Progress in Nuclear Energy 110 (2019) 30–33

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Progress in Nuclear Energy

journal homepage: www.elsevier.com/locate/pnucene

Review

Modern financial models of nuclear power plants T

∗
Pawel Terlikowski , Józef Paska, Karol Pawlak, Jakub Kaliński, Dawid Urbanek
Warsaw University of Technology, Institute of Electrical Power Engineering, Poland

A R T I C LE I N FO A B S T R A C T

Keywords: The last few years have seen some significant changes in the financing of large infrastructure projects, including
Nuclear power plants nuclear power plants. Financial models must take into account factors such as high capital investment, long
Financial model construction periods, long capital payback periods, problems associated with the fuel cycle, including security of
Diversification supply, exchange and storage of fuel, non-proliferation. Traditionally, the only entities facing the difficulties and
Investment risk
risks mentioned above were large, vertically integrated, state-owned or regulated, sovereign-backed utilities.
Also, only they have been able and willing to undertake the financing of investments. The change consists in a
greater interest in global capital markets in order to diversify sources of financing and to spread both the costs
and the risks among numerous groups of investors. The evolution of the financial models of nuclear power plants
in the world takes place based on the following trend: government financing, corporate financing, hybrid fi-
nancing, project finance. This transformation is moving towards a greater involvement of private capital instead
of a reduction of the share in public funds. The article is a detailed discussion of a few modern financial models:
Government-to-Government Financing, Loan Guarantees, Host Government-Backed Power Purchase Agreement
(PPA), Vendor Financing, and Investor Financing.

1. Introduction
One may find many similarities between investments in nuclear
power and other significant infrastructural investments. These include
high capital intensity, long lead times, long payback periods. Typical
problems for the type of investments are mainly related to the fuel
cycle. Some of them would be: security of supply, used fuel and waste
management as well as non-proliferation and decommissioning. The
operator would be responsible for the nuclear liability and ensuring
safety in case of extraordinary nuclear events. Due to strong regulation
in the power industry, there is a high risk of some uncertainty occurring
in the regulatory process.
Over the last sixty years, typical economic studies of nuclear in-
vestment have shown an unusual sensitivity to changes in its para-
meters, including those with an unpredictable fluctuation in time. Some
of them would be the wholesale price of energy or the authorisation
price for the emission of carbon dioxide granted as obligatory by the
European Commission. The volatile nature may be observed throughout
the whole energy market. The economic downturn has caused a de-
crease in energy demand, so new generation capacities are not required.
The bigger the capital expenditures, the more important the fi-
nancial model. Attracting tens of billions of euros for the construction of
a large nuclear power plant is a difficult task. Such an investment is not
only very costly in terms of initial investment, but also involves a
considerable risk, which further increases the cost of the invested ca-
pital. The capital expenditures vary between the different regions of the
world and include the following limits (World Nuclear News, 2014):
• Europe 1900–7200 USD/kW,
• North America 2400–7000 USD/kW,
• Middle East 3240–5300 USD/kW,
• Rest of Asia 1600–4365 USD/kW.
The above costs also depend on the specific location of the object, its
size or technology. The choice of first-of-a-kind technology may result
in a project's overnight capital cost increasing by up to 30% (World
Nuclear News, 2014). However, it seems extremely difficult to predict
the future costs of construction and use of nuclear power plants. Ob-
servations have indicated that there is no clear trend of costs, while
indicating the dependence of costs on many factors including the lo-
cation of the investment, the legal regime or international cooperation
in the project. Implementing projects of similar scale and technology at
the same time, but in different places in the world can generate dif-
ferentiated costs (Lovering et al., 2016).
A significant problem is the construction risk. In order to earn the
investors' trust, more blocks need to be built within the prescribed time

∗
Corresponding author.
E-mail address: pawel.terlikowski@ien.pw.edu.pl (P. Terlikowski).

