Is Government the Only Game in Town for the Nuclear Re-Renaissance?
An Examination of Government Involvements in Recent Nuclear Projects
Key Points:
Nuclear Capacity Expansion: Over 20 countries at COP28 aim to triple nuclear capacity by 2050, amidst challenges of delays and cost overruns in nuclear projects.
Construction Risks: Nuclear projects face significant risks, including budget and timeline overruns, often necessitating government intervention.
Government Involvement Essential: Successful nuclear projects increasingly require full government participation due to the high risks and past failures of private-sector financing.
The 2023 Conference of Oil Producers the Parties (COP28) to the United Nations Framework Convention on Climate Change is currently underway in the United Arab Emirates. In an early win for the nuclear industry, more than 20 countries have announced a pledge to work together to triple nuclear capacity by 2050 from the 2020 level. This represents the largest push for nuclear electricity since the early 2000s. Will this new push for nuclear achieve its aim? Let's examine the recent history of nuclear project developments, review approaches to dealing with construction risks, and understand why government involvement is key in delivering new nuclear projects.
Nuclear Delays and Cost Overruns
The primary issue for the nuclear industry is construction risks, including delays and cost overruns. Delays are costly as wage bills continue to rise, interest on construction loans (if utilized) accumulates, and cash flow from electricity sales is deferred. These delays also strain the electricity system, as additional generation capacity is required to bridge the gap between scheduled and actual completion dates.
Figure 1 below shows the planned construction duration and actual or projected delays for projects involving the current generation of Western reactors, including Westinghouse’s AP1000 and EDF’s European Pressurized Water Reactor (EPR). Projects are listed in the order of their construction start date for each model. As the figure illustrates, delays are common, with Olkiluoto 3 and Flamanville 3 experiencing the most significant delays. Excluding these two projects, the actual construction time now appears to average around 8-10 years for both models, with no evidence suggesting that construction time will decrease with each additional unit built.
Sources: Olkiluoto 3, Flamanville 3, Taishan 1&2, Hinkley C1&2, Sanmen 1, Sanmen 2, Haiyang 1 & 2, Vogtle 3&4
Note: *Based on EDF’s May 2022 update. In its 2023 half-year results, EDF stated that the risk of additional delay is increasing. **Assumed similar delays as Sanmen 1 & 2 due to lack of information. ***Based on the latest projection.
Cost overrun is also a common issue for nuclear projects. The first-of-its-kind EPR at Olkiluoto is over 250% over budget. Chinese EPR and AP1000 projects, including Taishan, Sanmen, and Haiyang, were about 50% over budget. The most recent EPR projects, such as Hinkley Point C in the UK, are currently 60% over budget, with EDF warning that the project schedule is at risk of further delay, which will increase costs. Meanwhile, the most recent AP1000 projects at Vogtle in the US are over 100% over budget. While Hinkley and Vogtle were both impacted by Covid-19, the typical 8-10 year construction time for a new nuclear project means that all projects are likely to experience at least one macroeconomic cycle.
Sources: Olkiluoto 3, Flamanville 3, Taishan 1&2, Hinkley C1&2, Sanmen 1&2, Vogtle 3&4
Note: *Based on EDF’s May 2022 update. In its 2023 half-year results, EDF stated that the risk of additional delay is increasing, which could influence costs. **Assumed similar overruns as Sanmen 1 & 2 due to lack of information. ***Based on the latest projection.
Construction Risks: The Hot Potato
Given the history of delays and cost overruns, finding private-sector equity investors and lenders has proven challenging. The sector has previously attempted to mitigate these risks privately.
Olkiluoto 3 and Vogtle 3&4, for example, were delivered under fixed-price turnkey contracts. The technology providers, Areva for Olkiluoto 3 and Westinghouse for Vogtle 3&4, assumed all construction risks. In 2003, Areva agreed to deliver Olkiluoto 3 to TVO for a fixed price of 3.6 billion euros. However, cost overruns and lengthy delays led to a 4.5 billion euro bailout by the French government in 2017. EDF acquired the remaining Areva business, excluding the Olkiluoto contract, for 2.0 billion euros. The construction was finally completed in 2023, totaling 11 billion euros. Similarly, Westinghouse entered into a fixed-price contract with Georgia Power in 2008, initially estimated at $14 billion. After facing bankruptcy in 2017 due to cost overruns and delays, Westinghouse's contract was nullified. Toshiba, Westinghouse’s parent company, incurred $3.7 billion in losses due to the parent company guarantee payment to Westinghouse. Georgia Power absorbed the remaining cost overrun. Vogtle 3 has just been completed, while Vogtle 4 is scheduled for early completion next year. The total cost is $31 billion. This private sector experiment has failed.
