New Projects, Nuclear

Financing Options for New Nuclear Power

Issue 5 and Volume 5.

By Lindsay Morris, Associate Editor, Power engineering

Financing for nuclear power projects has been met with several challenges in recent years. Issues such as escalating construction costs and installation mishaps have caused the cost of some plants to soar millions to even billions of dollars higher than original projections. Concerns over financing threaten to freeze or delay new nuclear construction in the U.S. Rebuilding the supply chain of the nuclear industry has not proven cheap, and at the same time, dramatically low natural gas prices have lured many potential new nuclear operators.

While hindrances are plentiful, the government and some states have developed programs to help finance new projects. These incentives include loan guarantees, the production tax credit, standby support and construction work in progress.

Current Challenges

Three new nuclear projects are facing increased prices, according to a July 2012 analysis of public records and regulatory findings conducted by The Associated Press. Plant Vogtle, which earlier this year received the first construction license issued for a U.S. nuclear plant since 1978, was initially estimated to cost $14 billion. However, the plant is likely to cost $800 million over estimates due to licensing delays. Plant Vogtle was originally scheduled to have its first reactor operational by April 2016, but projected operation is now delayed by seven months.

However, co-owner Southern Co. said that cost increases are expected with nuclear projects, and that savings over the life of the plant will make up for construction price hikes. Southern Co. expects Plant Vogtle will cost $2 billion less to operate over a 60-year lifetime than original projections because of expected tax breaks and low interest rates.

Watts Bar in central Tennessee could cost up to $2 billion more than the originally budgeted $2 billion, according to the Tennessee Valley Authority. The utility said it underestimated how much work was needed to finish the plant and should have conducted more design work prior to starting construction. The project was originally scheduled to be finished in 2015, but TVA has postponed start of construction until 2015.

Plant Summer in South Carolina is yet another plant affected by cost increases. The project was originally expected to cost $10.5 billion but has seen increases of $670 million. However, co-owners SCANA and South Carolina Public Service Authority expect that the project is still on budget due to lower interest rates and inexpensive labor.

Congressman Dennis Kucinich (D-OH), who has led an effort in Congress to ensure the safety of nuclear power plants, has said that there is currently no economic justification for nuclear power. “Wall Street and banks have turned away from nuclear power plants,” Kucinich said in a recent statement. “The price of natural gas has fallen so far that nuclear industry CEOs have admitted that new nuclear reactors cannot be competitive.”

It’s true that record low natural gas prices, which have been sub- $3/MMBtu for all of 2012, have dimmed the glimmer of hope for some new nuclear projects. Progress Energy, for example, has delayed construction plans for two reactors in Florida because of the economy, low demand and cheap natural gas. Progress now anticipates its first new reactor to be completed in 2024.

“We should not be wasting money on extremely expensive nuclear reactors,” Kucinich said.

Undoubtedly, the cost of a new nuclear facility is expensive when compared to the size and financing capability of most utilities. The largest U.S. electric company, Duke Energy, has a market value of approximately $37 billion, while a new nuclear power plant can cost anywhere from $6 to $8 billion, according to the Nuclear Energy Institute.

This cost ratio and other issues have led to some difficulty in convincing the financial market that new nuclear is a good idea. Investors today are concerned that new nuclear plants could endure the same longer-than-expected construction times and cost overruns associated with the current nuclear fleet. However, federal policymakers have encouraged the growth of the nuclear industry by including three incentives in the Energy Policy Act of 2005.

Loan Guarantees

According to the NEI, the most useful of the federal incentives is the loan guarantee program, which was established by Title XVII. The program allows the Department of Energy (DOE) to grant federal loan guarantees to projects that avoid, reduce or storage greenhouse gas emissions by using a new or significantly improved technology. Title XVII was created to assist projects that have challenges securing financing on reasonable terms because they employ technology that is not yet common to the market.

New nuclear power projects are among the qualifiers for the loan guarantee program. Final regulations for the loan guarantee program were published by DOE in October 2007. In July 2009, DOE proposed a change to the rules, which will likely be promulgated by the end of 2012. The proposed change would allow DOE to share collateral with other lenders, making partnerships possible as well as the participation of export credit agencies as co-lenders.

A federal loan guarantee allows for companies to use project finance structures to pay for nuclear projects non-recourse to the project sponsor’s balance sheet. Additionally, the loan guarantee permits a more highly leveraged capital structure – the guaranteed project debt cannot exceed 80 percent of total project costs.