https://doi.org/10.1016/j.pnucene.2018.09.010
Received 10 April 2018; Received in revised form 25 July 2018; Accepted 12 September 2018
Available online 15 September 2018
0149-1970/ © 2018 Elsevier Ltd. All rights reserved.
P. Terlikowski et al. Progress in Nuclear Energy 110 (2019) 30–33

and budget, as with the Chinese Ningde 2 and Honhgyanhe 1 and 2. energy as well. The energy is treated as a result of the production and is
Unfortunately, there are now many more examples of negative growth discounted using the same method as for costs incurred in subsequent
in construction time and effort than originally planned. Some of them years.
include Olkiluoto 3, Flamanville 3, Levy County, Angra 3, the Watts Bar The expanded formula for long-term unit cost of production in fa-
2, Taishan 1 and 2 and Hongyanhe. Nadira Barkatullah, PhD, Director cilities designed takes the following form (Paska et al., 2010; Paska,
of Economic Regulation at the Regulation and Supervision Bureau of 2012):
the United Arab Emirates, says that in North America, with a two-year n n
delay and the discount rate at 10%, the overnight costs of construction ∑t= 1 It ⋅(1+p)−t + ∑t= 1 Kt⋅(1+p)−t −WMn ⋅(1+p)−n
Kj = LCOE = n ,
could rise by 75% (World Nuclear News, 2014). ∑t= 1 At⋅(1+p)−t
The average construction time for completed power plants in 2015 (2)
was 73 months, compared to 127 months in 2014. The average for
2011–2015 was 66.4 months (World Nuclear Association, 2016). where:
Numerous studies of the costs of generating electricity from nuclear
sources have been published in recent years. Among the most accurate LCOE – levelised cost of energy; n – the period of analysis, covering
publications in their methodological approaches and data, we can the period of construction and operation of the facility; It – invest-
mention: “The Future of Nuclear Power” (Massachusetts Institute of ment in year t of analysis; Kt - costs of operation of the facility in
Technology, 2003) and its recent update “Update of the MIT 2003” year t; WMn – the value of non-amortized assets in the n-th year of
(Massachusetts Institute of Technology, 2009), published in 2009 as a operation (final value of the assets); At – energy produced in year t.
result of the sharp increase in the cost of raw materials and generation
technologies which occurred between 2004 and 2008. Several institu-
3. Financial models
tions in the USA have provided detailed technical studies of the same
subject, including “The Economic Future of Nuclear Power” (University
3.1. General trends
of Chicago, 2004) and “Nuclear Power's Role in Generating Electricity”
by the Congressional Budget Office (Congressional Budget Office,
Traditionally, the only entities which, against the difficulties and
2008). Furthermore, for the sake of completeness of the analysis, what
risks mentioned above, have been able and willing to undertake the
deserves a mention is the study “Levelised Unit Electricity Cost Com-
financing of investment, have been large, vertically integrated, sover-
parison of Alternate Technologies for Baseload Generation in Ontario”
eign-backed utilities. As noted by Nadira Barkatullah, in this situation,
and the detailed study “Nuclear Feasibility” (Wilson, 2009), where
the costs associated with such a model of financing and all the risk
special modeling software along with levelised cost analysis of elec-
associated with it focus on electricity consumers (Barkatullah, 2011).
tricity equations are used to analyse the technology under different
The utilities are covered from the consumers' taxes, as well as the fees
scenarios.
they incur for energy.
This article attempts to identify the modern models of financing new
However, as in the case of large capital-intensive power infra-
nuclear power plants, which make an effort to deal with the afore-
structure projects in other sectors, the financing of nuclear power sta-
mentioned difficulties.
tions over the last decade has changed significantly. Investors with
interest take advantage of global capital markets in order to diversify
2. Economic efficiency assessment methodology
the sources of finance and spread the financial cost and risk among
multiple investors. These changes are presented in Fig. 1.
We can find various methods for determining the economic effi-
As Daniel Joyner noted (Joyner, 2014), although there are many
ciency of power plants. One of them is the Net Present Value method.
types of financial structures, there are essentially two sources of capital:
It is calculated as the sum of the discounted differences between cash
equity or debt. Typically, infrastructure projects combine both these
inflow and cash outflow, realised throughout the lifetime of the
sources to varying degrees. According to Nadira Barkatullah, there are
power plant, separately for each year. The value of this sum expresses
three possibilities (World Nuclear News, 2014):
the profit which the development of the project can bring the in-
vestor.
The discounting can be carried out for any time, but usually coin-
cides with the planned facility construction start time. The discount rate
should be defined based on certain rules. It can be interpreted as the
rate of profit, below which the investment does not pay off (i.e. the
minimum rate of efficiency).
Net present value is calculated using the following formula:
n n NCFt
NPV = ∑t=1 (CIt −COt )⋅(1+p)−t = ∑t=1 (1+p)t
,
(1)
where:

