Q&A: Investment in the nuclear energy sector
April 2023 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE
Financier Worldwide Magazine
April 2023 Issue
FW discusses investment in the nuclear energy sector with Karen Rowe at Addleshaw Goddard, Ian Truman at Burges Salmon LLP and Robert Armour at Gowling WLG.
FW: Reflecting on the last 12-18 months or so, what do you consider to be the key trends and developments shaping the nuclear energy sector? What issues are dominating this space?
Armour: The last 18 months have highlighted the shifting priorities in the energy trilemma. At the end of 2021 we saw international commitment to tackling climate change, to achieving net zero and to ‘keeping alive’ the commitment to limiting temperature rises to 1.5C. But 2023 had barely been rung in when the planet’s greatest challenge was reprioritised, hopefully temporarily, by the near-term pressures of energy affordability – a change being driven by a heady cocktail of pandemic induced recession, austerity, spiking gas and oil prices fuelled by the reaction to Russian aggression in Ukraine and resulting inflation, as well as, in the UK, the aftermath of the impact of Brexit. Simultaneously though, the weaponisation of oil and gas supplies reminded us of the critical importance of the third leg of the energy trilemma: security and energy independence. Balancing each part of the trilemma is important, and nuclear generation is a critical part of the solution.
Rowe: The energy transition and the global focus toward delivering net zero have been and remain the core issues from the past 12 to 18 months, driving opportunities for nuclear energy. We are seeing jurisdictions with traditionally fossil-fuel based economies – for example in the Middle East and Africa – take significant steps toward developing their own independent nuclear projects, seeing nuclear as a way to transition to long-term low carbon energy supply. Energy security has also been a resurging topic in the last 12 months since the war in Ukraine started. Nuclear energy forms an essential part of that conversation, both from the perspective of delivering long-term energy security, but also in understanding the unique risks of nuclear technology. These were brought to the fore when Russian forces first captured, and then withdrew from, Chernobyl, and then attacked the Zaporizhzhia nuclear power plant. The continuing efforts of the International Atomic Energy Agency to report on and secure the continued safe operations at those sites brings home the uniquely global nature of this technology. It remains critical for every nation that nuclear energy is built, used and safeguarded in accordance with the most stringent safety and security standards, and we see that continued focus on delivering those rigorous standards in the systems and agencies that have been built around the application of this technology.
Truman: Net zero and a renewed focus on energy security are contributing to renewed interest in nuclear energy around the world. Where possible, many countries have extended the life of their existing nuclear assets, but the financing of new nuclear power stations and delivering them on time and on budget are firmly in the spotlight. Attention is shifting to small modular reactors (SMRs) built in factories that promise to be cheaper, quicker to build and more flexible to operate than the current operational fleet of GW-scale reactors. Some degree of international harmonisation of regulatory approaches will be key if SMRs are to fulfil their true potential. Nuclear fusion remains an embryonic technology but is developing fast, with a number of recent technological breakthroughs. A UK demonstrator project to be sited at West Burton hopes to commence operation in 2040.
“New nuclear will be delivered where there is a backdrop of favourable and stable government policy and support, pragmatic risk allocation and improved project delivery.”
FW: Could you outline the benefits and drawbacks that nuclear energy offers, and how it compares to other sources of power in the move to replace fossil fuels?
Rowe: Nuclear provides steady baseload energy, which is essential to supporting and balancing an electricity system. At present, renewable energy systems suffer from intermittency issues – only generating when the wind is blowing or the sun is shining – and stabilising technologies, such as energy storage, are not yet sufficiently available at scale to balance out such intermittencies. This means that energy system operators are managing intermittent technologies through a mixture of curtailment – when there is excess generation – or paying for backup energy to be provided from ‘peaking’ technologies, when there is limited generation, which are often powered by fossil fuels. Nuclear assists in avoiding these peaks and troughs in operation by providing steady state baseload generation to the system. Additionally, nuclear has a high fuel efficiency and therefore can provide significant volumes of output for a small footprint. For example, the Hornsea 2 offshore wind farm in the UK – claimed as the largest offshore windfarm in August 2022, when it entered operations – covers 462 square kilometres and generates 1.3GW of renewable electricity. By way of comparison, the Sizewell B nuclear power station produces 1.25GW of low carbon electricity, from a nuclear site which is less than 2 square kilometres in size. The drawbacks of nuclear energy are typically that it is relatively expensive and takes a long time to build. This is due to a variety of factors, including – in particular – varying degrees of political support for the development at both a local and national level. This may be impacted by the advent of small and advanced modular reactors (AMRs).
