– All supply and demand options
– Minimize long-term costs to ratepayers
– Reflects uncertainty and risk
– Regulated utility “own-build” options included
Higher assurance of cost recovery if selected, but
Implicit or explicit cap on cost recovery
Up-front prudence review if nuclear option selected
Early recovery of costs (i.e., return on CWIP)
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19. 3 - Public Power
Summer 2 & 3
(Santee Cooper)
Vogtle 3 & 4
(OPC & MEAG)
South Texas Project
(CPS Energy)
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20. 3 - Public Power
Public Power ≠ risk-free
Politics and government involved in decisions
Power and cost passed from
– Wholesale entity to members via contracts
– Members to customers via rate setting authority
Some past defaults
– Public power involved in troubled nuclear projects
– Financial stress due to delays and cost overruns
– Some defaults on debt
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21. 3 - Public Power
A few big defaults
Energy Northwest - formerly Washington Public
Power Supply System (WPPSS) - defaulted on
$2.25B of revenue bonds related to WPPSS 4 & 5 in
1983
Wabash Valley Power Association, rural electric G&T
cooperative in Indiana - defaulted on $671M in REA
loans related to Marble Hill in 1985
Cajun Electric Power G&T Cooperative in Louisiana;
defaulted on $4.2B in RUS debt related to River Bend
in 1994
16 Nov 2010 Nuclear Investment and Project Finance 21

22. 3 - Public Power
Risk mitigation
Long-term contracts (WPPSS)
– All-requirements contracts with members
– Terms and conditions structured to withstand legal
challenges
– Term at least as long as loan repayment period
Avoid state utility regulation (Wabash & Cajun)
Co-signatures from members
State laws controlling end-user utility switching
16 Nov 2010 Nuclear Investment and Project Finance 22

23. Summary
Each approach to new nuclear plants involves risk
Market risk
– Faced directly by merchant projects
– Faced indirectly by regulated and public power projects
Market risk combined with high capital costs and high
project risk make nuclear plants difficult to build in US
When (if) capital cost and project risk are lower (i.e., in
Second Wave), may be easier to build nuclear projects
US commercial approach is somewhat unique
16 Nov 2010 Nuclear Investment and Project Finance 23

24. Global nuclear build
Gen II+, III, III+ by country
China
Russia
India
USA
ROK Non-government utilities
Japan
UAE
Turkey
Vietnam
0 20 40 60 80 100 120 140 160
In operation Under construction Planned Proposed
16 Nov 2010 Nuclear Investment and Project Finance 24

25. Role of Government
State Electricity
Mixed
Capitalism markets
India Japan US market
France regions
China US regulated
South states
UK
Korea
US public
Russia power
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26. State Capitalism
Strategic and long-term state
domination of markets
National Corporations & State-
Owned Enterprises
Strategic goals above profits
Inside & outside host country
China and Russia leading
examples
16 Nov 2010 Nuclear Investment and Project Finance 26

27. Contact Us
Edward Kee
Vice President
Washington, DC
+1 (202) 370-7713
edward.kee@nera.com
© Copyright 2010
National Economic Research Associates, Inc.
All rights reserved.