NPV – net present value; NCFt – net cash flow in year t; n – the
discounting period (facility life-cycle); CIt – cash inflows in year t;
COt – cash outflows in year t; p – the discount rate.

A positive NPV value is a prerequisite for the profitability of a

project. The boundary of profitability is NPV = 0. A project which
yields the highest net present value should be selected.
Another method consists in determining the long-term unit cost of
generating electricity. It refers to the NPV, as well as taking into ac-
count the changing value of money over time. In the formula, the dis- Fig. 1. The transformation of the investment financing scheme between the
count factor is present not only for the cash flow but for the volume of public and private sectors (Barkatullah, 2011).

31
P. Terlikowski et al.
• Corporate finance (balance sheet finance),
• Hybrid financing (investor finance),
• Some new forms of financing, such as Vendor Financing.
She also estimated that the project finance model still remains un-
available to the nuclear industry.
Daniel Joyner distinguishes between these models (Joyner, 2014).
In the corporate finance model, the financial insurance is invariably the
company's assets. In project finance-type solutions, the investment
ought to be self-financing, as the project is backed only by the itself, not
supported by any assets.
According to Barkatullah, export credit agencies still remain very
important and are ‘extremely important for the bankability of a nuclear
power project’ (World Nuclear News, 2014). Compared to the com-
mercial offers, they provide access to long term loans, with attractive
fixed interest rates and a high loan amount and a low total cost.
The financial models have been described in detail by IFNEC (The
International Framework for Nuclear Energy Cooperation) (IFNEC
Financing Nuclear Power Projects, 2014), wherein simple types are not
very common. Typically, combinations of several financing options
described below occur.
3.2. Government-to-government financing
The first model is Government-to-Government financing (Murphy,
2014). With this type of financing, the nuclear tender is processed
through intergovernmental arrangements. The success depends on the
strength of the bilateral relations between two or more government
parties. This model often takes the form of intergovernmental loans.
To be successful, both parties should be motivated to pursue gov-
ernment-to-government financing. For the host country, this model
offers a valuable source of foreign financing and experience in the
nuclear sector, when such funds and experience may be lacking do-
mestically. For the exporting country, it is an opportunity to enter a
new market as well as to establish bilateral relations in other industries
through long-term linkages. This can lead to the strengthening of re-
lations between the two countries.
Notwithstanding the advantages of intergovernmental funding
rules, we should pay attention to its shortcomings. Such agreements
may restrict the choice of technology in the host country and cause a
lack of competitive pressures among suppliers. In addition, the host
government (host government) takes on a considerable responsibility,
which can be challenging, especially for countries without existing
nuclear power plants. The government is still responsible for setting up
their own regulatory body, acquisition of licenses, site selection, de-
velopment or amendment of the provisions of national law, maintaining
international obligations, promoting safety, maintenance of spent fuel,
waste disposal and decommissioning.
Ultimately, this model is neither good nor bad. It is thus important
that the host country be able to assume the responsibilities arising from
having nuclear power plants in its territory. IAEA recommendations
and guidelines help ensure the safe operation of a nuclear power plant.
Such a solution is being implemented by Russia, among other players,
in countries such as India, Vietnam, Belarus, and Nigeria.
3.3. Loan guarantees
In the loan guarantee, financing support is provided by the gov-
ernment. The host government or export credit agency guarantees re-
payment of part of the debt in the financing structure (Murphy, 2014).
As such, the loan base, which is guaranteed, comes from the commer-
cial market. A limit should be imposed on how much of the debt is to be
covered by the guarantee. Of course, the guarantor charges a fee for the
guarantee. This fee can be based on an assessment of the cred-
