IAEA Nuclear Energy Series

No. NG-T-4.6

Basic Managing the

Principles
Financial Risk
Associated with
Objectives
the Financing of
New Nuclear Power
Guides
Plant Projects
Technical
Reports

@
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 MANAGING THE FINANCIAL RISK
ASSOCIATED WITH THE FINANCING OF
NEW NUCLEAR POWER PLANT PROJECTS
 The following States are Members of the International Atomic Energy Agency:

AFGHANISTAN GEORGIA OMAN

ALBANIA GERMANY PAKISTAN
ALGERIA GHANA PALAU
ANGOLA GREECE PANAMA
ANTIGUA AND BARBUDA GUATEMALA PAPUA NEW GUINEA
ARGENTINA GUYANA PARAGUAY
ARMENIA HAITI PERU
AUSTRALIA HOLY SEE PHILIPPINES
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AZERBAIJAN HUNGARY PORTUGAL
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ETHIOPIA NEW ZEALAND REPUBLIC OF
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 IAEA NUCLEAR ENERGY SERIES No. NG-T-4.6

MANAGING THE FINANCIAL RISK

ASSOCIATED WITH THE FINANCING OF
NEW NUCLEAR POWER PLANT PROJECTS

INTERNATIONAL ATOMIC ENERGY AGENCY

VIENNA, 2017
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STI/PUB/1765

IAEA Library Cataloguing in Publication Data

Names: International Atomic Energy Agency.
Title: Managing the financial risk associated with the financing of new nuclear power
plant projects / International Atomic Energy Agency.
Description: Vienna : International Atomic Energy Agency, 2017. | Series: IAEA
nuclear energy series, ISSN 1995–7807 ; no. NG-T-4.6 | Includes bibliographical
references.
Identifiers: IAEAL 17-01093 | ISBN 978–92–0–100317–1 (paperback : alk. paper)
Subjects: LCSH: Nuclear power plants — Design and construction — Finance. |
Nuclear reactors. | Financial risk management.
Classification: UDC 621.311.25:336 | STI/PUB/1765
 FOREWORD

One of the IAEA’s statutory objectives is to “seek to accelerate and enlarge the contribution of atomic energy
to peace, health and prosperity throughout the world.” One way this objective is achieved is through the publication
of a range of technical series. Two of these are the IAEA Nuclear Energy Series and the IAEA Safety Standards
Series.
According to Article III.A.6 of the IAEA Statute, the safety standards establish “standards of safety for
protection of health and minimization of danger to life and property”. The safety standards include the Safety
Fundamentals, Safety Requirements and Safety Guides. These standards are written primarily in a regulatory style,
and are binding on the IAEA for its own programmes. The principal users are the regulatory bodies in Member
States and other national authorities.
The IAEA Nuclear Energy Series comprises reports designed to encourage and assist R&D on, and application
of, nuclear energy for peaceful uses. This includes practical examples to be used by owners and operators of
utilities in Member States, implementing organizations, academia and government officials, among others. This
information is presented in guides, reports on technology status and advances, and best practices for peaceful uses
of nuclear energy based on inputs from international experts. The IAEA Nuclear Energy Series complements the
IAEA Safety Standards Series.
Given the large capital expenditures involved in nuclear new build projects, managing the various risks that
can lead to financial losses is a key to project success. Perceived failure to mitigate and allocate risk effectively will
ultimately lead to excessive and potentially prohibitive costs of financing, since funders will demand a higher return
on the funds they commit to a project if they perceive that risks have not been mitigated and shared appropriately.
As a result, a lack of understanding of the basics of FRM on the part of project sponsors may result in their failure
to secure sufficient funding to allow their project to proceed.
Despite the importance of FRM in the nuclear new build process, this is an area in which many project
proponents, particularly nuclear newcomers, lack extensive experience. Although proponents can — and almost
always do — hire specialist financial advisers to help them in this area, it is clearly desirable that they have a basic
understanding of the topic themselves. Newcomers should be aware of the broad relationship between financial
risk and the cost of capital, and that FRM is typically not something that is engaged in after having signed contracts
with vendors, engineering, procurement and construction contractors and others, but rather an area in which project
proponents should engage from the outset of any new build project.
This publication is designed to enhance new build proponents’ understanding of the key concepts of FRM.
It is intended that the report will be accessible to readers from Member States with little or no experience of
financing a nuclear project (as well as to those from Member States with more experience). It covers the major
aspects of FRM, including the identification and mitigation of financial risk, its optimal allocation, the ways in
which FRM will influence the cost of capital and sources of funding for nuclear new build projects. Member States
contemplating an expansion in their existing nuclear fleets can be expected to benefit from this publication, but it
will likely be even more valuable for Member States with limited (or non-existent) experience of financing nuclear
power projects (i.e. newcomers).
The IAEA officer responsible for this publication was P. Warren of the Division of Nuclear Power.
 EDITORIAL NOTE
This publication has been edited by the editorial staff of the IAEA to the extent considered necessary for the reader’s assistance.
It does not address questions of responsibility, legal or otherwise, for acts or omissions on the part of any person.
Although great care has been taken to maintain the accuracy of information contained in this publication, neither the IAEA nor
its Member States assume any responsibility for consequences which may arise from its use.
Guidance provided here, describing good practices, represents expert opinion but does not constitute recommendations made on
the basis of a consensus of Member States.
The use of particular designations of countries or territories does not imply any judgement by the publisher, the IAEA, as to the
legal status of such countries or territories, of their authorities and institutions or of the delimitation of their boundaries.
The mention of names of specific companies or products (whether or not indicated as registered) does not imply any intention to
infringe proprietary rights, nor should it be construed as an endorsement or recommendation on the part of the IAEA.
The IAEA has no responsibility for the persistence or accuracy of URLs for external or third party Internet web sites referred to
in this book and does not guarantee that any content on such web sites is, or will remain, accurate or appropriate.
 CONTENTS