Truman: Nuclear is the only proven technology capable of generating low carbon, baseload power to complement renewable assets like wind and solar. It also offers significant energy security benefits over coal, oil and gas. A single fuel load and the next load stored on site will typically last two to three years. The main uranium suppliers also include politically stable, and friendly, countries, such as Canada and Australia. Drawbacks include the production of hazardous waste, although the most hazardous forms of waste account for less than 1 percent of total waste by volume. There are currently no disposal facilities for these high activity waste operating anywhere in the world, but several are under construction. Other concerns relate to nuclear technology getting into the wrong hands and the delivery of nuclear power projects on time and on budget, which in recent years – at least in the western economies – has been challenging.
Armour: There is no single silver bullet that produces the optimal generation mix. Giant strides made to reduce costs and increase efficiency in wind and solar give them a major role, but their intermittency means they can only play a part in a net zero electricity system notwithstanding advances in battery technology. Other emerging renewable technologies such as tidal stream and wave energy offer more predictable power if costs can be driven down, and hydrogen has real promise in transport, heat and generation. As we wean ourselves slowly from coal, gas and oil, as part of the mix nuclear generation offers a proven, reliable, dispatchable and very low carbon option at scale. However, its high upfront fixed costs, the immense concentration of financial costs in developing large scale nuclear, the extended project timescales from planning to first generation, its lamentable history of mega project overruns and the polemic sensitivity surrounding the ‘N’ word are real barriers to deployment.
FW: How are prevailing trends influencing investment levels in nuclear energy? How important is nuclear energy to the target of achieving net-zero global carbon dioxide emissions by 2050, for example?
Armour: Net zero must be our overriding driver. The failure of offsets to deliver and our continued reliance on greenhouse gas emitting technologies will test our resolve. Add to that the electrification of transport and heat to displace hydrocarbons and it is clear that the world needs the large scale reliable power that nuclear generation offers – not least for the populations of Africa, Asia and South America whose aspirations will drive up electricity demand. We cannot expect energy poor but growing regions to not want more as they view western affluence and profligacy. So we need to deliver technical solutions that meet their demand with abundant and reliable clean energy. Nuclear, be it large scale or SMR and AMR, offers a way through. The backdrop of climate change and energy security are making nuclear hard to ignore but the key barriers remain financial and political. New nuclear will be delivered where there is a backdrop of favourable and stable government policy and support, pragmatic risk allocation and improved project delivery. Investor confidence, underpinned by track record and applied learning, is key.
Truman: States across the world, including the UK, have concluded they cannot reach net zero without nuclear. This has led to renewed interest in both GW-scale plant and SMRs with lower upfront capital costs, a significantly shorter construction period and by extension less risk and quicker returns for investors. Many of the successful GW-scale nuclear projects have used sovereign finance, and even those described as ‘privately financed’ often involve the balance sheets of huge state-owned utilities relying on long term funding mechanisms from the host government like a contract for difference, such as EDF with Hinkley Point C in the UK. The development of a nuclear regulated asset base (RAB) model could change that by de-risking projects and attracting more conventional investors. It does this by allowing returns during construction and making sure risks are borne by the parties most able to bear them – including government.
Rowe: Nuclear is a key part of achieving the world’s net-zero targets. This is being recognised by a variety of investors, and we are seeing significant and renewed interest in nuclear developments worldwide. This extends to the increasing opportunities and applications for nuclear energy. Historically, nuclear energy has meant large scale power plants, but new opportunities are opening up for SMRs and AMRs, which in turn is encouraging developers to consider new applications for nuclear energy, for example in shipping or in assisting in the transition of other sectors which face particularly difficult carbon abatement paths. Key to realising this investment will be ensuring that suitable environmental, social and governance (ESG) metrics are in place to support it, and to recognise nuclear as a low carbon technology.
“Nuclear is the only proven technology capable of generating low carbon, baseload power to complement renewable assets like wind and solar. It also offers significant energy security benefits over coal, oil and gas.”
FW: How has the conflict between Russia and Ukraine impacted the nuclear energy sector? How effective could greater investment in nuclear energy be in reducing dependency on Russian gas, and boosting energy security in an uncertain geopolitical environment?
