US working with allies to change global rules for nuclear financing

Thursday, October 23, 2008

Platts - The US, France and Japan are working to put international mechanisms into place to help finance construction of nuclear power plants in the US and elsewhere, government officials and financial analysts said this month.

Two principal targets are international financial institutions, such as the World Bank, and national export credit agencies, the sources said.

In an October 15 e-mail, DOE spokeswoman Healy Baumgardner said export credits “will likely play a significant role” in financing new nuclear construction. But “their existing terms are not optimal to stimulate new nuclear power plant development,” she said.

She appeared to be referring to OECD guidelines for export credit agency, or ECA, backing for exports of nuclear power plants from OECD countries.

Those rules already have set a payoff schedule for nuclear plants that is somewhat longer than for other types of construction. But the timetable is still "a little off," because nuclear plants are expensive to build and have a long economic life, Daniel Mallo, a managing director for project energy and finance with Societe Generale Corporate & Investment Banking, said in an interview last week.

Mallo is advising UniStar Nuclear Energy, which aims to license, build and operate a fleet of Areva’s US-EPRs in the US.

Baumgardner said the US is working with other OECD countries “to better match loan repayment terms to projected cash flows for a new nuclear power plant.”

The Arrangement on Guidelines for Officially Supported Export Credits was first established in 1978. Institutions that follow its rules are known as the Participants to the Arrangement. They meet periodically under the auspices of the OECD, but the Arrangement is a gentlemen’s agreement, not an official OECD document. The Arrangement provides special treatment for certain sectors, notably nuclear power plant equipment, materials and services. The present “understanding” allows a 15-year payback period for nuclear export credits — three more than for conventional power plants and five more than for other types of equipment — but adds a premium of 75 basis points to the fixed interest rates determined periodically for general export financing.

The Participants to the Arrangement will meet in Paris next month. As part of that meeting, members of the Nuclear Sector Understanding subgroup will confer November 19 and 20, and “the 15-year payback issue is one of the main items for consideration,” a US industry official said. The proposal under consideration could stretch that period out to 30 years, to better match the term of the US government’s loan guarantee program for nuclear power plant projects, he said. The period for reimbursing the first half of the debt would be correspondingly extended, he said.

However, Societe Generale’s Mallo said that revising the guidelines is a long and fairly cumbersome process. It is “unlikely there will be a resolution” before the financing decisions are made on the anticipated “first wave” of US nuclear construction, he said. The US industry official said government-to-government negotiations tend to take time, but suggested that “if the DOE wants ECA support, they might push the process” to arrive earlier at a consensus.

The main potential sources of ECA financing for US plants are Japan and France, Mallo said. Japan’s government has established an entity, the Japan Finance Corp., that could carry out that task. According to US industry officials, Japanese financing for US projects would not be tied to the use of Japanese reactor technology, although the use of such technology could make a project a more attractive candidate for the financing. The project would need to have Japanese investors, the officials said (NW, 25 Sept., 1).

The Japanese embassy in Washington did not respond to requests for comment by press time.

France’s government has not advanced as far as Japan’s and is still in the process of drafting a memorandum of understanding with the US, Mallo said. But he said that “letters have been exchanged at a relatively senior level.” French loans can be expected to be linked to French content, he said.

Revisions being discussed
A French industry official said that the parties are discussing an agreement that would broaden the scope of export credit guarantees. The current Arrangement covers exports of components, equipment, materials and service, as well as nuclear fuel, exported directly from the ECA country. But vendors now procure supplies internationally, and the official said they want to be able to apply French export credit guarantees to other types of content, such as engineering or components sourced from a country other than France.

Another point to be clarified in bilateral discussions, the US industry official said, is how the collateral for the loans supporting new reactor construction would be controlled. Should a debtor default, US law provides for all lenders to share equally in rights to the collateral and proceeds therefrom, a legal arrangement known as pari passu treatment.

However, Mallo noted that the current rules for DOE’s loan guarantee program do not assume the department would be sharing the financing burden with other lenders. Therefore, under that program, while all debt would be pari passu to the DOE-guaranteed debt and/or Federal Financing Bank loans, the US official said, only DOE could decide what to do with that collateral — to sell the pledged assets or hold them, for example. “It seems likely that major lenders will want a vote in the disposition of the collateral, as opposed to simply following DOE’s lead,” the official said.

The US and Japan are discussing that point, he said. Coface, France’s ECA, did not respond by press time to a request for information on its position, but the US official said it would probably be similar to the Japanese one.

At an October 16 press conference in Paris, OECD Secretary General Angel Gurria said “the key matter is that there’s a level playing field” among countries exporting nuclear power plant equipment and technology. “The key is not under what conditions [equipment is exported] but whether those conditions are comparable” among export credit agencies, he said.

In the nuclear field, Gurria said, “you’re talking about three to five countries” capable of exporting complete nuclear power plants — France, the US, Japan, South Korea and Russia. “All but the Russians are members of the OECD,” Gurria said, adding that “generally, Russia joins our working groups, and they are a candidate for accession” to the OECD. Russia’s nuclear export firm, Atomstroyexport, did not immediately respond to a request for information on Russian nuclear export financing terms.

