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Market and Regulatory RiskNuclear Investment and Project FinanceNuclear Energy Insider16 NovemberWashington DCEdward KeeVi...
DisclaimerThe slides that follow do not provide a complete   record of this presentation and discussion.  The views expres...
US new nuclear timeline                                             Capacity planning; state regulatory process           ...
US first and second wave      US COL & DC filings                                       US Second Wave                    ...
New nuclear build not easy      Very large capital investment; long development period      Asset with operating life of 6...
Life cycle adds problems                First Wave Buyers                Second Wave Buyers                           Late...
Nuclear – three tracks in US      Merchant        – Project returns from market revenue; in regions with          electric...
1 - Merchant nuclear plants                                            Calvert Cliffs 3                                   ...
1 - Merchant nuclear plants   Project structure      Operate in electricity markets        – Limited market history (compa...
1 - Merchant nuclear plants   Market risk AND project risk      Market risks (over years 10 to 70 from today)        – Car...
1 - Merchant nuclear plants US   DOE Loan Guarantee      Up to 80% of project cost at low interest rates      Close after ...
2 - Regulated nuclear plants                                          Summer 2 & 3                                        ...
2 - Regulated nuclear plants   Regulation ≠ risk-free      Project risks and market risks may mean less      than full rec...
2 - Regulated nuclear plants   Prudence review lessons      Prudence cases from 1980s asked:        – Were decisions made ...
2 - Regulated nuclear plants   Excess capacity lessons      Long planning horizon        – Key issue is excess capacity at...
2 - Regulated nuclear plants   Canceled plant lessons      Some canceled plants totally disallowed      In some cases, pru...
2 - Regulated nuclear plants   Impact of disallowances      Bankruptcies and financial distress      Utilities became wary...
2 - Regulated nuclear plants   Regulatory reforms reduce risk      Integrated Resource Planning (IRP)        – All supply ...
3 - Public Power                                              Summer 2 & 3                                             (Sa...
3 - Public Power   Public Power ≠ risk-free      Politics and government involved in decisions      Power and cost passed ...
3 - Public Power   A few big defaults      Energy Northwest - formerly Washington Public      Power Supply System (WPPSS) ...
3 - Public Power   Risk mitigation      Long-term contracts (WPPSS)        – All-requirements contracts with members      ...
Summary      Each approach to new nuclear plants involves risk      Market risk        – Faced directly by merchant projec...
Global nuclear build      Gen II+, III, III+ by country China Russia  India   USA   ROK                                  N...
Role of Government           State                                             Electricity                                ...
State Capitalism                         Strategic and long-term state                         domination of markets      ...
Contact UsEdward KeeVice PresidentWashington, DC+1 (202) 370-7713edward.kee@nera.com                      © Copyright 2010...
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2010 11 16 Edward Kee - Nuclear Investment And Proj Finance Dc Final No Notes

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Slides by Edward Kee at 16 Nov 2010 conference on Nuclear Power Investment and Finance - discussion of the US industry structures and risks

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2010 11 16 Edward Kee - Nuclear Investment And Proj Finance Dc Final No Notes

  1. 1. Market and Regulatory RiskNuclear Investment and Project FinanceNuclear Energy Insider16 NovemberWashington DCEdward KeeVice President
  2. 2. DisclaimerThe 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. 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. 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 wave16 Nov 2010 Nuclear Investment and Project Finance 4
  5. 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 disputes16 Nov 2010 Nuclear Investment and Project Finance 5
  6. 6. Life cycle adds problems First Wave Buyers Second Wave Buyers Later Buyers Concept FOAK Learning Mature Actual cost first unit EPC contractsUnit 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. 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)16 Nov 2010 Nuclear Investment and Project Finance 7
  8. 8. 1 - Merchant nuclear plants Calvert Cliffs 3 (Maryland/PJM market)South Texas Project(Texas/ERCOT market)16 Nov 2010 Nuclear Investment and Project Finance 8
  9. 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 certainty16 Nov 2010 Nuclear Investment and Project Finance 9
  10. 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 outages16 Nov 2010 Nuclear Investment and Project Finance 10
  11. 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 large16 Nov 2010 Nuclear Investment and Project Finance 11
  12. 12. 2 - Regulated nuclear plants Summer 2 & 3 (SCE&G) Vogtle 3 & 4 (Georgia Power)16 Nov 2010 Nuclear Investment and Project Finance 12
  13. 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 industry16 Nov 2010 Nuclear Investment and Project Finance 13
  14. 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. 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 result16 Nov 2010 Nuclear Investment and Project Finance 15
  16. 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 prudence16 Nov 2010 Nuclear Investment and Project Finance 16
  17. 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 & markets16 Nov 2010 Nuclear Investment and Project Finance 17
  18. 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)16 Nov 2010 Nuclear Investment and Project Finance 18
  19. 19. 3 - Public Power Summer 2 & 3 (Santee Cooper) Vogtle 3 & 4 (OPC & MEAG) South Texas Project (CPS Energy)16 Nov 2010 Nuclear Investment and Project Finance 19
  20. 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 debt16 Nov 2010 Nuclear Investment and Project Finance 20
  21. 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 199416 Nov 2010 Nuclear Investment and Project Finance 21
  22. 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 switching16 Nov 2010 Nuclear Investment and Project Finance 22
  23. 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 unique16 Nov 2010 Nuclear Investment and Project Finance 23
  24. 24. Global nuclear build Gen II+, III, III+ by country China Russia India USA ROK Non-government utilities Japan UAETurkeyVietnam 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. 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 power16 Nov 2010 Nuclear Investment and Project Finance 25
  26. 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 examples16 Nov 2010 Nuclear Investment and Project Finance 26
  27. 27. Contact UsEdward KeeVice PresidentWashington, DC+1 (202) 370-7713edward.kee@nera.com © Copyright 2010 National Economic Research Associates, Inc. All rights reserved.

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