Rowe: The Ukraine conflict exposed a deep dependence in certain parts of the world – particularly Europe – on Russian gas. In the wake of the conflict, many European countries have scrambled to reduce their reliance on Russian energy. Those countries with robust civil nuclear energy programmes were less exposed. Germany, Europe’s largest economy, has faced difficult decisions – having effectively banned new nuclear projects, and accelerated the decommissioning of existing projects, in response to the Fukishima nuclear disaster, dependence on Russian gas had become embedded into the energy system of this highly industrial country. Despite having clear net-zero targets, and being an early adopter of renewables, Germany had invested heavily in alternate sources of gas, particularly liquified natural gas (LNG) import, and even increased its use of coal, to reduce its dependence on Russian gas. The issues with energy security are immediate and urgent. But we expect the ramifications of the shock on energy issues from the war in Ukraine to be long-lasting. Nuclear is not a quick fix technology, but it can be part of the longer-term solution to providing greater energy stability and security. In particular, greater investment in SMR and AMR might bring new nuclear energy online within a timeframe to make a real impact on energy security in the medium term. Long-term security solutions will also need to consider the security of uranium supply and the fuel supply chain.
Truman: Russia’s actions have underlined the additional energy security benefits of nuclear power and many countries currently dependent on Russian gas see nuclear power as the only viable replacement for baseload capacity. According to the International Atomic Energy Agency (IAEA), about 30 countries are currently considering nuclear power plants, including Serbia, Latvia, Lithuania, Estonia, Croatia and Poland. For the most part, the Russian nuclear sector has escaped sanctions because a number of other countries like Hungary depend on it for their energy production. The general financial sanctions that are in place, however, could still apply. Currently Russia is the only commercial-scale supplier of high assay low enriched uranium (HALEU), which will be used in most future advanced reactor designs around the world. The conflict has caused a number of states to begin urgently developing their own domestic HALEU production capability.
Armour: Clearly, the hiatus in oil and gas prices has transformed the landscape in the short term. Russia has tactically overplayed its hand, throwing away its strategic position in energy supply to western Europe. The elimination of that energy dependence, and the influence and wealth going with it, is well underway and unlikely to be derailed by a cessation of hostilities even if it comes at a painful price. But as well as in oil, gas and coal, Russia has built up a strategic position worldwide in uranium and enrichment services and that too has to be displaced – something we see well underway with support for nuclear fuel facilities in the west and the reopening of uranium prospects in North America and Australia. Nuclear generation offers a real alternative to Russian gas, but it will only deliver energy independence when Russian influence on uranics markets is also reduced. On the other hand, western boycotts aimed at Russia may prove a buying opportunity for the non-aligned and the third world. And for similar reasons, those same parties may find Russian nuclear technology and stapled financing to be project winning. But the war between Russia and Ukraine also complicates other aspects of the already complex world of nuclear vendor geopolitics.
FW: How would you characterise the appetite and opportunities involving nuclear projects, particularly for investors pursuing environmental, social and governance (ESG) initiatives?
Armour: The investor group must include governments, with or without the private sector. For them, nuclear generation could be part of the solution to deal with every aspect of the trilemma: the imperative of net zero, reducing or levelling high energy prices, and the need for energy independence. Some of these attributes mean more to governments than other investors. But prices will ease over time, and entrenched domestic political environments can sometimes make nuclear a no-go area. The hard-fought inclusion of nuclear in the European Union (EU) taxonomy has opened up access to private capital and institutional investors and is likely to be mirrored elsewhere. However, ESG acceptability is not uniform, and many investors remain unconvinced or undecided on supporting nuclear projects. A delivered solution for nuclear waste remains a key issue even if hydrocarbon technologies vent much of their waste to atmosphere, driving our climate problems. That has made coal, oil and gas increasingly unacceptable in the west and has powered the investment into wind and solar. The long-term economics of nuclear generation look interesting for investors seeking stable long-term revenues but the long timescales without returns before project completion and the track record of extended overruns diluting initial investors remains a big investor concern. That makes risk allocation between government and investors key, something the RAB model seeks to address.
Truman: The inclusion of nuclear power as a potential enabling or transitional activity in the EU taxonomy establishes nuclear power as an environmentally sustainable investment for ESG purposes. The UK government has already indicated the UK green taxonomy – due in early 2023 – is likely to follow suit. The government has committed to a significant nuclear new build programme of up to 24GW of nuclear energy by 2050 – which roughly equates to a new Hinkley Point C every 54 months until 2050. To facilitate the investment required the government has proposed the RAB model along with the development of supporting legislation to address nuclear liability concerns for US-based investors. These factors have led to increased interest among investors, subject of course to the publication of a fully developed nuclear RAB model, the adoption of the associated nuclear liability legislation and robust project due diligence.