1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4. Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. INVESTING IN A NUCLEAR NEW BUILD PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2.1. Project duration and construction duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2.2. Capital intensity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3. Equity, debt, cost of capital and project economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4. The investment screening process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3. FRAMING THE FINANCIAL RISK ASSOCIATED WITH NEW NUCLEAR POWER PLANT
PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.1. Financial risk and cost of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.2. A preliminary view of the nature of financial risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3. Controllable versus uncontrollable risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4. Importance of risk assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4. MANAGING AND ALLOCATING FINANCIAL RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4.1. Identifying, assessing and monitoring financial risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

4.1.1. Identifying project risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.1.2. Developing a risk matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.1.3. Risk register I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.1.4. Risk register II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.2. Risk allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.1. Risk allocation via contract language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.2. Concept of the ‘risk premium’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2.3. Efficient risk allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.2.4. Key stakeholders’ objectives and risk appetites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.2.5. Risk allocation via international financial and insurance markets . . . . . . . . . . . . . . . . . . . . 36
4.2.6. Risk allocation via ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.2.7. Risk allocation via credit enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.2.8. Risk allocation via commercial contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.3. Examples of financing structures and risk allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.3.1. Sovereign model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.3.2. Corporate based model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.3.3. Project based model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

5. SOURCES AND COSTS OF FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

5.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.1.1. Revisiting the conceptual framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.1.2. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.2. Stylized facts on financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
5.3. Characterizing financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
 5.3.1. Hurdle rates: An intuitive introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.3.2. Determinants of stakeholders’ hurdle rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
5.3.3. Modelling the basis of financial stakeholders’ decisions: Project returns versus
hurdle rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.4. Financing sources and types available in different project phases . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.5. Debt to equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.6. Equity financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
5.6.1. Types of equity, sources of equity and qualitative benchmarking of equity cost . . . . . . . . . 58
5.7. Debt financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.7.1. Types and sources of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.7.2. How debt providers measure risk acceptability using liquidity metrics . . . . . . . . . . . . . . . . 62
5.7.3. Benchmarking the cost of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.8. Finding an acceptable project risk allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
5.8.1. Introducing a third financing stakeholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
5.8.2. Locating financing in the overall search for acceptable risk allocation . . . . . . . . . . . . . . . . 65
5.9. Phased financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

6. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

APPENDIX: THE ROLE OF EXPORT CREDIT AGENCIES IN THE FINANCING OF

NUCLEAR POWER PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
LIST OF ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
CONTRIBUTORS TO DRAFTING AND REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
STRUCTURE OF THE IAEA NUCLEAR ENERGY SERIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
 1.  INTRODUCTION

1.1. BACKGROUND

The process of financing a new nuclear power plant (NPP) project can be thought of as a negotiation of
a sequence of agreements, such as those illustrated in Fig.  1. A new NPP project will be initiated by a project
developer — a legal entity that will seek to put together a set of agreements (contracts) on terms that ensure a
financially viable project at financial close. This project developer will often retain a significant ownership stake in
the project at financial close, i.e. it will become at least a partial owner, with the right to receive a share of project
revenues and the responsibility to pay a share of costs arising for as long as it retains that stake, which is potentially
over the entire project life cycle. It may, of course, retain a 100% share of these, i.e. it may become the sole owner of
the project. Figure 1 illustrates the relationships between a project developer or owner, its commercial counterparties
(represented by the three entities shown on the left of Fig. 1) and financial counterparties, i.e. those parties providing
finance to the project (debt provider(s) — here assumed to be commercial banks — and equity providers) shown at
the top and on the right of Fig. 1; these may be regarded as project stakeholders. At this point, the ‘operator’ role is
ignored — it is not assigned to the project developer or owner, and no operator contract is shown in Fig. 1.
Each of the commercial relationships between the entities shown in Fig. 1 and the owner will be governed,
as shown, by a contract (in Fig. 1 an electricity off-take agreement, an engineering, procurement and construction
(EPC) contract and a fuel supply agreement are shown). For the purposes of illustration, a project developer can
be thought to first negotiate a set of broad principles and terms with the electric utility (e.g. reaching a preliminary
high level agreement — or term sheet — on the range within which the price per kW·h that the utility will pay the
NPP owner must lie), moving next to reaching a similarly high level agreement with an EPC contractor, and then
with a fuel supplier. Crucially, each of these high level agreements / term sheets may be regarded as essentially
being arrangements to allocate risk and reward between the respective parties to that agreement.
The terms of the electricity off-take agreement will largely determine the revenues for the project over its life
cycle, and the EPC contract and the fuel supply contract will largely determine the project’s costs over its life cycle.
Taken together, these contracts will set expectations regarding the residual income (the remaining part of project
revenues after project costs have been met) available for division between debt providers (lenders) in the form of
debt service (repayment of principal and payment of interest) and shareholders.

Commercial
Banks
Fuel Supplier

Loan & security

agreements
Fuel supply
agreement

EPC Contractor EPC contract Project Developer/

Owner Shareholders
Equity agreement

Electricity off-take
agreement

Electricity Utility

FIG. 1.  Allocating risk and reward between stakeholders.

