New Build Nuclear: Who takes completion risk? Platts Nuclear Energy – Opportunities for Growth & Investment in Europe by Milton Caplan President, MZConsulting.

New Build Nuclear:Who takes completion risk?

Platts Nuclear Energy –

Opportunities for Growth & Investment in Europe

by

Milton Caplan

President, MZConsulting Inc.

2006 May 8

2

Outline

• The return of nuclear power

• Risks and Realities of Nuclear Power

• Examples

• Moving forward

3

It’s Cool to be a Nuke!

• France to build at Flamanville

• UK considers new nuclear

• Finland commits to Olkiluoto 3

• Germany to do energy review

• Sweden supports ongoing nuclear operations

• Canada considers nuclear

• US supports nuclear energy

• G8 supports nuclear power as part of the mix

• Bush reopens nuclear cooperation with India

• Environmentalists now supportive

4

Nuclear Advantages

• Environmental – no GHG emissions

• Security of Supply

• Economic

• Excellent performance of existing fleet

5

What are the Alternatives?

• Fossil fuels falling from favour– Coal is dirty, new clean coal technology on the way

– Gas prices volatile and increasing

• Renewables increasing in use – Acceptance that it can’t do it all

• Nuclear is the only large scale generation option available for baseload requirements

6

Is it time to Celebrate?

Maybe its still too soon.

7

Making it happen!

• Support for nuclear is only the beginning

• Is the infrastructure in place to enable new build projects to succeed?

BIG RISK

Governments support new build, but do not create the criteria for success!!

8

Nuclear Issues

• Large capital

• Long project schedule

• Low variable cost of operations

• Complex regulatory regime

9

Project Risk Triangle

Market

Construction Operations$ + $

= $

Generator

•Evolving markets•De-regulated/liberalized

• Fixed risk (PPA)• Merchant Plant

•Low variable cost•Strong performance •Much M&A experience•Confidence is High

•High Capital Cost•Poor performance in past•New Improved Designs•Confidence is building

10

What is Completion Risk?

• The total cost of the completed plant including – Engineering

– Equipment

– Construction and erection

– Commissioning

– Fuel

– Financing costs

– Regulatory approvals

– etc

11

Old Model

• Vendors built on cost plus basis• Utilities (Generators) borrowed on balance sheet• All costs both construction and operations passed

on to the customer

Essentially 100% risk on the customer

Many projects had long delays and significant overruns

12

The Market Fights Back

Generator

Market

Vendor

Lenders

Project Finance

Turnkey

PUSH

13

Vendors Listen

• Vendors have now taken a more product oriented view i.e. develop new products considering all the risks associated with its implementation

• Modern designs such as EPR, AP1000, ESBWR and ACR-1000

• Worked with regulators to improve processes and governments to improve planning approvals

• Results are lower costs and lower risks

14

Criteria for a Successful Project

• Well designed economic plants• Stable regulatory regime• Risk sharing amongst all project stakeholders• Strong project team • Extensive Project Planning

Confidence

15

Generator Risk Models

Generator

Turnkey

Scope B

Scope A

Scope F Scope E

Scope CScope D

• There is a limit to the risk that vendors will take

• Exclude circumstances beyond their control

• Consequences commensurate with role and responsibility

• No consequential damages

Generator cannot lay off all of the risk!

16

New Build Nuclear Reality #1

Generators have the completion risk

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Financing

• Projects– Large Capital– Long schedules– Risk profile varies from construction to operations

• Lenders will require– Strong debt coverage (large equity)– Overrun funds in place (stand by facilities)– Date certain for start of repayment

• Project Financing is not ideal and high cost• On balance sheet creates EPS dilution issues

18

New Build Nuclear Reality #2

Generators have the financing risk

– Credit risk

– Funds to complete

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Plan for Success

• Well planned and managed project• Structure to assure successful project completion• Completion risk is real

– Assess the risk– Mitigate the risk– Manage the risk

• Low risk, high consequence• Economics not robust enough to price it in• Generators cannot risk bankruptcy on one project

20

New Build Nuclear Reality #3

Generators will not bet the company on a new build nuclear project

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Recent Projects

• Finland Olkiluoto 3 Project– Turnkey supply of EPR from Areva– Customer owned utility– Deliver power to customers at cost

• Canada Bruce Units 1&2 Restart– Multiple contracts managed by independent

project manager– Shared risk of overruns with government

22

USA

• Government programs to support new build include:– Delay insurance for regulatory and litigation risk– Loan guarantees for 80% of project cost– Production tax credit of 1.8 cents / kWh

23

Let’s get real!

New Build Nuclear Realities1) Generators have completion risk

2) Generators have financing risk

3) Generators will not bet the company on a new nuclear project

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Business Models that Work

• Large utility with multiple units• Well structured project that places

significant risk with vendors• Strong project management• On balance sheet financing• Risk sharing with the market

– Regulated, or PPA with some overrun risk sharing

25

Making it Happen!

• More work to be done to create well structured projects that can proceed

• Requires committed stakeholders to work together to develop details of workable models

• Different markets will have different solutions

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Objective is Clear

Well managed successful new build nuclear projects!!

It’s cool to be a Nuke!!

Thank You

Milton CaplanMZConsulting [email protected]+1.647.271.4442