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Nuclear: no easy ride

Nuclear energy is growing in popularity again. But securing financial support for a notoriously capital-intensive technology is not easy, writes James Gavin

NUCLEAR power offers governments the alluring prospects of making their countries more self-reliant in energy production and reducing carbon emissions. It is, therefore, no wonder that – at a time of such concern over energy supply and global warming – nuclear is making a comeback.

According to a recent survey by PricewaterhouseCoopers, senior executives at power companies expect the combination of technological advances in nuclear and sustained high energy prices to increase significantly nuclear's share of the energy mix.

Many governments have prepared the ground for newbuild nuclear programmes. The US' Energy Policy Act of 2005 (EPA05) is the most ambitious gambit so far. It contains several incentives designed to promote investment in construction of new nuclear power plants. Meanwhile, several European countries are undertaking energy reviews that will reconsider nuclear's role.

Controversial actions
Predictably, these actions have proved controversial. Some critics claim governments are bankrolling new-plant construction through subsidies that they do not extend to other forms of energy. Environmental lobby group Greenpeace has alleged that the financing structure for Europe's first newbuild nuclear plant, the Olkiluoto-3 (OL-3), under construction in Finland, rests on a series of implied state subsidies.

Because the agreement between French nuclear developer Areva and the Finnish end-user group TVO is a so-called fixed-price contract – with Areva promising to shoulder any cost overruns above the agreed Euro3.2bn ($4bn) contract – the French state (as 84% shareholder in Areva) is effectively acting as the ultimate guarantor. The lobby group suggests that it would not act in a similar way to guarantee a renewable energy scheme.

Governments are under pressure to diversify the energy mix, and nuclear presents an increasingly attractive solution – but one that also involves overcoming a host of obstacles. The new generation of reactors – such as the European Pressurised Water Reactor (EPR), made by France's Framatome ANP and Germany's Siemens – present substantial improvements in terms of safety and cost over the previous generation of reactors.

Yet while technological advances have reduced the cost of new plant construction, the investment case for nuclear energy in the context of liberalised power markets remains complicated. For example, commercial bank debt is likely to play a significant role. Yet financial institutions are unfamiliar with the industry and are not yet comfortable with the risks involved. "We haven't been able to put it to the test," says Peter Goodall, head of project finance at Calyon.

For the OL-3 plant, a 1.6 gigawatt facility, a mixture of debt and equity was used to finance the project, with the majority of debt funding made through a quasi-corporate facility, as opposed to pure project finance.

A Euro1.95bn loan was signed in December 2003. The lead arranger group consisted of Bayerische Landesbank, BNP Paribas, JP Morgan, Sweden's Handelsbanken and the Scandinavian Nordea. In addition to the syndicated loan, bilateral loans worth Euro0.55bn were negotiated and a Euro0.61bn loan guarantee was extended by France's export credit agency, Coface, to Areva, the state-owned seller of the reactor. This was the first time such a guarantee has been put in place for an export within the European Union. There was also a Euro100m guarantee from Sweden's state-owned export-credit insurer.

TVO's shareholders – a group of Finnish pulp and paper industry companies – provided an equity component of 20%, along with a 5% subordinated loan.

Highly favourable terms
The sponsors were able to secure highly favourable terms for the deal, partly because total financial risk was limited because of the fixed-price turnkey contract agreed with Framatome (a subsidiary of Areva and Siemens). Banks appeared comfortable with the level of risk because the project had strong government support. As a result, the main Euro1.95bn loan was secured with a reported interest rate of just 2.6%.

Confirming the strong appetite for the project, a Euro1.6bn refinancing of the original facility in June 2005 was oversubscribed, with an increase from the original target amount of Euro1.5bn. A lead-managing group of 16 banks participated in the refinancing.

Nuclear's supporters acknowledge that, in most cases, governments have a role to play in building the investment case, not least because the high costs of decommissioning plants must be taken into consideration. However, with the passage of the US' EPA05, the proponents of nuclear energy argue that the right investment conditions now exist in the country. A form of insurance has been fashioned under which the federal government will cover debt service for the first few plants if commercial operation is delayed. This coverage is capped at $0.5bn for the first two reactors and at $250m each for the next four reactors.

Increasingly, industry leaders are holding the US legislation up as a model for attracting financial support for newbuild nuclear schemes elsewhere. But supportive legislation on its own may not be enough to catalyse investment in new schemes. According to Areva's chief executive, Anne Lavergeon, more innovative financing solutions would improve the risk/reward balance. Reward needs to more accurately be matched to risk, potentially splitting projects into different stages, with the early stages – being riskier – offering greater return.

A mixture of government-backed financing, export-credit support and strong and stable legislative frameworks can mitigate the factors that have traditionally made banks cautious about financing nuclear projects. If these conditions are met, bankers expect a transition from corporate lending towards pure project financing for nuclear schemes.

"The trick with nuclear would be to have the longest tenor possible. You're already seeing this on infrastructure deals, with bank debt going out to 30 years," says Goodall.

However, it will not be an easy ride. Not all newbuild nuclear plants are likely to enjoy the kind of sponsor credit-worthiness and government support present in the OL-3 deal. Additionally, reputational risk will always be a factor in nuclear. In May, Bayerische Landesbank reportedly withdrew its interest in participating in a nuclear power plant project financing in Bulgaria, following pressure from environmental organisations.

"The political argument has to be won before it becomes a commercial financing proposition. Otherwise you could spend time on financing and then see the thing disappear for political reasons," says Goodall.

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