1
 This residual income will be more volatile if the project developer has managed to ‘push’ less risk on to the
commercial entities, or less volatile if more risk has been pushed. However, it will also likely be expensive to push
risk on to a particular party as the party being asked to take ownership of the risk in question will likely demand
additional payment (a risk premium) to do so.
In the example shown in Fig. 1, the project developer will seek to reach a high level agreement with the
commercial banks involved in the project regarding the division of this (volatile) residual income. These banks
will, of course, wish to avoid taking the risk arising from the volatility of the residual income. Once again, it can be
imagined that a high level agreement (or agreements) could be reached that will allocate claims on residual income
to the banks in return for their providing loans and taking (likely a rather small amount of) risk.
At this point in the cycle, the project developer will be in a position to evaluate whether its share of the
residual income (and the residual risk) arising from the project is broadly acceptable. If it is acceptable, or close
to acceptable, a further cycle of discussions will take place with the stakeholders shown in Fig. 1 to increase the
detail of the high level arrangements, and potentially revise the risk and reward sharing arrangements to make them
acceptable to the other project stakeholders.
As these arrangements become more detailed (e.g. as the initial range of electricity prices in the electricity
off-take agreement becomes narrower), the economics of the project will become clearer, and stakeholders will
attain sufficient clarity on the key metrics in which they are interested (e.g. the price of electricity for the utility,
the internal rate of return (IRR) on debt for banks), as well as on the risks to which these metrics will be exposed,
to allow them to decide whether to participate. Stakeholders’ decisions may be thought of as being based on a
comparison of what they expect their participation in the project to deliver (based on financial modelling) versus
their own boundary values for those metrics [1].1 For example, a utility may not be willing to agree to an electricity
off-take agreement under which the electricity price will exceed a certain threshold (e.g. US $0.12/kW·h) or a
potential equity investor may require an IRR that exceeds its own weighted average cost of capital (WACC) of,
for example, 14%.
To summarize, for illustrative purposes the project development process can be considered as consisting of
the developer iterating around the cycle shown in Fig. 1, sequentially attempting to reach an agreement with its
counterparties that delivers a value to them that satisfies their boundary values (or comes close enough to ensure
that those counterparties continue to negotiate rather than simply walking away) while retaining for itself a
risk–reward profile that meets its own requirements.
Of course, the process outlined above is a very simplified and stylized model of reality. For example, in real
life, negotiations between the owner and several project stakeholders will likely proceed simultaneously rather than
sequentially (and one of the key challenges for the project developer will be to integrate the various agreements
under development as the project development process evolves). However, this simplified and stylized model
provides a framework within which several key themes will be explored in this publication.

1.2. OBJECTIVE

This publication addresses the financial risk management challenges that must be addressed over the course
of nuclear new build projects. Its main aims are to:

—— Supply a framework within which Member States, both newcomers and those expanding existing nuclear
generation fleets, can think about issues of risk allocation, project structure, project financing and project
economics, and the linkages between them;
—— Provide an understanding of the relationship between risk allocation or mitigation within a new build project
and the cost of capital for that project;
—— At a practical level, provide an insight into the concerns, modes of thinking and language that a nuclear new
build proponent may expect to encounter within the financing community as it seeks to develop its project.

1
In general, financial modelling will be crucial at all stages of the process of securing finance from potential sources. At an early
stage in the development of a nuclear new build project (for example, during the energy planning exercises that are typically carried
out to determine whether nuclear can and should be part of a nation’s energy mix) such modelling can be carried out using off-the-shelf
tools such as the IAEA’s Model for Financial Analysis of Electric Sector Expansion Plans (FINPLAN) model [2]; at later stages it is
likely that a project developer will commission financial advisers to develop a customized (i.e. project specific) financial model.

2
1.3. SCOPE

This publication outlines the challenges associated with nuclear new build projects, and the way in which
the various risks associated with such a project over the course of its life cycle can be viewed as financial risks.
It introduces the linkage between efficient risk allocation or mitigation and the cost of capital and sets out a number
of tools and mechanisms that can be used to manage and allocate risks efficiently, thereby minimizing the cost of
capital. It stresses the importance of project structure as a key factor in determining the practicality of different
risk management and allocation or mitigation strategies, and provides a number of examples of such structures
(and their implications for the cost of capital). As noted in Section 5.1.2, much of the discussion and presentation of
key financing ideas is presented in a project finance context; however, it is important to recognize that the ideas are
more broadly applicable (see, for example, the models presented in Section 4.3).
Guidance provided here, describing good practices, represents expert opinion but does not constitute
recommendations made on the basis of a consensus of Member States.

