IAEA International Atomic Energy Agency

Management of Financial Risks

in Nuclear Power

Presentation to TM on Topical Issues of Infrastructure Development

Nuclear Power Project Development in Emerging Nuclear Power States

Paul Warren

Planning & Economic Studies Section

Vienna, 12th February 2013

IAEA

Risks over the nuclear project lifecycle

Construction Operation Decommissioning

Design

performance

not achieved

Inadequate

demand

Inadequate

financial

provision

2

Exchange

rate risk

Interest rate

risk

Schedule

delay

Construction

cost overrun

Regulatory

delays

Design

capacity not

achieved

All these risks will potentially impact the return received by funders

All these risks are financial risks!

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Contracting: stakeholders and agreements

3

Commercial

banks

Shareholders Host

government

Electricity

Utility

Fuel supplier

EPC

contractor

Export credit

agencies

Multilateral

agencies

Owner/

Operator

Shareholder

agreement Fuel

supply

agreement

EPC

contract

PPA

Loan

agreement

Loan

guarantee

Political

risk

insurance

Political

risk

insurance

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Risk sharing via contract language

“The contractor undertakes to construct a

power plant with a (net) capacity of 900MWe

for the sum of 4 billion USD.

The contractor will pay for replacement

power for each day in excess of 10 in any

year in which unplanned outages exceed 10

days.

The contractor will also pay for replacement

power for every day on which the plant is not

synchronized to the grid after January 1,

2018, except for delays caused by

unreasonable regulatory performance.”

Schedule

delays

Design

performance

not achieved

Regulatory

delay

Design capacity

not achieved

Construction

cost overrun

Inadequate

demand

Exchange rate

risk

4

Owner/Operator

EPC contractor

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Shifting risk away risk premia

5

Commercial

banks

Shareholders Host government

Electricity Utility

Fuel supplier

EPC contractor

Export credit

agencies

Multilateral

agencies

Owner/

Operator

Shareholder

agreement

Fuel supply

agreement

EPC

contract

PPA

Loan

agreement

Loan

guarantee

Political risk

insurance

Political risk

insurance

• As you put together your project as an Owner/Operator you can

offload risk – but there’ll be a cost of doing so: a risk premium

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Risk allocation financing cost

6

Owner/

Operator

Electricity

Utility

Fuel supplier

EPC

contractor

Fuel

supply

agreement

EPC

contract

PPA

Commercial

banks

Shareholders

Shareholder

agreement

Loan

agreement

Residual

financial

risk

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Intuitions on risk premiums

• Premium paid by OO to a ‘Party’ will depend on:

1. Size of the risk

• Volatility

• Monetary value

2. Party’s financial capacity relative to the size of

the risk

• A small party, with limited financial capacity might be

willing to bear a large volatile risk, but….

• …it will demand a large risk premium for doing so

3. Party’s risk appetite

4. Party’s ability to control the risk

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NB!

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Allowing contractors a ‘menu’ approach

8

Fee

Site

pre

p

Equipment

Construction

materials

Construction

labour

Alternate pricing

options

Nu

cle

ar

Isla

nd

BO

P

AS

Nu

cle

ar

Isla

nd

BO

P

AS

Nu

cle

ar

Isla

nd

BO

P

AS

Fixed Price (1)

Firm Price (2)

Target with 10% collar

(3)

Target with a fee at risk

(at signing) (5)

Target with a fee at risk

(after signing) (6)

Reimbursable with a

fixed fee (8)

Cost plus (9) Pre

fere

nti

al

treatm

en

t o

f b

id

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Intuitions on risk premiums

• Premium paid by OO to a ‘Party’ will depend on:

1. Size of the risk

• Volatility

• Monetary value

2. Party’s financial capacity relative to the size of

the risk

• A small party, with limited financial capacity might be

willing to bear a large volatile risk, but….

• …it will demand a large risk premium for doing so

3. Party’s risk appetite

4. Party’s ability to control the risk

9

NB!

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‘Controllable’ versus ‘uncontrollable’ risks

10

Change in

taxation

regime

Inadequate

wind (wind

power)

Inadequate

rainfall

(hydro)

Project

becomes

uneconomic

Fossil fuel

price

escalation

Equipment

failure during

operation

Fuel supply

interruption

Pollution

limits not met

Inadequate

demand

Design

performance

not achieved

Construction

cost overrun

Schedule

delay

Commodity

price

escalation

Interest rate

volatility

Exchange

rate volatility

Design

capacity not

achieved

Regulatory

delay

Exchange

convertibility

risk

Controllable Uncontrollable

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Allocating ‘uncontrollable’ risks

• The larger and more ‘uncontrollable’ the risk

(e.g. prices set in global markets) the more

likely that only parties with very high financial

capacity will be willing to bear it at a price which

allows the project to remain economic

• Host governments (i.e. tax base!)

• Customer base (via regulated utilities)

• Multi-lateral agencies, regional development

banks

• Financial markets (via hedging instruments)

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Three ‘uncontrollable’ risks

• When risks depend on prices determined in

global markets (e.g. exchange rates), it is difficult

to identify any stakeholder “able to control them”

• Exchange rate risk

• Interest rate risk

• Commodity price escalation risk

• Risk of construction material price increases during

construction

• Risk of fuel price escalation during operation

• These risks can be allocated to financial markets

via swaps, options and futures

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An uncontrollable risk

• A risk which is similar to these three

‘uncontrollable’ risks is default risk

• The risk that the owner of the project will be unable

to repay some part (or any) of the principal or

interest on the loan

• Default risk associated with a project will be a

concern for lenders

• This makes it a concern for the project owner as well

• The higher the default risk that lenders perceive in a

project, the more they will charge to lend

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Default risk: sovereign guarantees

• A common way of mitigating default risk is

the sovereign guarantee • When a host national government guarantees to a

lender that if the project fails, it will repay all lending

• Providing a sovereign guarantee will almost

always reduce the cost of financing • Because governments are able to tax, their ability to

raise revenue is highly trusted by lenders

• A sovereign guarantee shifts significant

risk onto domestic taxpayers

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NB!

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Takeaways

• All risk maps into financial risk

• As you put together your project as an

Owner/Operator you can offload risk – but there’ll

be a cost of doing so: a risk premium

• Costs of financing – including risk premiums – are

not necessarily always identified separately - but

they will be present nonetheless

• Sovereign guarantees will usually lower financing

costs – but they will also increase risk exposure

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Coordinated Research Project

• Financing Nuclear Investments will bring together

Member States, supported by IAEA activities.

• Objectives will include:

• Identifying the lessons which can be drawn with regard to

sources of financing for nuclear projects

• Exploring the nature of the financing process (including the

role of Financial Advisors)

• Identifying the barriers to financing nuclear projects.

• Designed for Member States with limited (or non-

existent) experience of financing nuclear power

projects

• Contact: P.Warren@iaea.org

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Financing TECDOC

• Document is currently being prepared

• Authors (5) are investment banking professionals

• Extensive financing experience in energy and nuclear ‘space’

• Framework, contents and topics set out by IAEA

• Document will constitute a “textbook” (a comprehensive set

supporting material) for future Expert Missions on financing

• Intended audience: mid-level Ministry of Finance or Ministry of Energy

officials (likely on secondment to a NEPIO) or mid-level executive in a

sponsoring utility

• An Executive Summary will be aimed at policy makers - explaining the

main options and choices that they will face when looking at financing.

• Contact: P.Warren@iaea.org

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Thank you!