Financing Nuclear Projects

1. Gowlings-OCI Nuclear Supply Chain Symposium
November 2015
Financing Nuclear Projects
Ahab Abdel-Aziz
Global Director of Nuclear Power Generation
Gowlings LLP

2. What Is Nuclear Project Risk?
• Public fear of nuclear accidents
• Regulatory intensity and standards
• Nuclear projects have suffered from 2 inherently
related types of risks:
• Completion Risks: where a reactor never produces electricity
either because the project is too upside down or because of the
withdrawal of political support
• Economic Risks: where the project goes upside down - cost
exceeds economic return (without accounting for public industrial
economic policy returns)
• The overhanging risk has become all important in
nuclear power development
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3. Government Engagement With Nuclear Risk: 3 Models
• Currently, there are three models for the government’s role in nuclear
power development and finance
• Complete Engagement:
• Complete engagement in proponency, ownership and risk absorption
• Those are the world’s most active nuclear programs
• Ex: Russia, Korea, China, UAE, India
• Complete Disengagement:
• Complete disengagement, hoping to shift the responsibility for proponency,
ownership and risk absorption to vendors or private market actors
• Those programs are not proceeding at all
• Ex: US (Calvert Cliffs, South Texas), Bulgaria
• Middle Road:
• Attempting “middle options” with partial or ambiguous government engagement by
offering to hedge some risk for private capital investment in nuclear projects
• Early tally suggests only likely to succeed where the correct risks are effectively
hedged and likely to fail where they are not
• Ex: UK’s CfD (Hinkley Point C, Horizon, NuGen), US (Vogtle and VC Summer)
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4. US “MIDDLE OPTION”
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5. 4 Projects Selected for Loan Guarantees
• License applications for some 33 proposed reactors
• US DOE wanted to support a mix of “Project
Financed” and “Rate Based” projects
• US DOE selected 4 projects for intense due
diligence:
• Constellation Energy’s Calvert Cliffs #3
• NRG’s South Texas # 3 and #4
• South Carolina Electric & Gas VC Summer #2 and #3
• Southern Company’s Vogtle #3 and #4
• Only VC Summer and Vogtle are proceeding
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6. What’s Working
• VC Summer and Vogtle are under construction
• Rate based: utilities are able to obtain both advanced
rate hikes and, after construction approval, pass the
cost onto the rates
• This is a public hedge of the nuclear project risk
• It is working
• It has a similar impact to a fully engaged government
• Capacity to anchor construction risk
• These models point to the type of risk hedge that works and the type that
does not
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7. THE UK EMR, ANOTHER “MIDDLE
OPTION”
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8. How the CfD Mechanism Works: An Illustration
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Sources: UK Electricity Market Reform White Paper
John E Parsons, “The Principles of Finance and Nuclear New Build”

9. Summarizing What the EMR Provides Nuclear
• The UK’s CfD is a mechanism for an electricity
market price hedge
• It is not a project completion risk hedge
• The UK Guarantee is a liquidity enhancement
• It is specifically designed to avoid completion risk
absorption by the UK Government
• The UK EMR does not hedge project completion
risk
• No UK government completion risk absorption
• No rate base absorption of schedule delay or
cost overrun
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10. Hinkley Point C
• For Hinkley Point C, the CfD and UK Guarantee
were structured to insulate the UK government
from completion risk
• Result: EDF and its equity partner, CGN, have
been required to put up a massive contingent
equity fund
• £8 billion on a £24 billion project
• Even EDF (French government-backed) could
not absorb this alone
• The project could only proceed with the Chinese
sovereign also stepping up to the risk
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11. Horizon & NuGen
• Horizon & NuGen are not owned by sovereign-
backed shareholders
• Toshiba-Westinghouse GDF and GE Hitachi
• The result to expect:
• Sponsors will be pushing for contingent equity
participation from the Tier 1 contractors, and they, in
turn, from the supply chain behind them
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12. Brave New World
• Eastern Europe and other smaller economies
(Poland, Romania, etc) all intend to copy the UK
EMR model
• If that happens, sponsors will have to pass
completion risk and contingent equity down the
supply chain
• Bottom line: unless governments change tact,
supply chain members need to be prepared to
participate in the contingent equity requirements
• It is pay-to-play and that will have to be factored into
the price
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13. Thank You
montréal  ottawa  toronto  hamilton  waterloo region  calgary  vancouver  beijing  moscow  london
Ahab Abdel-Aziz
Global Director, Nuclear Power Generation
Gowling Lafleur Henderson LLP
TEL: 416-814-5608
EMAIL: ahab abdelaziz@gowlings.com