Congress has approved $51 billion in loan volume for the loan guarantee program. Of that, $18.5 billion has been approved for nuclear power projects and $2 billion for uranium enrichment projects. The DOE has selected loan guarantee applications from four nuclear projects for detailed due diligence and term sheet negotiations. The $18.5 billion in loan volume could provide financial support for, at best, two or three projects, since the four projects’ requested loan volume is $38 billion. Therefore, additional loan volume will be required to support the four to eight nuclear plants anticipated in the next decade.

Production Tax Credits

The production tax credit (PTC) for new nuclear generation (section 1306 of the Energy Policy Act of 2005) allows 6,000 MW of new capacity to earn $18 per megawatt-hour for the first eight years of operation. Any one plant may receive no greater than $125 million per year from the tax credit.

Production tax credits are a familiar asset to the energy industry, as many renewable resources also benefit from them. However, unlike the renewable PTC, which increases annually with inflation, the nuclear PTC does not escalate.

A facility must meet several criteria in order to qualify for the PTC. First, the construction and operating license applications were due to the U.S. Nuclear Regulatory Commission by year end 2008. Second, the plant must be under construction by Jan. 1, 2014. Finally, the plant must be operating by Jan. 1, 2021.

The PTC allows for 6,000 MW of capacity to receive credits, and the credits will be divided among eligible facilities on a pro rata basis. While the PTC is helpful at reducing the cost of nuclear power plants once they are operating, “it does little to offset the construction and commission risk,” according to the NEI.

Standby Support

Provided under section 638 of the Energy Policy Act of 2005, standby support is a type of risk insurance. This insurance covers licensing and litigation risk for the first six new nuclear facilities. It covers delays caused only by factors outside a company’s control.

Final regulations for the standby support program, issued by DOE in August 2006, allow for each of the first two new nuclear power plants constructed to receive up to $500 million. Each of the subsequent four new power plants can receive up to $250 million. The coverage through standby support can only be applied to debt service (principal and interest).

DOE put certain provisions on the first three through six nuclear plants constructed. This includes daily coverage that begins six months into a covered delay and 50 percent of eligible delay costs.

State Policies

Several states have passed legislation or implemented regulation to support new nuclear plant construction. These policies require the state public utility commission to determine if a proposed plant is prudent before construction begins. The state utility must also periodically approve costs during construction in order to guarantee that capital costs will be added to the rate base when the plant begins operations.

A helpful mechanism in state financing for a nuclear project is the allowance to carry the cost of a construction work in progress (CWIP) – or the financing cost associated with construction, which is passed on to ratepayers during construction. Allowing CWIP diminishes the cost customers will pay for power when the plant enters operation.

The CWIP cost includes interest costs on the money used for construction expense and a return on equity utilized during construction. If these costs were not recovered during construction, they would be capitalized, rolled into the total project cost and recovered when the facility goes into operation. But by employing CWIP, this carrying cost is paid during construction.

This method prevents utilities from having to pay “interest on interest,” introduces reduced rate shock for consumers by gradually introducing small rate increases during construction, and allows for improved utility cash flows by including the carrying cost in the rate base as it is incurred. As seen in Table 1, CWIP can be effective at lowering the levelized busbar cost of electricity.

table 1

Several states have benefitted from CWIP legislation. In 2009, the Georgia Nuclear Energy Financing Act was signed into law, allowing Southern Co. subsidiary Georgia Power to include approved carrying costs in the rate base during construction of two additional reactors at Plant Vogtle. Georgia Power has calculated a savings of over $300 million is savings in “interest on interest.” And by choosing to pay the interest during the construction period, rather than allowing charges to accumulate for repayment during the project’s amortization period, the in-service cost of Vogtle Units 3 and 4 is expected to be diminished by nearly $2 billion.

Another state-level nuclear financing option is available in South Carolina, which enacted the Base Load Review Act in 2007. This allows the state public service commission to grant a project development order for nuclear generation facilities. It also permits the utility to collect carrying costs via annual rate requests. SCANA, the owner of 66 percent of the V.C. Summer site in Jenkins, S.C., has estimated it will save $1 billion of capitalized interest costs through the construction cycle for its portions of Units 2 and 3.

All of these state and federal measures can assist companies in securing financing for new nuclear power plants, thus reducing the overall project risk. While nuclear financing currently faces challenges from lower-cost forms of power generation, as well as speculation from financial institutions and political figures, utilities can benefit from the incentives available through the Energy Policy Act of 2008 and state financing allowances. However, most of the subsidies available benefit only the first few new nuclear projects. Therefore, the faster power generators act to secure construction permits, the more likely they will be to benefit from federal and state financial assistance.