It is unlikely that technology providers will be able or willing to build new nuclear plants under fixed-price contracts, given the substantial losses experienced by Areva (now EDF) and Westinghouse. Construction risks in other EPR and AP1000 projects were transferred to governments in one way or another. For instance, the State Nuclear Power Technology Corporation (SNPTC) was the turnkey contractor for the AP1000 project at Sanmen 1 & 2. Being state-owned, the Chinese government ultimately bore the construction risks; Westinghouse was only contracted to provide the reactors.
For Hinkley Point C, the project company adopted a multi-contracting strategy, with EDF managing contracts for different work components, thereby assuming the risks of delays and cost overruns. The project company is two-thirds owned by the French government through EDF and one-third owned by the Chinese government through General Nuclear Power Group, effectively sharing the construction risks between the French and Chinese governments.
Will Construction Risks Derail New Nuclear Projects?
There has been a surge of announcements for new nuclear projects over the past several years, especially in Central and Eastern Europe. However, none of these projects will proceed to construction until construction risks are addressed. Most likely, national governments will end up backstopping the risks.
In Poland, for example, the government-owned company Polskie Elektrownie Jadrowe (PEJ) signed an engineering services contract with Westinghouse in September. To clarify, this is not a construction contract; Westinghouse will deliver the design and engineering documentation at the project's end. Currently, no financing models are in place for the construction. The incoming government wants Westinghouse to take at least a 30% equity stake in the project, ensuring the technology provider has significant stake in the game. However, Westinghouse is pushing back, stating they do not take equity interests in projects. As it stands, this project is unlikely to proceed unless the Polish government is willing to absorb construction risks.
The second new Polish plant is being developed by a Polish-Korean consortium. Financing plans are still in the works. Korea Hydro and Nuclear Power (KHNP), a subsidiary of the majority-state-owned Korea Electric Power (KEPCO), has previously expressed interest in providing 20-30% of equity investments in the project. However, with KEPCO currently facing its own financial crisis, it is unlikely to invest in this project until it receives a bailout from the Korean government. For this project to move forward, the Korean government will likely need to provide some form of state guarantee to ensure that KHNP has sufficient resources to complete the project.
Other projects are still in the early stages. For instance, the final investment decision for Slovenia’s JEK2 2.4 GW nuclear plant is not expected until 2028. Another AP1000 project in Slovakia is still at the technical and developmental planning stage. Bulgaria is proceeding with the front-end engineering and design study for two new AP1000 reactors. The Bulgarian government states that the final contract must have “a fixed price and execution period.” However, this is unlikely to happen. It is unclear whether the Bulgarian government can backstop the project, as the country's gross domestic product (GDP) is $100 billion, and the project is expected to cost at least $20 billion; a 50% cost overrun would amount to 10% of the country's GDP.
UK: An Exception That Proves the Rule
The UK is unique in its continued attempts to instill "market" disciplines in new nuclear financing. Its first attempt at offering a 35-year fixed-price contract (Contract-for-Difference, CfD) to Électricité de France (EDF) for the construction of Hinkley Point C (HPC) has attracted widespread criticism. A 2017 review by the National Audit Office concludes that:
“…the Department’s deal for HPC has locked consumers into a risky and expensive project with uncertain strategic and economic benefits […] The Department and other parts of government were concerned primarily with the strategic ramifications of not proceeding and the benefits of keeping the project off the government’s balance sheet. They did not consider sufficiently the costs and risks of the deal for consumers.”
The latest attempt involves the UK government imposing the regulated asset base (RAB) model for financing the 3.2 GWe Sizewell C nuclear power station in Suffolk. This model turns Sizewell C into an investor-owned regulated utility, with revenues set to allow investors to recover capital expenditures, operating costs, and financing costs over the life of the project. Unlike the CfD scheme, where revenues do not flow to the project until it starts generating, the RAB model will see revenues recovered from customers through a levy on customer bills during construction and operations.
The model includes a pain/gain share on project costs and a rate of return down ratchet if the project is delayed. The pain/gain share reduces investor risks by having electricity customers absorb a portion of cost overruns up to a specified threshold, beyond which additional government authorization is required. If the project comes in under budget, investors keep a portion of the underspend. Similarly, the rate of return ratchet reduces risks by ensuring that investors still receive revenues (albeit lower) during the delayed period.