Rowe: Investment in nuclear projects has historically been the preserve of state-owned entities and a small group of large industrial players. This has been as much to do with the financial risks associated with nuclear projects as any ESG issues. However, as ESG criteria becomes more and more prevalent in investment decisions globally, many investors are turning away from investments in fossil fuel projects where the financial risks were significantly lower than nuclear. This means that those investors are increasingly looking to deploy capital in other technologies and sectors that meet their ESG criteria. Nuclear is one of these sectors. So there is new interest in nuclear opportunities from ESG investors. But we will need to see legal systems, independent taxonomies and financial rankings lining up behind nuclear as a ‘green’ and ‘low carbon’ technology. We have seen challenges with legal appeals to the EU green taxonomy including nuclear within its scope; there are mixed approaches to this across jurisdictions, and investors will want to know there is stability and certainty behind those labels in order to be able to commit to long-term investments in this sector.
“Due to the special nature of nuclear power, it divides political opinion like no other technology.”
FW: What essential advice would you offer to those making investments in nuclear energy projects? Are there any unique aspects or characteristics that need to be evaluated?
Truman: There are reasons why no nuclear power project has ever been successfully project financed anywhere in the world. The nature and characteristics of these projects carries a unique set of risks that investors need to consider carefully. Nuclear projects are subject to special liability regimes and a wider network of specialised international nuclear law and good practice. Investors must understand the key legal and regulatory requirements applicable to any project they invest in and their associated exposure. The intense regulatory scrutiny around nuclear safety, nuclear security and nuclear safeguards adds time, cost and uncertainty to any project. Many reactor designs are first of a kind without resilient supply chains or an operational track record. Political risk is also a factor as was evident from Germany’s decision to close its nuclear power stations following the Fukushima accident.
Rowe: Investors in new nuclear developments will want to consider the projected length of the build and the security of the revenue stream as basic, but key, factors in that investment decision. They will also want to review the plans for funding decommissioning and spent fuel management and the relevant jurisdiction’s legal requirements around this. The decommissioning requirements of nuclear power are unique, highly specialised and expensive. Investors will want to ensure they are not caught out with a large liability at the end of the asset’s life.
Armour: Nuclear is not for everyone, be it large-scale, SMR, AMR or even fusion. The risks need to be understood, such as those for conventional energy, including systems and markets, but with added technological, liability, political and regulatory risks plus sheer project size. The smaller project size for individual SMRs offers a more digestible scale for financing but the performance and economics of SMRs are as yet unproven. Modularisation and the economics of factory-based production at scale should deliver benefits, but there is little appetite to be the lead customer taking proof of concept risk. A supportive – not just financially – and stable political environment, a credible, suitably resourced and experienced operator, a professional and nuclear savvy engineering, procurement and construction (EPC) contractor and a thorough understanding of the risk allocation are key attributes, as are patience and deep pockets. But there are rewards to be had down the line.
FW: What are some of the main risks and challenges associated with investing in nuclear power? How important is it to perform robust due diligence and deploy effective risk management practices?
Rowe: Construction risk has historically been the biggest blocker to investment in nuclear projects. For GW-scale projects, the track record of those built to the highest safety standards is sadly one of delays and cost overruns of a magnitude comparable to no other energy technology. Large nuclear projects are just so complex that it is almost impossible to accurately project how much they will cost or take to build and put into operation. For a financial investor, whether debt or equity, their return is dependent on a project getting into operations and generating electricity, and thereby revenue. If there is not sufficient certainty around this, then investors will not put their capital at risk. Political risk is another one. Due to the special nature of nuclear power, it divides political opinion like no other technology. As we have seen in countries like Germany, the risk that a sovereign government makes a political decision to end nuclear power in its territory is ever-present. This creates a massive stranded asset risk. Financial investors will not put capital at risk unless strong government support is provided to mitigate this risk. It is always important for any investor to do proper due diligence on the assets in which it is investing. This is true for nuclear as it is for any other energy or infrastructure asset. The additional factors – in the case of nuclear – will be for investors to consider the credibility and responsibility of the developer. The developer will need to be able to handle not just the normal risks of construction, but also have the confidence of the relevant nuclear regulator to deliver a safe project, and to manage the political risks which could well appear during the lifetime of the build.
Armour: The long timescales for developing, operating and cleaning up nuclear projects mean it is important to take a lifetime view of risks. Regulatory standards and expectations will change over time so mitigating regulatory risk is important. Policy and politics change over time, so tying in protections for unanticipated changes is a must. Agreement on waste disposal and transfer to appropriate agencies is key given the lack of progress in most jurisdictions in providing a solution and sticking to it. And the credibility of the developer, the operator, the contractor, the post closure arrangements and funding, as well as the risk allocation all need to be fully understood. All those contribute to public acceptance or at least acquiescence, so understanding the stakeholder stances and the arrangements for stakeholder management are real considerations. And round all this, the right liability channelling regime needs to be in place to protect from liability exposures should an accident happen. Due diligence is essential, including on the project funders.