itworthiness of the borrower or the quality of the project.
There are many benefits of loan guarantees. For the guarantor, they
32
Progress in Nuclear Energy 110 (2019) 30–33
represent only a hypothetical obligation and do not require an actual
allocation of funds. The borrower guarantees may provide lower in-
terest rates, because the guaranteed loan has a lower risk and therefore
lower costs. It also improves the liquidity. Of course, from the point of
view of funding, the guarantee is as strong as the guarantor behind it.
A key aspect of granting a loan guarantee is the feasibility of the
project. Financing involving export credit agencies is often perceived
positively by other financial institutions as it creates a new relationship
in the financing structure and improves its stability.
A loan guarantee program is currently being implemented in the
United States and the United Kingdom, among others.
3.4. Government-backed power purchase agreement
The government's power purchase agreements (PPA) involve a
power purchaser – for example a host government owned utility – en-
tering into a contract with the project developer, which includes an
agreement to purchase some or all of the electricity generated by the
power plant (Warren, 2014). The government is responsible for the
energy buyer agreeing to guarantee the purchase of electricity from the
power plant owner. There is usually a guaranteed unit price for 1 MW
hour amount of electricity. It is the type of financial support that is
important for the bankability of nuclear power project. It is a must for
most of the financing model.
In this scenario, the financing market risk is effectively transferred
from investor to electricity customers (through energy companies) with
the proviso that if, for some reason, the company is not able to cover
their obligations under PPA contracts solely based on its own clients,
the government will make up for any shortfall in revenue. When de-
signing a PPA contract, the policy objective of the government is to
offer the investor just enough price support for the investment to pay
off.
The key elements of establishing a fixed or floor price include a
comparative analysis of risk and return on investment, getting accurate
cost estimates and financial models. The results should be built into the
financial models as appropriate coefficients availability, operation and
maintenance costs. A well-designed PPA contract is a guarantee for
investors and lenders. This reduces the costs and rsks of investment and
ensures political stability. An example of this solution is a Contract for
Difference, which the French EdF received from the British government
for the sale of power from Hinkley Point C.
3.5. Vendor Financing
This form can refer to a variety of financing options (Murphy,
2014):
1) Vendor arranged credit,
2) Vendor provided credit,
3) Vendor equity.
In the first case, the vendor facilitates financing from sources such
as relationship banks and export credit agencies. This type of credit
does not appear on the vendor's balance sheet.
Vendor provided credit often takes the form of short-term loans
given by vendor, such as construction loans.
Vendor equity gives vendors a share in the future net income gen-
erated by the nuclear power plant. From a risk perspective, vendor
equity is the riskiest proposition.
Before deciding to choose this model of financing, one needs to be
able to judge the cost of a provider of capital, the cost of capital and the
cost of the loan, as the financing providers can be relatively expensive
compared to the cost of raising capital from other sources.
This solution is implemented in Lithuania (Visaginas Nuclear Power
Plant and GE Hitachi), in the United Arab Emirates (a power plant in
Barakah with the Emirates Nuclear Energy Corporation and the Korea
P. Terlikowski et al.
Electric Power Corporation), among others. During the construction of
Hinkley Point C in the United Kingdom, a consortium was established
(vendor equity option), in which EdF holds approx. 50% of shares and
some shares have suppliers (AREVA - 10%, China General Nuclear
Cooperation and China National Nuclear Corporation in total approx.
30–40%). In the end, EDF will hold 66,5% of shares, while Chinese CGN
will remain 33,5% (Thomas, 2016).
3.6. Investor Financing
This model of financing (Barkatullah, 2014) assumes a group of
investors coming together to collect sufficient funds necessary to carry
