Peter Lux

Financing Nuclear Build

I have been having a quick look at the cost of nuclear power compared with wind, solar, CHP etc. However, I have many problems many problems in the data used. So here are a few points that need to be taken into account.

Interest During Construction

If you are building a nuclear power station you are going to have to borrow some money. Normally if you go down to the bank then you will start paying the loan back straight away. However, if you are building a power plant then it will not start producing income until it has been constructed and therefore the repayments have to be deferred until after construction is complete.

The way that this is handled is the interest accumulated is added onto the cost of the build. For example if you have construction costs of £5billion and your lender charges you 10%pa interest then the second year your construction costs will be £5billion + £0.5billion = £5.5billion. The third year it would be £5.5billion + £0.55 billion = £6.05 billion. After 10 years then the cost would have increased to nearly £11.8 billion. Of course this assumes that all of the costs are paid in the first year which is may not be the case. However, this is just about some principles not a proper analysis. (Using the figures from EDF about employment figures over the construction I get a end figure of over £7.8billion over a 10 year constructin period. This is an underestimate since the capital costs of components is going to be incured long before people are employed to put them in place at the construction site.)

The cost of the plant without the ‘Interest During Construction’ is often called the overnight costs – i.e. the cost if the plant was built overnight. Unsurprisingly this is the figure that many pro-nuclear people use.

One thing to note is that we are basically dealing with compound interest and therefore the length of the loan is very important – longer construction times are much more expensive. It is also very dependant on the interest rate charged (for example if the interest rate was 15% the total cost after 10 years in the above example would be nearly £17.6 billion).

Once the plant is built and operating they cannot pay back the loan immediately and it has to be paid back over a number of years – rather like a mortgage. Again the period over which the plant operates and produces an income is important. If it is operating for 60 years you would get a much bigger income than if it operated over 20 years. That is you have a lot longer to pay back the loan.

Interest Rate and Risk

If you had a wad of money and wanted to invest it you have several options. You could stick it into a bank and get a very low rate of interest or you could invest it in sub prime mortgages that might give you a higher rate of return. The riskier the investment the higher the rate of return the borrower has to give you.

There are several risks involved in building a power plant and they have a big influence on the rate at which the builders can borrow.

• construction may take a lot longer then originally thought
• the cost of electricity may go up or down
• the power plant may not be as reliable as you originally estimated and therefore not generate the income you expected

Nuclear can be seen as much riskier

• they are much larger and more complicated than renewables and therefore construction time and costs are much more difficult to predict.
• Due to the longer construction times there is much more uncertainty about the cost of electricity when the plant is complete. (which is why EdF is asking for a guaranteed price for electricity in the future).
• The nuclear industry quotes figures of 90% load factors for its new plants. However, that figure does not fit with historic data particularly in the early years of the plant due to ‘teething problems’ and later years when the plant becomes less reliable due to age.

One way to decrease the financing costs is to get the government to finance the project since if everything goes wrong the debt can be paid by the tax payer. This is the reason why governments can borrow at a much lower rate than private companies. However, governments should look at the relative risks when they decide to back one power source over the other.

Summary – Pitfall to look out for

• Does the cost quoted include interest during construction or is it just overnight costs?
• Are the construction times realistic?
• Are the load factors quoted realistic?

It is also important to remember the the finance of building a large nuclear plant are very different from building more smaller renewable plants so these financial factors must be taken into account when doing comparisons.