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Financing and Managing Nuclear Energy Risks: The UK Model

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Picture of Aerial view of proposed Hinkley Point C powerstation

Nuclear Power Plants (NPPs) have long lifetimes and low running costs, but they require high up-front capital expenses and a long planning and construction time. This means the economics of NPPs are sensitive to the cost of financing and overruns, and project delays can be costly. Successful financing is a major challenge and typically requires significant government involvement.

Traditionally, the costs of constructing and operating nuclear power plants were mostly passed on to electricity consumers in the form of regulated tariffs, minimizing the risk to lenders, investors and operators of exposure to price fluctuation. This traditional approach characterized most pre-liberalization electricity markets, where many of the utilities were integrated monopolies combining generation, transmission, distribution and retail, and the level of government involvement in regulation
was high.

However, the market liberalization that started in the developed world in the 1990s has led to increased price and revenue uncertainty, causing reluctance among lenders and investors to commit the significant resources needed for NPP construction.

In an attempt to address this reluctance, stakeholders have come up with innovative approaches to risk sharing in nuclear power projects that aim to give additional assurance to potential lenders and reduce capital costs. These include reducing revenue volatility by guaranteeing electricity prices and providing various forms of government guarantees.

Replacing nuclear with nuclear: Why the UK model matters

Around 20 percent of the UK’s electricity supply today is produced by nuclear.

Within the broader context of its Electricity Market Reform, the Government has decided to continue to rely on nuclear rather than only on gas or renewable energy sources, and is seeking to replace its existing nuclear fleet.

Currently, developers have up to 11 reactors proposed or planned at six sites. The power plant at Hinkley Point C has already passed through several stages of the decision-making process and is expected to be commissioned in the early 2020s.

The UK model features three main mechanisms in support of nuclear: a price guarantee scheme known as contract for difference (CfD); a government guarantees scheme; and a mechanism for limiting investor exposure to the costs of disposing of higher activity waste, including spent nuclear fuel.

Contract for Difference

The CfD features a ratepayer-backed guaranteed price for electricity generated by low-carbon technologies. According to the terms of its CfD, Hinkley Point C, once operational, will be paid the difference (on a ‘per megawatt hour’ basis) between a ‘strike price’ (the electricity price that reflects the cost of investing in a particular low-carbon technology) and the ‘reference price’ — a measure of the average price for electricity in the UK market. When the average market price (the price that a generator such as Hinkley Point C might expect to receive directly from the sale of its electricity in the market) is lower than the strike price, the generator receives a ‘top up’ payment to make up the difference. When the average market price is higher than the strike price, the generator must pay back the difference.

“In the Hinkley Point C project, the CfD substantially mitigates the so-called ‘market risk’ faced by lenders and investors,” said Anurag Gupta, Director and Global Sector Head for Power Infrastructure and Corporate Finance at KPMG.

This gives electricity generators greater certainty and stability of revenues by reducing their exposure to volatile wholesale prices, while protecting consumers from paying for higher than necessary support costs when electricity prices are high.

“By creating greater certainty, investors and lenders are able to model the project, which in turn allows them to make more informed decisions,” explained Paul Murphy, Managing Director of Gowling WLG. “Furthermore, taking a 35-year tenure, as opposed to a classic 20-year tenure, facilitates further long-term equity investment as well as refinancing options.”

The UK Guarantees Scheme

The UK Guarantees Scheme (UKGS) is a mechanism developed by the UK Government to provide credit enhancement through debt guarantees. The scheme was introduced in 2010 with a budget of £40 billion in guarantees to be invested across a range of UK infrastructure categories, including energy, transport and social infrastructure. Support from this scheme has been made available to the Hinkley Point C project (for up to ₤2 billion worth of debt).

“It is instructive that the UK Government has concluded, based on years of analysis, that even in a market that has a long history with civilian nuclear power, government support is still needed to facilitate nuclear power development,” Murphy commented.

Limiting investor exposure to the costs of disposing of higher activity waste

One of the key issues associated with nuclear power is uncertainty with regard to the costs of disposing of higher activity waste, including spent nuclear fuel. The UK Government has put in place a mechanism to effectively cap such costs, thereby reducing operators’ exposure to the risk of cost escalation. The mechanism operates by setting an upper limit (or ‘cap’) on the ‘waste transfer price’ that an operator will have to pay in return for the UK Government taking ‘ownership’ of the higher level waste (and thus responsibility for its disposal).