out the project. Capital may come from foreign sources, such as loans
by commercial banks or an export credit agency, issuance of bonds, etc.,
or their own, for example from the shareholders. There are many de-
tailed models of this type of financing, the financial involvement of the
government, enterprises, creation of cooperatives and combinations of
these options. Each of these models has a different distribution of the
investment risk and of the share between the public and private sectors.
The entities involved in the implementation of investments and risk
sharing are, among others: shareholders, lenders and contractors. For
this reason, this model is sometimes called the model of cooperation
(Barkatullah and Ali, 2017).
One example of a power plant being finance by the investor is the
Mankala model, popular in the electricity sector in Finland. The
Mankala model involves many investors, to diversify the risk. Part of
the equity and borrowed capital is supplied by large customers. Long-
term power purchase agreements concluded by large customers provide
a stable source of income from the nuclear project. The company
Mankala is not intended to make a profit, and the shareholders will not
receive dividend. The individual companies comprising a Mankala
company are usually less focused on high profits from the sale of energy
than on the supply of cheap energy needed for their production.
Typically, companies with excess current financial liquidity are able to
join this type of co-operatives.
A concrete example of the application of the Mankala model is a
project of the Finnish nuclear power plant in Hanhiki. Finnish
Fennovoima will be the first European company to begin construction
of a nuclear power plant since the Fukushima disaster in 2011. In April
2014, the shareholders approved the terms of the agreement with
Russian Rosatom, which will turnkey-build a power plant and cover a
34% stake in the venture. The remaining 66% of the shares will consist
of 69 companies, most of which are locally owned – such as municipal,
mining and steel companies, but they include both electricity trading
companies and big industry giants, including smelter Outokumpu and
the Rautaruukki building materials manufacturer. The metallurgical
sector is dominant. They share a common goal – access to cheap energy.
Rosatom's main contribution is to provide reactor technology-AES-2006
VVER (Barkatullah and Ali, 2017).
This model is particularly popular and used especially in Finland.
However, other countries are interested in adapting this financing
model to their national conditions (Barkatullah and Ali, 2017).
4. Summary
Nuclear power engineering has a significant impact both on the
economy and on the functioning of the electricity market in the
country. The global economy and the growing impact of economic
calculation results in increasing interest in the development of financial
tools and ways of financing nuclear power plants.
The article discusses the issue of the financing of investments
33
Progress in Nuclear Energy 110 (2019) 30–33
related to the construction of nuclear power plants. The current status
of selected investments in nuclear power and the European and global
trends in the methods of financing these capital-intensive investments
were presented.
The issue of financing nuclear power plants is a difficult challenge,
but emerging new trends offer increasing opportunities to improve the
economic efficiency of the projects. New financing models enable better
diversification of the design risk, especially given a large and sometimes
difficult to estimate cost of investment, which was a big challenge in the
past. The models described here offer a new approach to the traditional
techniques of financing nuclear power plants, which can improve the
prospects of financing both for the “new” countries and those experi-
enced in the field of nuclear energy. The key role will still have to be
filled by governments, responsible for ensuring long-term liabilities, but
other actors in the public and private sectors can also play a significant
role.
The authors suggest the possibility of financing the construction of
nuclear power plants not only in order to achieve short-term economic
profits but also long-term effects, contributing to the development of
the economy and the society. The applied financing methods were re-
viewed and those which could be used in Polish conditions were
identificatied.
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