Despite worries following Japan’s earthquake and tsunami, there is a strong appetite for nuclear projects across Asia
Japan’s six-reactor Fukushima Dai-ichi nuclear facility withstood the 9.0 magnitude earthquake and the hundreds of 6-plus magnitude aftershocks. But the ensuing tsunami was twice the height of the facility’s sea wall, and flooded the back-up electrical systems that powered the pump cooling systems and pressure ventilators.
The resulting overheating and pressure-builds caused a series of explosions that enabled radiation to escape the reactor chambers, causing widespread concern about threats to health and safety and the environment that continues to date.
So what affect will Fukushima have on the region’s other nuclear energy countries and aspirants and, for those who persevere, what affect will it have on the financing of nuclear projects?
The risks of the events that occurred at Fukushima are most evident along the circum-Pacific belt, along which 90% of the world’s earthquakes occur. The horseshoe-shaped arc spans 45,000km from the west coasts of Peru and Chile, along the west coast of the United States, across the Aleutian islands, down across the Sea of Japan, the South China Sea and the Philippines Sea to Malaysia, and along the Indonesian archipelago, to New Zealand.
Three countries in Asia that have installed nuclear power facilities (Japan, China and Korea) and five more (Philippines, Thailand, Indonesia, Malaysia and Singapore) that are considering or implementing plans to build nuclear power plants all face significant earthquake risk. Vietnam – the most ambitious of Asia’s nuclear aspirants – lies just outside the circum-Pacific belt, and faces less earthquake/tsunami risk.
The economic case
By 2035, global energy consumption is projected to almost double, and in non- OECD countries, it will triple. Much of the demand driving that growth is coming from Asia. Today, more than 40% of the world’s energy is produced by burning coal, and the abundance of coal supplies in the United States, China, India, Australia, Indonesia, Vietnam and Russia mean that coal will remain a key fuel in power generation for the foreseeable future.
There are more than 50,000 fossil-fuelled plants in the world today and they generate nearly 30 billion tonnes of carbon dioxide – the principal greenhouse gas. However, they are particularly efficient in producing baseload generating capacity demanded in the Asian markets.
Wind, solar, geothermal and biomass fuels remain relatively expensive and/or cannot meet baseload capacity demands. Hydropower is almost fully developed and natural gas – also a fossil fuel – is subject price volatility. Nuclear generation, therefore, is the only remaining alternative to fossil fuels for baseload power generation.
The role of nuclear energy is not to supplant coal or other fossil fuels or even to replace renewaMbaleys2–5,a2t0l1e1ast not in the medium term – but to play a larger role in the broader mix of energy solutions. But nuclear plants present a unique series of challenges to investors and lenders, particularly in developing countries.
The capital challenge
The costs of developing nuclear projects remains daunting, particularly in developing countries or in countries in which nuclear power is new and the legal and regulatory regime for nuclear energy is not yet fully developed. In nuclear energy projects, the term “overnight capital costs” is used to capture the engineering, equipment procurement and construction (EPC) costs and the owner’s costs for land, infrastructure, site work, interconnection, licensing, project management and administration, plus contingency, but excluding interest charges during construction.
Capital costs for nuclear plants ranges widely from country-to-country, depending on a variety of factors, but $5,000 per kilowatt hour (kWh) is a useful rule-of thumb. This translates into $5 billion of capital for a 1,000MW plant.
For example, Phase 1 of the Sanmen nuclear plant in Zhejian, China will comprise two 1,250MW units that will generate 17.5 billion kWh of electricity for a reported total project cost of $5.3 billion. Phase 1 of the Ninh Thuan nuclear plant in central Vietnam will generate 2,000MW and cost between $10 billion and $12 billion.
The longer design, approval and construction timelines required for nuclear plants also affect the financial analysis. Today, the construction period for a nuclear plant is about five to eight years, compared to two years for a gas or coal plant. The projects awarded in Vietnam in 2010 envision construction starting in 2014 and completion in 2020. Malaysia’s current planning aims at having its first nuclear plant operational by 2021 and Indonesia is aiming for 2022. The longer planning, approval and construction times mean nuclear projects require capital to be at risk for longer periods.
Other variables affecting the financing include discount rates, the mix of equity and debt in the project, interest rates, construction periods, plant life, taxes, inflation and depreciation rules. Contingency concerns are exacerbated by longer timelines and the magnitude of capital. Delays and cost overruns at the Olkiluoto nuclear project in Finland, for example, have ballooned project costs from €3 billion ($4.29 billion) to €5.7 billion and extended construction time from four to eight years.
