By Beatrice Lo and Heeran Caselton

The Expert Finance Working Group on Small Nuclear Reactors (EFWG), an independent group convened in January 2018 by the Department for Business, Energy & Industrial Strategy, recently published its report with recommendations for a market framework to enable the development of small nuclear projects in the UK with private financing and investment. The report follows the publication of the UK government’s Nuclear Sector Deal (see Latham’s related blog post).

The EFWG report considered small nuclear projects ranging from micro-generation projects through to 600 MW reactors. In contrast to “megaprojects”, such as Hinkley Point C, which is estimated to cost almost £20 billion, the costs of small nuclear projects typically range from £100 million to £2.5 billion. Small nuclear projects can benefit from lower capital costs and quicker build times through modular construction and factory build (as opposed to on-site build) and are generally less complex than a GW nuclear project. These factors render a number of the risks more manageable, and the lower costs involved make the investment required for a small nuclear project within the range of a greater number of market participants (compared to larger projects).

Although the EFWG report focuses on small-scale nuclear new build projects, a number of the considerations and proposals may also be relevant for conventional large-scale nuclear power projects.

The EFWG issued a number of recommendations in its report, including:

  • Addressing barriers to private financing of nuclear, including lack of understanding of the technology and perceived risks of nuclear compared to other low carbon technologies. The EFWG recommended that the government should work with the financial sector to develop lender’s processes and procedures to more accurately reflect the risks and mitigants of small nuclear projects.
  • Developing a more streamlined and flexible Generic Design Assessment (GDA) process for small reactors. The GDA is the first stage of the licensing process in the UK for a new nuclear power reactor, during which the regulator carries out a generic assessment of the proposed reactor design. The current process is expensive and can take more than four years, so a quicker process will help lower costs by assisting developers and lenders to determine and manage risks at an earlier stage.
  • Considering alternatives to the funded decommissioning programme (FDP) for small nuclear projects. The FDP requires operators of new nuclear plants to provide for decommissioning out of revenues during the operation phase, with such payments/provisions taking priority over debt repayment. The FDP was designed for large plants, and if smaller nuclear can be decommissioned in a different way, alternative funding mechanisms for decommissioning costs may be applicable — which in turn could make financing easier to obtain.
  • Setting up a new clean energy infrastructure fund. As an alternative to a direct equity investment from the government into specific projects, the EFWG report explores the possibility of establishing an infrastructure fund specialising in nuclear projects. This would be seed funded by the government with incentives to source additional funds from the private sector, to provide debt or equity to small reactor projects to reduce costs and encourage private third-party investment. This can be an effective way of facilitating flexibility in the form of government support, as well as private finance — which can be injected at different levels between the fund and the project companies.
  • Extending the Guarantee Scheme through to 2030. While the EFWG recognises that the benefit of the Guarantee Scheme, provided at market rates, is limited, it also considered the scheme might nonetheless assist with development of some projects.
  • Assisting with financing of small nuclear projects through funding support mechanisms. The EFWG considered a number of potential funding structures and recommended government support in the form of a Contract for Difference (CfD), a power purchase agreement (PPA), or potentially a Regulated Asset Base (RAB). The EFWG recognised that, without some form of revenue support mechanism, at least until the industry has established itself, merchant plants are unlikely to be financially feasible or to attract significant private finance.
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The EFWG report raised other concepts that are potentially relevant to the initial financing structure for nuclear new build projects, including:

  • Refinancing. After the construction phase is complete and the plant is successfully operational, refinancing by attracting private finance should be possible. When designing the initial financing structure, it should be taken into consideration how best to facilitate subsequent refinancing possibilities.
  • London insurance market. The EFWG states that the London insurance market has more than ample capacity and appetite to insure various risks associated with nuclear new build projects. These risks include third-party liability, property damage, risk during construction, cargo risk, cyber risk during operation, and even cost overrun risk.

Latham will continue to monitor the extent to which the government implements the EFWG recommendations. Institutional investors and financial institutions will likely focus particularly on the details and price level of any proposed government revenue support mechanism.