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

Market and Regulatory Risk

Nuclear Investment and Project Finance Nuclear Energy Insider 16 November Washington DC

Edward KeeVice President

16 Nov 2010 Nuclear Investment and Project Finance 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.


NRC DC & COL approval process

US new nuclear timeline

Nuclear procurement and construction

Complete NRC ITAAC review; load fuel, startup and testing; begin commercial operation

0 1 2 3 4 5 6

Capacity planning; state regulatory process

-1- 2

Financial commitment; EPC Final Notice to Proceed

Procure long-lead components; negotiate EPC contracts; site preparation

- 3- 4- 5- 6


US first and second wave

US COL & DC filings

First US COL approvals

First new US project COD

US First Wave construction start

UAE selects APR1400

China, Finland

& France building

20102008 2020

OL-3 EPR COD?

First UAE unit COD

Sanmen (first Chinese AP1000) COD

Flamanville EPR COD

2015

US Second Wave construction starts?

Many risks and uncertainties about new nuclear plants resolved by about 2020 –

lowering risk for second wave

CC3 pulls out of LG process


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


Life cycle adds problems

Concept Mature

Conceptual cost

estimates

Actual cost first unit

Uni

t Cos

t

Years

Detailed engineering & licensing

EPC contracts

Learning on additional units

reduces time and cost

Long production lines for standard unit components

FOAK Learning

First Wave Buyers Later BuyersSecond Wave Buyers


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)


1 - Merchant nuclear plants

South Texas Project (Texas/ERCOT market)

Calvert Cliffs 3 (Maryland/PJM market)


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


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


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


2 - Regulated nuclear plants

Vogtle 3 & 4 (Georgia Power)

Summer 2 & 3 (SCE&G)


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


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?


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


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


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


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 includedHigher assurance of cost recovery if selected, butImplicit or explicit cap on cost recovery

Up-front prudence review if nuclear option selected

Early recovery of costs (i.e., return on CWIP)


3 - Public Power

Vogtle 3 & 4 (OPC & MEAG)

Summer 2 & 3 (Santee Cooper)

South Texas Project (CPS Energy)


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


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


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


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


Global nuclear build Gen II+, III, III+ by country

0 20 40 60 80 100 120 140 160

Vietnam

Turkey

UAE

Japan

ROK

USA

India

Russia

China

In operation Under construction Planned Proposed

Non-government utilities


Role of Government

State Capitalism

China

Russia

Electricity markets

UK

US market regions

India

Mixed

US regulated states

Japan

US public power

South Korea

France


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

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

Documents

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