Truman: The RAB model aims to mitigate many of the traditional hurdles to financing new nuclear power projects but issues like nuclear liability may still remain a concern, especially for funds with a significant US presence. Until the UK adopts the necessary legislation, it remains possible for investors to be sued in US courts following a nuclear incident in the UK. Investors will be faced with a wide range of projects involving different nuclear technologies with different risk profiles. Robust due diligence performed by suitably experienced advisers will be essential to understand the key risks associated with any given project and the accuracy of any estimated project costs and schedule. During the project development phase, investors will be concerned whether the technology in question passes the key regulatory hurdles or the developer achieves other major milestones, such as securing one of the sites officially designated for nuclear new build.
FW: What are your predictions for nuclear investment activity through 2023 and beyond? What key factors are likely to shape transactions and investments in the years ahead?
Truman: In 2023, EDF will continue looking for investors in its Sizewell C project through a nuclear RAB model, following the UK government’s announcement it would invest £700m and become a 50 percent shareholder in the project’s development. Most of the other investment opportunities in 2023 will support SMR and AMR vendors qualifying for, and commencing their works packages under the Future Nuclear Enabling Fund (FNEF) and several select projects which could receive separate government awards. There are also a number of technology vendors and development companies seeking to develop nuclear power projects separately from these government-led initiatives, although siting remains a key challenge. Given the current policy commitment to nuclear new build, once the nuclear RAB model has been developed, the necessary supporting nuclear liability legislation adopted and Great British Nuclear is up and running, the case for investing in nuclear power projects will never have been stronger.
Armour: Everything in nuclear takes time. Projects have very long timescales. Approval processes take time for governments and investors. But events over a number of years have made nuclear hard to ignore as part of the future energy mix in advanced economies, and as part of the solution to ramping demand elsewhere. There is now real momentum behind Sizewell C and a panoply of interested – though as yet uncommitted – investors and funders that have noted the backing of both the French and British governments of this project. An army of business, energy and industrial strategy (BEIS) civil servants and advisers is working hard on the investor proposition under RAB. I am optimistic that will get Sizewell C to final investment decision in the coming year. The pressure for SMR deployment is also rising. We now have multiple designs in the generic design assessment (GDA) process and worldwide we see projects moving forward in the US, Canada, Romania and Poland, as well as China, Russia and elsewhere. It feels that for this idea, its time has come. And we should not overlook the selection of a fusion commercial demonstrator site at West Burton last year. Whether these projects fly in 2023 or 2024 is harder to judge, but we will not make net zero for the energy sector in the 2040s without them.
Rowe: Net zero and energy transition is the key factor which is going to be shaping investment in this sector for years to come. We know it is here to stay and we are seeing a huge level of focus from investors on low carbon opportunities. Aside from the baseload security offered by nuclear, which provides attractive and stable long-term returns, we are also seeing nuclear starting to innovate to meet some of the harder transition challenges; this may open up new investment routes and options. I am still on the fence as to whether or not 2023 will be the year of the new nuclear renaissance, but I think there will be momentum building toward nuclear throughout the 2020s as the world rises to meet the challenge of energy transition.
Karen Rowe specialises in M&A, regulatory advice and project development for clients in the energy sector, particularly in low carbon technologies, nuclear energy and energy transition issues. Her wider sector expertise includes energy networks, renewables, and carbon capture and storage. She can be contacted on +44 (0)20 7160 3958 or by email: karen.rowe@addleshawgoddard.com.
Ian Truman is an expert in the field of nuclear regulation and international nuclear law and has invaluable experience in nuclear new build projects in the UK from his time as deputy general counsel of the Hinkley Point C Project. He is also an experienced environmental lawyer. Mr Truman uses his industry experience of new nuclear projects in the UK to lead development of Burges Salmon’s expertise in small modular reactors. He can be contacted on +44 (0)117 939 2280 or by email: ian.truman@burges-salmon.com.
Robert Armour is senior counsel in Gowling WLG’s nuclear practice. He sits in the firm’s London-based team advising on global nuclear generation and nuclear decommissioning matters. Prior to joining the firm, he served as general counsel for British Energy Group until its sale to EDF in 2009. He is also a non-executive director of several companies in the renewable energy sector. He can be contacted on +44 (0)7768 111 004 or by email: robert.armour@uk.gowlingwlg.com.
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