“By effectively capping the ultimate waste transfer price, the UK Government has provided reassurance to potential investors regarding a very ‘difficult to quantify’ project risk,” explained Paul Warren, IAEA Senior Nuclear Engineer for Nuclear Power.

First published in International Atomic Energy Agency

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Renewables and Improved Cooling Technologies Key to Reducing India’s Water Use

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A new policy brief co-authored by the International Renewable Energy Agency (IRENA) and the World Resources Institute (WRI) finds that increasing the share of renewables, in particular solar photovoltaic (PV) and wind, in India’s power mix, and implementing changes in cooling technologies mandated for thermal power plants would not only lower carbon emissions intensity, but also substantially reduce water withdrawal and consumption intensity of power generation.

The brief, Water Use in India’s Power Generation – Impact of Renewables and Improved Cooling Technologies to 2030, finds that depending on the future energy pathways (IRENA’s REmap 2030 and the Central Electricity Authority of India), a power sector (excluding hydroelectricity) transformation  driven by solar PV and wind, coupled with improved cooling technologies in thermal and other renewable power plants, could yield as much as an 84% decrease in water withdrawal intensity by 2030, lower annual water consumption intensity by 25% and reduce carbon emissions intensity by 43%, compared to 2014 levels. It builds off of the findings of Parched Power: Water Demands, Risks, and Opportunities for India’s Power Sector, also launched today by WRI.

“India has emerged as a global leader in renewable energy achieving record-level growth in deployment, rapid cost reductions and many socio-economic benefits of the energy transformation.” said Dr Henning Wuester, IRENA Director of the Knowledge, Policy and Finance Centre (KPFC). “Scaling up the use of renewables, especially solar PV and wind, will yield further benefits, in particular long-term reductions in the dependency of the power sector on freshwater.”

More than four-fifths of India’s electricity is generated from coal, gas and nuclear power plants which rely significantly on freshwater for cooling purposes. Moreover, the power sector’s share in national water consumption is projected to grow from 1.4% to 9% between 2025 and 2050, placing further stress on water resources. Renewable energy, with the added potential to reduce both water demand and carbon emissions, must hence be at the core of India’s energy future.

“India’s move towards renewable energy is essential, especially as water stress puts increasing pressure on India’s thermal power plants,” said  Dr O.P. Agarwal, CEO, WRI India. “Water risks to thermal power plants cannot be ignored when considering the cost of thermal energy. Renewables, especially solar PV and wind energy, present a win-win solution for both water and climate.”

The joint brief was launched at the World Future Energy Summit 2018 in Abu Dhabi.

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Going Long Term: US Nuclear Power Plants Could Extend Operating Life to 80 Years

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The last couple of decades have witnessed increased interest in the extension of the operating life of nuclear power plants. Extending the life of a plant is more economical than building a new one, and where it makes business sense, many plant operators in the United States are seeking licence renewals. This helps avoid supply shortages and support the country in reducing carbon emissions.

“It is very important for us as a world community to care how electricity is produced,” said Maria Korsnick, President and Chief Executive Officer of the Nuclear Energy Institute. “You can produce electricity of an intermittent nature, like wind and solar, but you are going to also need 24/7 baseload energy supply that is kind to the environment, and nuclear is just that.”

The US Nuclear Regulatory Commission (NRC) issues licences for nuclear power plants to operate for up to 40 years and allows licences to be renewed for up to 20 years with every renewal application, as long as operators prove that the effects of ageing on certain plant structures and components will be adequately managed.

About 90 percent of US plants have already renewed their licences once, extending their operation to 60 years. But most of these will soon reach the end of their 60-year term. If they cease to operate or are not replaced by new plants, the percentage of energy generated from nuclear will drop. A subsequent renewal extends a plant’s operation from 60 to 80 years.

Nuclear provides 20 percent of the United States’ electricity supply and more than 60 percent of the country’s CO2 emissions-free generation. Electricity demand is expected to rise by more than 30 percent by 2035.

