Professional Engineering

Many countries are committed to backing more nuclear power, but observers claim that utilities will only be able to pay for plants if, controversially, governments guarantee their incomes.

The huge costs and risks associated with nuclear construction mean that plants will only be built with public support in the form of long-term power purchase agreements, according to David Simpson, global head of mergers and acquisitions at finance firm KPMG.

Others echo that view. Jean-Pol Poncelet, the new director general of the European nuclear trade association Foratom, said that the industry must convince the European Commission of the need for contracts typically lasting up to 10 years.

“There is work to do,” Poncelet told a recent meeting in Brussels of Europe’s electricity industry association Eurelectric. “There is a long way to go.”

In particular, such contracts – Simpson expects the UK government to offer 35-year deals – could be illegal state aid under European Union competition rules. There has been no formal ruling.

Simpson said that, even if the law did not put the kibosh on contracts, utilities’ shareholders would have to pay for their first nuclear plants, as investors would see the risks as too high to provide debt. “There’s no non-recourse debt out there at all,” he said.

Yet London-based Simpson said that if the consortia bidding to build plants in the UK used shareholder cash (assuming a €4,000/kW cost for 1,600MW plants), the net debt of all consortia member firms but one would exceed their market capitalisations. Utilities would also receive no income for years, until plants begin operating.

It is also unclear whether utilities would have enough equity to begin follow-on plants – at a rate that would satisfy governments – well before initial projects were completed and generating income.

Simpson said that governments would probably also require utilities to pay decommissioning funds. Poncelet said that one of Foratom’s recommendations to the nuclear industry, to ensure its survival, was for financial provisions for radioactive waste programmes: “Let’s demonstrate that we have the money to do it. Of course, it’s political but we need to do something.”

Nuclear plants, which are among the largest and most complex engineering projects in the world, also carry high technical and regulatory risks, with World Nuclear Association figures showing cost overruns – often huge – for most projects.

Utilities could also be tripped up by policy changes, said Simpson, as evidenced by Germany’s rejection of lifetime extensions of nuclear stations after the Fukushima disaster in Japan.

Yet, if utilities build plants and pay for them over the power purchase agreement periods, they could see huge profits for the rest of the plant lifetimes of 60 or perhaps 80 years.

Simpson said that if the first plants are a success, traditional funders would appear: “The infrastructure and pension funds will not put the money up until construction of the first plants is complete.” The cost of follow-on engineering projects tends to fall quickly, he added.

The nuclear industry recognises that, following Fukushima, it must try harder for public and political acceptance. Foratom, for example, is to rewrite its case for nuclear power to provide up to a third of Europe’s electricity in 2050. “There is no way for a key role for nuclear without sustained political support,” said Poncelet. “We need that support.”

He claimed that nuclear power remained essential to the EU’s energy roadmap 2050, for security of energy supply, competitiveness and a low-carbon economy.

There are “very good reasons to support nuclear power” in the long term, according to Jan-Horst Keppler, deputy head of nuclear development in the OECD’s Nuclear Energy Agency. He cited factors such as rising electricity demand, energy security and geopolitical risks with oil and gas supplies.

• Take a look at the latest nuclear industry vacancies on our jobs board www.topengineeringjobs.com