It is hoped that these mechanisms will sufficiently reduce project risks to attract a wider pool of investors for the project’s equity and debt. Indeed, the government recently launched a process to find private investors for the equity raise for Sizewell C.
In practice, the pool of interested private investors will likely be limited. The success of Sizewell C will ultimately depend on 1) continued financial and policy support from the French government for state-owned EDF as the technology provider, and 2) continued financial and policy support from the UK government for Sizewell C as the ultimate backstop in the event of severe delays and cost overruns.
Would the French government be content with EDF providing more cash (effectively French taxpayers' cash, since EDF is 100% state-owned) to fund equity calls in the case of a severe cost overrun? We don’t know. This is already becoming an issue with Hinkley Point C, where EDF noted in its 2023 half-year results presentation that:
“As the project’s total financing needs exceed the contractual commitment of the shareholders, shareholders will be asked to provide additional equity on a voluntary basis from Q4 2023. The probability that CGN [State-owned China General Nuclear Power Group] will not fund the project beyond its committed equity cap is high. Financing solutions are being investigated, in the event that CGN does not allocate its voluntary equity.”
If the French government is unwilling to let EDF provide more cash for future equity calls, would the UK government be content with passing cost overruns to electricity customers, i.e., the electorate? One potential scenario is that Prime Minister Starmer, in his 8th year in office, could cancel a scheduled meeting with the French president over a refusal to provide more equity, and King William V could respond by wearing a French flag tie at COP36.
The risks with Sizewell C are both financial and political. Any third-party private investors would just be tagging along for an expensive rollercoaster ride with no real say in how EDF/the French government would deliver the project or how the UK government handles severe cost overruns. This is why recent reports of the UK discussing with the United Arab Emirates make sense. The potential investor would need some leverage over both the French and UK governments to protect its interests in the project. Perhaps a threat to cut LNG supply to Europe would do just that.
A more realistic scenario, though, is that the UK government would step in to backfill any equity shortfalls with taxpayers' money at that late stage of construction. This would mark the failure of the nuclear regulated asset base (RAB) model. Millions spent on consultants debating the design of various incentive mechanisms, the setting of the regulatory rate of return, and the assessment of "efficient" construction costs would have been wasted. The government will blame the regulator. The economic regulator will blame the foreign investors. A parliamentary inquiry will be initiated to find out what went wrong. Everyone will walk away with minor bruises in yet another accountability merry-go-round, with taxpayers holding the bag. The Nuclear Renaissance in the UK would once again come to an end…
…Or I could just be a cynical, pessimistic sod. The model could actually deliver Sizewell C on budget and on time. The government and the regulator would receive global accolades for being world leaders in a new nuclear financing model. Only time will tell.
If Abu Dhabi indeed becomes another equity investor in Sizewell C, then Sizewell C would be 100% government-owned across three different governments. The RAB model is an exception that proves the rule; big nuclear is a government game.
Government-Delivered Nuclear Power
There is no doubt that this is an exciting time to be in the nuclear industry. There is demand for new nuclear plants. Policymakers have finally recognized the key role of nuclear in reaching net zero.
However, the history of construction delays and cost overruns is not encouraging. Previous private sector attempts at managing construction risks ended in government bailouts and bankruptcy, inflicting major financial losses on participants.
For future projects to succeed, full government participation will be required during the construction stage, either through state-owned technology providers, state-owned project developers, or direct state guarantees. A public-private partnership delivery is unlikely to provide value for money. If the public is going to be the ultimate backstop for construction risks anyway, then it seems prudent for national governments to establish state-owned nuclear delivery corporations with internal capabilities for managing and financing new nuclear construction. This approach also leverages the power of the national government in negotiations with other sovereign-backed participants when disputes inevitably arise and ensures direct democratic accountability if things go wrong.
This does not mean there is no role for private participants. A government nuclear corporation could privatize each nuclear plant once the project begins generating electricity, allowing the corporation to recycle capital for the next project. The shares are likely to fetch high values since the project no longer has construction risks, allowing taxpayers to capture maximum value in exchange for the backstop provided during the construction period.
Will the pledge to triple nuclear energy capacity by 2050 be met? I don’t know. Countries like France, China, and Canada, which already have state-owned nuclear delivery approaches (EDF/China National Nuclear Corporation/Ontario Power Generation), will charge ahead, while countries that continue to experiment with private-sector participation will likely fail.