1.4. STRUCTURE

The structure of the remainder of this publication will largely reflect the framework introduced in Section 1.1.
Broadly, the report is arranged in three parts. Sections 2 and 3 introduce some of the key features that make the
challenges associated with a new build NPP investment project different from those associated with, say, a coal-fired
generation project, and describe some key concepts in the area of risk. Section 4 starts by setting out the key steps
in the process of identifying, assessing and monitoring financial risk (including the tools that are available to carry
out these tasks effectively). It should be noted that many of these risks are not — in the first instance — purely
financial in nature. Typically, a nuclear new build project offers a broad range of risks (e.g. technical, political,
reputational, contractual, construction related, operational); however, insofar as the crystallization of some, or all
of these risks will ultimately have financial consequences for the economics of the investment under consideration,
they will be the focus of keen interest from potential finance providers.2 Section 4 goes on to explore the idea of
risk allocation in some depth: how it is carried out via contract language, and the limits to efficient risk allocation.
It goes on to outline four potential structures or approaches for allocating risk, before providing a number of
illustrative examples. Section 5 then addresses the cost of financing a nuclear new build power plant, including the
types and sources of such financing. The link between the second and third broad themes of this publication is, of
course, that successful risk allocation and mitigation will reduce the cost of such financing.
Finally, the Appendix addresses the role of one key source of finance for new build NPP projects in practice:
export credit agencies (ECAs). The Glossary provides definitions of the financial terms used in the publication.

2.  INVESTING IN A NUCLEAR NEW BUILD PROJECT

Nuclear power generation projects represent particularly capital intensive investment proposals. NPPs are
relatively distinctive assets, economically speaking, and their typical cost structure is driven by costs and risks
arising from, inter alia:

—— An exhaustive, lengthy and expensive permitting and licensing regime;

—— Long construction periods (5–7 years) with numerous interlinked sequences of work and testing;
—— A complex contractual environment, with the potential for a high degree of construction delay and/or cost
variance compared with the base case scenario;
—— Very large upfront capital investment costs.

2
There is a very real sense in which all risk is financial risk: in seeking support from potential investors and/or lenders, a project
developer will be asked to demonstrate (via financial modelling) the sensitivity of investor/lender returns and risk measures to the key
risks that attend the project, including completion delays, performance shortfalls, etc.

3
 In this context, new build NPP projects are typically not undertaken purely on least-cost-of-electricity
grounds; there are other key factors that motivate the construction and financing of a new NPP, including political
considerations (e.g. a search for greater energy supply independence, or aspirations to develop a national nuclear
industry) and the pursuit of sector related policies (e.g. diversification of energy sources to rebalance existing
energy mix, decarbonization of the energy sector).
Nevertheless, the pure cost characteristics of new build NPP projects, and the ways in which their unique
characteristics will impact cost implications, should be well understood at the outset of any project.
The remainder of this section will highlight the importance of a key determinant of the cost of the electricity
generated by an NPP project, namely, the cost of capital employed in the project. Sections 2.1 and 2.2 will stress the
importance of two key features of a typical nuclear project: long construction periods and high capital intensity, and
the resultant sensitivity of nuclear projects to the cost of capital. For the purposes of exposition, it will be assumed
in Sections 2.1 and 2.2 that the project is financed purely from borrowing; in such an instance, the cost of capital is
essentially equal to the interest charged by lenders (or, to be a little more sophisticated, to the debt IRR explained in
the internal rate of return definition in the Glossary).
In Section 2.3, the discussion is broadened — and made more realistic — by recognizing that in general a
new build NPP project will be financed (like any other project) by a mixture of debt and equity. Given this mixture,
in calculating the overall cost of capital for the project, the different proportions of these two sources of finance
— and their typically different costs, which reflect their relative riskiness to their respective providers — must be
reflected. This is done by assessing the WACC. It is important to note that the WACC will play two roles in this
publication. It is introduced in Section 2.3 as a measure of the cost of capital for a new build NPP project, and
thus a key determinant of overall project economics; later in this publication — particularly in Section 5.3 — the
importance of project financiers’ own WACCs as their bases for determining the returns they will require to induce
them to invest in a new build NPP project will be examined.
Finally, Section 2.4 provides a step-wise description of an (illustrative) investment screening process —
from fatal flaw analysis to the final investment decision.

