ntp project finance

ntp project finance

The Role of Project Finance in NTP Projects

1. Introduction to NTP Projects

To realize the return on the investment, two requirements are essential. First, the power station must be completed and placed into operation, and second, there must be willing buyers for the output from the power station. The sponsors can be private sector organizations, public sector organizations, or more generally, a mix of the two. The financing of the station can be as equity, or a mix of equity and debt. The plant operates for some thirty years, and the tradeoff between the sources of finance must be considered both at the project development stage and at the stage when the costs begin to be transferred from the project company to the end user or users of the electricity. The tradeoff between the sources of finance changes as the costs of the project increase and as the project takes shape. Different sources of finance have advantages and disadvantages, and the aim must be to choose the advantages and avoid the main disadvantages. In this analysis, we assume that the sources of finance are equity and debt, and therefore, project finance, as opposed to corporate finance, will be relevant.

Project finance has an essential part to play in all major investments, in particular now that the public sector is expanding some other basic infrastructure sectors and selling parts of the delivery system that has been traditionally the responsibility of the public sector. The nuclear power plant (NPP) is a major investment. It is generally built by a single sponsoring organization, and although the costs are high, the operating costs of the plant are low. This, along with the security of the supply of energy, are important advantages, even though the cost of production of electricity from nuclear plants is higher than that from several of the traditional sources of electricity, particularly when the price to society of the production of carbon dioxide is increased from zero to a significant amount.

2. Understanding Project Finance

At the centre of project finance is the need to create a body corporate, the borrower or project company, and to make strategic financial, physical, and operating decisions which allow the objectives of all parties to be met. Frequently, the project company-borrower is a special purpose company established to construct, finance, and operate a project. Each of the transactions, such as mobilisation and the delivery of construction outputs, the sale of products and services produced by operations, the finance of capital expense in the final project form, and the payment of divisional operating and maintenance expense, is each undertaken within the limits of a legally described “prescription”. However, while a poor choice of words, the “prescription” frequently permits the “medicine” to be taken in many different forms.

Understanding project finance can be complex and complicated because it can be applied in many different ways with different objectives and stages. The key in understanding and using project finance is to firstly understand the nature of the project, the project’s key strategically important financial and physical commitments, and the risks affecting ultimate cost and time. The observations and comments in this section are intended to provide a basis for the understanding of project finance which has a generic as well as specific applications for NTP projects.

3. Key Players and Stakeholders in NTP Project Finance

In the U.S., private activity bonds carry the credit of the federal government to lower the financing costs of essential infrastructure projects. Investors, underwriters, bond insurers, and rating agencies work together in facilitating bond financing solutions. For concessionaire projects, there may be limited options for using tax-exempt project finance structures. In general, NTP concessionaires do not have a credit rating from rating agencies. Besides tax-exempt bonds, commercial debt and equity are the primary financing alternatives. The interest paid on tax-exempt bonds by the sponsor of the facility is significantly less than the taxable bond and commercial bank loan interest costs. The lower interest cost from obtaining a tax break can help public and private nondomestic concessionaires support leveraging. Only domestic U.S. sponsees can issue tax-exempt PABs for their concession projects.

Project finance supports the delivery of NTP projects by using sophisticated financial structures rather than government appropriations. For revenue-generating projects, project developers increasingly use project finance, “triggered by the increasing risk and size of infrastructure projects and high levels of leverage that are needed to make these projects viable.” With project finance, financial investors are assured of a desired risk/return profile. Project finance provides a higher degree of financial leverage. It limits the financial exposure. In these projects, potential for shareholder control comes from another area—project development. Investors will be able to exercise control through their respective special-purpose vehicle companies by participating in project company equity, debt, or major contracts.

4. Challenges and Opportunities in Financing NTP Projects

The financing package for an NTP is large, and so are the associated costs. For example, the YH driver NTP solo plant has an expected cost of 18.9 US cent/kW, including construction, debt servicing, transmission, decommissioning, waste management, and a neighboring state that will purchase the plant’s design range of 1,400–2,000 MW electricity generation. As shown in the following chart, for a 2,000 MW example of benchmark figures with some plant construction financed over ten years at ten percent during construction, balanced on the project are expected to be approximately 8.5 cents/kW, capital costs for nuclear, fossil fuels, renewable energy sources, and taxes are estimated to be 8.6, 9.3, 26, and 6.3 cents/kW respectively. In addition, 6.4 cents/kW must be allowed, in a current interest on the recent capacity cost variability and financings. The 8.5 cent/kW capital cost for the NTP plant appears surprisingly low, considering that NTP projects have experienced significant cost overruns, time delays, and disputes involving technology, contractor performance, and facility safety during their construction and start of operation. However, a number of attractive attributes come with NTPs and warrant the challenges during construction and operation. These include high capital costs, relative commercial availability and reliable macro power, and long-term climate benefits with zero emissions of greenhouse gases during operation. The importance of project finance in NTP projects shall be more and more significant. With ever-increasing security and safety requirements placed upon fossil and renewable energy projects, NTP projects offer important economic and implied societal appeal, and the use of a project finance structure for cost reduction is tantamount to ensuring NTPs’ successful deployment on a local and widespread geographical base.

NTPs are new nuclear industry entities, and relatively new NTP building firms will be initiating their first new build. In addition, project sponsors, contractors, and vendors may have limited financial capability and balance sheet strengths. The NTP has to take the lead in assembling and arranging for securing unequally large amounts of nonrecourse financing, much supported government guarantees for potentially extended tenors on competently concessional terms during construction and in the form of an amortising senior debt during operation. It has to correctly price, manage, and transfer effectively and efficiently the significant construction, operating, and performance risks that inevitably arise. It has to decide on the most appropriate technology that potentially suits the prevailing conditions to erect efficient plants on time and within budget, guarantee the long-term performance operation and decommission the NTP’s site and stakeholder. It has to assess the project’s environmental and social risks and its impact on the local community and properly manage them respondents concerned stakeholders and communities.

5. Case Studies and Best Practices

In the course of our interviews, expert panel members were asked to opine on the reasons for previous project financings’ success in the U.S. and Europe. Additionally, facilitated by our discussions with investors and lenders attending panel meetings at Stanford and in New York, we identified and suggest that NTP project developers or other supporters consider several attributes of NTP financings that appear most supportive and best practices that may be repeatable elements for successful projects. This chapter introduces best practice general assumptions assigned throughout the study – useful inputs that seem particularly promising in the light of what we learned during our investigation and that may influence a project’s design, strategy and structure during the very early project planning.

This chapter provides additional experience of project financings in the nuclear industry by presenting three case studies of completed and funded NTP projects, as well as additional examples of financings for nuclear reactor construction and upgrade projects. It examines some factors that may improve a transaction’s likelihood of success, as identified by our panel and by market practitioners. The chapter first identifies some of the common characteristics and several attributes of NTP financings that investors and lenders find most supportive. Careful structuring to create a delicate balance of these factors will be crucial to gaining market support for the next wave of projects. Taken as a whole, the chapter underscores the importance of the innovation and creativity needed in NTP financing and suggests particularly promising approaches, especially in the U.S. context, that could be useful in expanding the global pool of existing financing models.