To obtain licence renewal, a plant must provide the NRC with an assessment of the technical aspects of plant ageing and show how any issues will be managed safely. This includes review of system metals, welds and piping, concrete, electrical cables and reactor pressure vessels. It must also evaluate potential impact on the environment, assuming the plant will operate for another 20 years. The NRC verifies evaluations through inspection and audits, and its reviews of licence renewal applications can last anywhere between 22 and 30 months.

“In the very beginning, an NRC review took years to complete,” Korsnick said. “Now that the process is better understood, we are just under two years. For subsequent licence renewal, we will probably get the process down to 18 months.”

While there have not been any subsequent licence renewals yet, three plants have already expressed their intent to submit an application for such renewal.

“If a subsequent renewal is granted and plants are allowed to operate for 80 years, NRC could see increased interest by other utilities,” said Allen Hiser, Senior Technical Advisor for Licence Renewal Ageing Management at NRC. “NRC experienced a similar trend when the original licence renewals were granted back in 2000.”

Coping with government and market challenges

Most US Government policies favour renewables over nuclear, and according to Korsnick the market does not value all of the attributes that the nuclear plants bring. Three plants in the past six years have already shut down even before their original licence expired because they could not make sufficient money in the current market place. Korsnick maintains that the markets must be improved so that they value the products that nuclear is bringing — products that include clean air, constant 24/7 power and continuous operation for at least 18 months before needing to refuel. Full recognition of these benefits would prevent additional plants from shutting down prematurely.

“Fundamentally we want an electricity grid that boasts a diversity of generating technologies and that appropriately values the core attributes of each technology and the benefits they deliver to society,” Korsnick said.

The IAEA and long-term operation

The IAEA has benefited from NRC support in its long-term operation (LTO) activities. The NRC was an early funder and active participant in the IAEA International Generic Ageing Lessons Learned (IGALL) programme, which used technical information from the NRC’s Generic Ageing Lessons Learned report as its starting point. Other IAEA Member States added data for their plants to that US information, including information for pressurized heavy water reactor designs.

The USA has been an active participant in other IAEA activities related to LTO, including the development of safety guides on ageing management and LTO and presenting LTO workshops for international regulators and plants. The US also continues to provide expertise during IAEA Safety Aspects of Long-Term Operation (SALTO) missions to countries in Europe, Asia, North and South America.

Source: International Atomic Energy Agency

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New Global Commission to Examine Geopolitics of Energy Transformation

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The International Renewable Energy Agency (IRENA), has today launched the Global Commission on the Geopolitics of Energy Transformation, with the support of the governments of Germany, Norway and the United Arab Emirates. The Commission will examine the immediate and longer-term geopolitical implications of global energy transformation driven by large scale-up of renewable energy in the context of global efforts to tackle climate change and advance sustainable development. The Commission will be chaired by Mr. Olafur Grimsson, the former President of Iceland.

“The global energy landscape is witnessing rapid and disruptive change that will have far reaching effects on geopolitical dynamics,” said Adnan Z. Amin, IRENA Director-General. “Renewable energy resources are abundant, sustainable and have the power to significantly improve energy access, security and independence.

“At the same time, the large-scale deployment of variable sources of renewable energy such as solar PV and wind, is fostering greater cross-border energy trade and cooperation between nations,” continued Mr. Amin. “Understanding these changing dynamics in a way that informs policy makers, will be the primary goal of the commission.”

“I am delighted to chair the Global Commission on the Geopolitics of Energy Transformation, and congratulate IRENA on this timely initiative,” said Mr.  Olafur Grimsson, former President of Iceland. “The geopolitical implications of energy transformation is becoming one of the most debated issues in the global energy agenda. The Commission can make an important contribution to these global discussions, on the basis of solid evidence and analysis as well as a diverse range of perspectives,” added Mr. Grimsson.

While most geopolitical analyses of energy related issues have focused on conventional fuels such as oil and gas, the Commission will review the implications of the ongoing global energy transformation underpinned by the surge in renewables and report on how it would impact the geopolitics of energy based on rigorous and credible evidence.

The Commission will be composed by twelve leaders and experts on international energy and global security issues, with particular emphasis given to ensuring diverse geographical and expert background representation. The Commission will present its report at the 9th Session of the IRENA Assembly in January 2019.

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