DOE loan guarantees
DOE’s loan guarantee program is designed to promote innovative generation technologies that have little or no greenhouse gas emissions. Under current law, the department is authorized to provide $18.5 billion in loan guarantees for new reactor construction.

Seventeen power companies have applied for $122 billion in federal loan guarantees — far above the amount available — to support construction of 21 reactors, DOE said early this month.

Several analysts have said that the loan guarantee authorization is too small and that the DOE guarantees would have to be supplemented by other sources, such as ECA financing.

DOE said five reactor designs are represented in the applications. Two of those designs — Westinghouse’s AP1000 and GE Hitachi’s ABWR — have been certified by the NRC. The other three — Areva’s US-EPR, GE Hitachi’s ESBWR and Mitsubishi Heavy Industries’ US- APWR — are under certification review.

The companies confirmed to have filed a loan guarantee request are: Calvert Cliffs 3 Nuclear Project LLC, a UniStar Nuclear Energy company, for a US-EPR at its Calvert Cliffs site in Maryland; Duke Energy for two AP1000s at a greenfield site in South Carolina; Exelon Generation for two ESBWRs in Texas; PPL Corp. for a US-EPR near its Susquehanna station in Pennsylvania; Progress Energy for two AP1000s at a greenfield site in Florida; AmerenUE for a US-EPR at its Callaway site in Missouri; Luminant Power for two US- APWRs at its Comanche Peak site in Texas; and Nine Mile Point 3 Nuclear Project LLC, also a UniStar company, for a US-EPR at Constellation's Nine Mile Point site in New York. Entergy filed two separate applications — one for an ESBWR at its Grand Gulf site in Mississippi and another for an ESBWR at its River Bend site in Louisiana.

There also were separate applications filed by co-owners of reactor projects: Dominion Virginia Power and Old Dominion Electric Cooperative sought federal financial backing for their shares of a proposed ESBWR at Dominion’s North Anna site in Virginia; NRG Energy and CPS Energy, for two ABWRs at the South Texas Project site in Texas; Southern Nuclear Operating Co., Oglethorpe Power, and Municipal Electric Authority of Georgia, for two AP1000s at the Vogtle site in Georgia; and South Carolina Electric & Gas and Santee Cooper, for two AP1000s at the Summer station in South Carolina.

DOE also received separate applications from USEC Inc. and Areva Inc. for planned uranium enrichment plants. The two companies are seeking a total of $4 billion in loan guarantees for their respective “front-end” nuclear facility projects, double the $2 billion that is available.

Financing new nuclear programs
In a July 2007 statement on nuclear energy and nonproliferation, US President George W. Bush and Vladimir Putin — then Russia’s president, now its prime minister — said their efforts to promote the expansion of nuclear energy would include “[f]acilitating and supporting financing to aid construction of nuclear power plants through public and private national and multinational mechanisms, including international financial institutions”.

Since then, DOE’s Baumgardner said, the US government has conducted a survey of existing US and international sources of support for financing nuclear power projects in countries that are starting nuclear energy programs.

That interagency study has been shared with several other nuclear supplier states for comment, she said. Members of the DOE-inspired Global Nuclear Energy Partnership, meeting in Paris October 1, agreed to make a concerted attempt to get international financial institutions to reverse their traditional opposition to financing nuclear power plant projects.

Multilateral development banks, or MDBs, are a potential source of nuclear financing, Baumgardner said. Most MDBs now have explicit or implicit policies barring investment in new nuclear projects, she said. But within the past year, the US, France and Japan have agreed to fund a research project within the World Bank designed to re-evaluate the cost competitiveness of nuclear power in light of growing concerns about climate change, Baumgardner said.

She said US officials “believe that such a study is likely to determine that, in some cases, nuclear power projects are among the least costly options for long-term energy production once all “externalities,” such as carbon emissions, are taken into account.

If that is the study’s conclusion, there could be “a shift in the standing, unofficial World Bank policy against funding for nuclear projects,” she said. That change could lead other MDBs to change their policies on financing for nuclear construction, she said.

The financial risk to investors during the construction period of new nuclear plants has been a recent focus of analysts. According to an October 15 Standard & Poor’s Ratings Services report, “Construction risk is the overriding risk for new nuclear units.” S&P, like Platts, is a division of The McGraw-Hill Companies.

The S&P authors said, “We believe that labor and material cost increases are particularly acute for nuclear plants given their specialized labor needs, material intensity, and a tight supply chain for key components.” The “scanty construction record for the new technologies” and the NRC’s “untested regulatory process” exacerbate the risks, S&P said.

Mallo made a similar point at an October 8 forum at the Department of Commerce in Washington. Many investors are more “comfortable” with the risks of operation than with construction risks, he said.

In the past, there has been a “consistent record” of cost overruns for construction, with many of them “massive,” he said.

Mallo suggested that ECAs in countries whose companies might be supplying key components to US reactors could help overcome investors’ reservations about new nuclear construction. Through certain mechanisms, they might be able to “plug the gap” left by other sources of financing, he said.

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