All these risk factors contribute to sponsors’ and lenders’ determination of required returns on their equity and debt.
Critical cost and finance factors
At the project-specific level, a lump-sum, turnkey EPC contract is key. EPC costs comprise about 85% of a project’s total overnight capital costs. These are comprised of direct and indirect costs. The direct costs are about 70% of the total, and include the costs of equipment, labour and the materials required to assemble and install the equipment. About 50% of the EPC costs are attributable to the nuclear reactor and turbine equipment – the most significant of the imported equipment.
In all the Asian countries with nuclear plans, much of the principal equipment would be imported, so shipping and insurance costs and multi-jurisdictional project management become important.
The indirect costs are about 30% of the total EPC costs, and include engineering, supporting labour and supervisory costs. Enabling legislation in most developing countries seeks to encourage localisation across much of the supply chain and labour deployment, yet human resources in the nuclear sector remain among the chief challenges across the industry. There are simply not enough qualified and experienced nuclear engineers and other personnel to tend to the world’s current and contemplated nuclear plants.
Operating costs for a nuclear plant are substantially lower – about one-third to one-fifth the costs of coal and gas – and are where nuclear catches up to its fossil-fuelled counterparts in terms of cost-efficiency. But nuclear plants have to account for higher costs of fuel production, waste disposal and decommissioning.
In fuel production, uranium has to be processed, enriched and fabricated into fuel elements for the reactor. About half these costs are attributable to the enrichment and fabrication processes. Spent fuel has to be removed, reprocessed, separated and disposed.
Unlike traditional fossil plants, nuclear plants have significant back-end costs for decommissioning, and the owner or operator has to establish reserves for them over the operating period. Decommissioning involves a range of special procedures because of the possible presence of radioactive or fissile materials in the equipment, premises or site.
Plant life expectancy is the other factor where nuclear catches up to fossil fuel plants on the economics. Nuclear plants today are expected to operate for 60 years or more as compared to 30 to 40 for a coal or gas plant.
The capital-intensive nature and risks involved in nuclear power plants make them particularly challenging to finance, and practices vary across countries. In the aspiring nuclear countries in Asia, sponsors and lenders will have to develop matrixes of factors and risk allocations specific to each country. An approach that would work in China will not be wellsuited to Vietnam or Indonesia, so project development and finance will have to vary from country-to-country to adapt to local circumstances, including legal and regulatory regimes and local markets and circumstances.
Limited-recourse project financing that relies solely on the credit of a local power purchaser is not likely bankable in emerging Asia, even if backed by a government guarantee. Yet financing off the back of the corporate balance sheet of domestic sponsors or generators is also unlikely to be sufficient.
Fortunately, the development of an export market for nuclear equipment and project management is of increasing importance to the governments of all the major suppliers, including the United States, China, Japan, Russia, Korea and France. As a result, the export credit agencies in these countries offer substantial loans or guarantees that add the full faith and credit of these countries to the credit of the local project sponsors and grids.
In some cases, however, these sovereign supports do not cover the entire capital needs of projects, and additional financing up to 15% or more of project cost is needed from other sources. In those cases, a mix of sovereign support from the exporters’ countries and the host country, together with financing from international and local banks and development banks can cover the needed capital so long as the lending group can be made confident of the host legal regime, project viability and project-specific due diligence.
Japan and Korea
As mature economies with highly-developed regulatory regimes and strong, reliable and predictable industrial demand, Japan and Korea can most effectively evaluate technical feasibility, design suitability and regulatory, contracting, supply and related project risks, all in the context of a fully-developed banking sector and clear government policy.
The efficient coordination of systems design, equipment supply, power generation and distribution enables lenders to accurately assess nuclear projects in Japan and Korea in the context of a open-market structure. Korea most recently demonstrated such supply-chain prowess in a surprise win of the $40 billion mandate to build and operate four reactors in the United Arab Emirates.
The Korean consortium included engineering, construction, equipment supply, operations and financing, in a one-stopshop approach that promised technical expertise, certainty, efficiency and cost-competitiveness.
In China, the participants in the nuclear power sector – from research institutions to developers, operators, regulators and lenders – are all closely coordinated under the central government.
