New Build

With no Government subsidies for new nuclear, private equity will be vital to the UK’s nuclear redevelopment programme. But while there is appetite and interest among investors, many hurdles need to be overcome before major financial commitments are likely to be made. It looks like if the UK does not act fast, it will fall behind foreign energy competition and its own renewable energy targets.

By Jack Craze

The scale of the UK’s nuclear investment challenge is huge.

From 2012 onwards, the industry will require major investment in infrastructure as new build projects get underway.

Renewables and clean coal will also require extensive funding, and Ernst & Young estimate that £234bn of investment will be needed to make the switch to a low-carbon economy.

The UK government, however, has been very clear that it will not be putting any money into new nuclear.

As a spokesman for the Department of Energy and Climate Change (DECC) told Nuclear Energy Insider, Whitehall is “confident that new nuclear can sustain itself commercially”.

But the government’s reluctance to invest public money in new build also has a lot to do with the mounting costs of decommissioning.

The costs of the national nuclear clean-up operation are indeed immense, estimated to extend to £70bn, with around £1bn of public money spent annually on decommissioning over the past four years.

Decommissioning costs are currently shared between the government and the National Decommissioning Authority (NDA).

The NDA’s total planned expenditure for 2009-10 is £2,788.7 million; of this amount, £1,632.9 million is being directly funded by government, while £1,155.8 million will be generated by the NDA’s own commercial operations.

But with threatened cuts and recriminations surrounding the NDA’s annual budget, the Government is putting measures in place to ensure that investors, rather than the British taxpayer, meet future legacy costs. As the same DECC spokesman remarked:

"The government is steadfast in its commitment to ensuring that future decommissioning costs do not hit the public purse. Developers investing in new build nuclear projects will be obliged to set aside money for decommissioning and clean-up operations."

Cheap to run, expensive to build

Private investment, then, will be essential to powering the UK’s nuclear renaissance.  But it would seem that new nuclear currently presents something of an investment dilemma.

While nuclear energy is cheap to run and highly efficient, the upfront costs required for new build projects are considerable.

And this is one of the major sticking points for potential private investors: with so many complexities in the planning and construction process, how can they be assured of a reliable return on their money?

Mathew Farrow, Head of Energy at the Confederation of British Industry (CBI), says that much remains to be done to calm investor nerves and stimulate funds for nuclear new build in the UK:

“Some investors are nervous about the uncertainties that currently surround nuclear energy. Construction delays, price volatility, complex planning procedures... all these issues need to be addressed. Investors are interested in both the level, and the predictability, of returns on their investment.”

Steady demand

For some time now the CBI has been lobbying for policy clarity on new nuclear to help achieve market certainty and boost investor confidence.

According to the CBI, planning and the early licensing of new reactor designs are key issues that need to be tackled.

And predictability seems to be the key: predictable design; predictable planning and predictable returns.

In the last few months the government has made efforts to improve regulation and speed up the new build planning process.

It is also considering fresh tax breaks for the nuclear industry.

These breaks, in the form of an exemption from the climate change levy, are estimated to be worth up to £300m a year, or £3bn over the next decade, when major new build projects are due to get underway.

But a framework for investment is still needed.

It is for this reason that the CBI is proposing a joint government-industry taskforce to help address investment issues, with a view to delivering steady returns over long periods of time.

According to Matthew Farrow, such measures will be crucial to galvanising private investment in nuclear energy:

“Progress is being made in streamlining processes and preparing the ground for investment”, Mr Farrow said.

“Hopefully this will attract future investors and capital markets. And nuclear can potentially offer long term steady returns. Once the initial capital expenditure...is made, fuel and operating costs are low, and if nuclear is providing base load generation then demand should be steady.”

Competition and consortia

One of the problems facing the nuclear industry is the fact that, come 2012, there will be other major infrastructure projects competing for private capital in the UK.

There is also the increased competition posed by overseas nuclear markets, with countries such as France, US, Russia and Japan driving their own nuclear redevelopment programmes.

Keen to remain at the forefront of nuclear power, the French Government has just pledged EUR 1bn to fund next-generation nuclear development.

It is also throwing open the door to foreign investment in the French power market.

The UK has to move quickly if it is to create an attractive environment for investment in nuclear and other low carbon industries.

The last year has seen major acquisitions of UK nuclear assets by leading energy companies, with E.ON and RWE, EDF and a consortium of GDF SUEZ SA, Iberdrola SA and Scottish and Southern Energy Plc buying up sites and land from the NDA.

Little detail has emerged yet about how the proposed new build operations will be financed, but it seems the consortium model for investment will prevail.

Indeed, all but one of these transactions was conducted as a joint venture.

Helping to share the cost and the risk, the consortium approach may also be the key to bringing private equity on board.

But this will only happen once the right framework is in place, and the element of uncertainty has been removed.