For example, the National Energy Commission (NEC), which formulates and coordinates energy strategy and development planning, is comprised of China’s Premiern Wen Jiabao, a vice premier, the director and a deputy director of the National Development and Reform Commission, the Finance Minister, Central Bank governor, and head of the National Energy Administration.
The NEC’s high-level composition clearly demonstrates the priority accorded the country’s energy strategy and its coordination from policy-making to execution, including industrial planning, economic impact and financing.
The China National Nuclear Corporation (CNNC) is the successor to the Ministry of Nuclear Industry, and oversees China’s nuclear-related companies, manufacturers, institutions, research institutes, and plants.
The CNNC is also the country’s largest nuclear power developer and seeks to almost triple its annual nuclear power generating capacity and its total investment in nuclear power plants by 2015. If achieved, its total investment in nuclear power projects would reach Rmb500 billion ($75 billion), including more than Rmb350 billion in bank loans.
Financing for its expansion will come largely from bank loans and capital from a probable share listing. China’s banking sector is flush with cash, ultimately responsible to the central government, and often supports the execution of government policy objectives, particularly in areas of national security such as natural resources and energy. Therefore, instead of seeking foreign financing for its nuclear expansion, China’s emphasis has been on accumulating world-class technology, including foreign designs, such as the Westinghouse AP1000 and the Areva EPR, and local designs such as the CAP1400 and CNP-1000.
Indonesia and Vietnam
GDP growth rates over 6% and 7% in Indonesia and Vietnam, respectively, seem certain to continue to strain the countries’ already over-taxed power generation capabilities, making nuclear an obvious consideration. Indonesia’s steady climb from the depths of the 1997 Asian financial crisis has put it back among Asia’s most promising countries for stability and growth.
Indonesia is also a uranium producer and has won fuel support from Australia, thereby mitigating some fuel-supply risk. In 2009, the International Atomic Energy Agency announced that Indonesia was ready to develop nuclear energy, based on human resources, stakeholders, industry and its regulatory system. But Indonesia’s banking sector is not as fully developed as that of Japan or Korea, nor as cash-rich as China’s.
Similarly, Vietnam has domestic uranium supply in Quang Nam, but is much further along with a far more advanced and ambitious nuclear development plan. Vietnam may generate 15,000 MWe by 2030 from eight facilities in five provinces. The first generation of plants will be owned by State-owned Electricity Vietnam.
The first plant at Ninh Thuan was awarded to Russia’s Atomstroyexport, which will build VVER-1000 or 1200 reactors to generate 2000MWe at a total cost estimated to exceed $11 billion. Ninh Thuan I has completed a pre-feasibility study and construction may start in 2014 with a 2020 operational date. Ninh Thuan II was awarded to a Japanese consortium, and is expected to come online by 2024-25. In each case, the foreign developers are expected to bring design, engineering, construction, fuel supply and waste management, as well as financing.
The financing is expected to be comprised of 85% of total project cost and to be provided by combination of export credit, insurance and loans. Electricty Vietnam would raise 15% equity capital. In each case, Indonesia and Vietnam are reassessing the technical feasibility of the proposed plant designs in wake of Fukushima. Although earthquake and tsunami risks are minimal in Vietnam, sites for plants in both countries are located near coastlines with some flood risk. If anything, Fukushima has caused a global reassessment of risks beyond the obvious, and both countries are re-examining terrorism, airplane impact and other disaster risks.
Lands of opportunity
The developing markets of Asia hold the most promise for nuclear energy’s continued renaissance. The economies are growing steadily across the region, baseload energy projections are robust and power generation is viewed as an integral part of economic and national security and prosperity.
In many Asian countries, centralised policy-making and the ability to coordinate the entire supply chain and domestic financing facilitate a high degree of efficiency over the entire project. With the support of the foreign governments of some of the strongest economies in the world, financing is within reach if properly structured, taking into account markets and circumstances in supply and host countries. Importantly, the ability of the host countries in Asia to design and implement policies with more than 20-year timelines enables them to accommodate larger capital costs by defraying them over a longer-term than might be tolerable in the west where merchant plants and private commercial players have to respond to different investment interests and where political and public support can be fickle.
The closer ties between government policy-makers, project sponsors, off-takers and lenders also enables players in the Asian markets to work more effectively towards longer-term goals of energy security, cost-efficiency in baseload power generation and minimisation of environmental impact.