2.1. PROJECT DURATION AND CONSTRUCTION DURATION

From the early days of its development to the start of associated decommissioning works, a new nuclear
project spans a 100 year economic cycle horizon, which is a considerably longer timeframe than for, say, a coal-
fired thermal power plant with a typical 3–5 year construction phase and a 40 year operating life. Furthermore,
as shown in Fig. 2, such a timeframe consists of four discrete phases, namely: a development phase (10 years are
typically assumed for that period); a construction phase of between 5 and 7 years (depending on the technology or
the size of the reactor, and assuming no delays); a 60–80 year operation period; and finally, a period of transition
in order to prepare for the decommissioning and the dismantling of the assets (currently estimated to comprise
between 10 and 20 years). Again, the number of discrete phases and their respective duration make a nuclear power
project a very specific investment proposal.
A particular challenge is posed by the need to finance the construction phase of the overall project life cycle
before the first revenues accrue to the project. Because nuclear projects are highly capital intensive (see Section 2.2),
the interest on funds borrowed to finance this construction — interest during construction (IDC) — can compound
into very large amounts. The longer the construction period, the higher the IDC, other elements (particularly interest
rates) being equal. Unexpected construction delays translate directly into unexpected costs.

Project Development Construction Operation ‘Back end’ activities

Contracting Engineering Operation

Decommissioning
Licensing Procurement Maintenance
Waste disposal
Siting Construction Waste management

FIG. 2.  Typical project cycle for a nuclear new build.

4
 Figure 3 compares the relative amounts of IDC incurred by two hypothetical projects that are of identical
value (US $5.75 billion) in terms of overnight costs — costs of materials, equipment, labour, etc. — but that differ
in terms of project duration and the rate of interest paid on financing. For simplicity it is assumed that the project
is 100% debt financed; in reality, it is more likely that a project might be 70% debt financed — this would not alter
the substantive point being illustrated, however.

FIG. 3.  Sensitivity of IDC to interest rate and construction duration. Each bar is composed of two ‘stacked’ parts. For the ‘7 year
construction period/10% interest’ case, the blue part represents the overnight cost expenditure in a given year and the red part
represents the total IDC that will have been incurred on that expenditure by the time the project is complete; for the ‘5 year construction
period/5% interest’ case the pale green part represents overnight cost expenditure in a given year and the purple part represents the
total IDC that will have been incurred by the time the project is complete. The orange bars on the far right compare the total amounts
of IDC incurred by these two projects: US $2.8 billion in the 7 year/10% case, versus US $1 billion in the 5 year/5% case.

2.2. CAPITAL INTENSITY

Although nuclear plants enjoy relatively low and stable operating costs, the upfront capital investment costs
can be considerable. It is extremely challenging to obtain reliable figures on nuclear plants’ capital costs for various
reasons, including:

—— Commercial confidentiality;
—— Site specific conditions, which can invalidate comparisons even if they are made between the same
technologies (e.g. if such site conditions require differing cooling approaches between sites);
—— Market conditions;
—— Bilateral circumstances (i.e. strength and warmth of relationship between vendor’s and host’s respective
governments);
—— Numbers quoted on different (unstated) bases (e.g. with versus without contingency; with versus without
owner’s costs; quoted on overnight cost basis versus total cost basis).

5
 Notwithstanding the relative paucity of detailed capital cost data, there is no doubt that that the construction
of a new NPP is an capital intensive venture: the magnitude of the financing requirements is much greater
(on the basis of cost per installed MW) than that of most alternative investment options that are available at present
to develop thermal and/or renewable power generation projects.
The life cycle cost profile for a new build NPP project will typically differ from that for, say, a combined cycle
gas turbine (CCGT) as a result of the heavily capital intensive and front end loaded nature of NPP cost and on the
long construction durations discussed in Section 2.1. Figure 4 compares the cost breakdown for a typical NPP with
those for a CCGT plant and a supercritical pulverized coal plant (data are for the United States of America [3]).
In conclusion, the most important points made in Sections 2.1 and 2.2 is that new build NPP projects will be
particularly sensitive to the cost of capital, as opposed to, for example (in the case of a CCGT), the cost of fuel.
Indeed, the cost of capital available to a project will be a key driver of overall project economics, and may well
decide whether a project will proceed.

2.3. EQUITY, DEBT, COST OF CAPITAL AND PROJECT ECONOMICS

80%
Share of cost components

70%
60%
50%
40%
30%
20%
10%
0%
Investment cost Fuel cost O&M cost Refurb &
decomm cost

CCGT Supercritical pulverised coal Nuclear

FIG. 4.  Relative importance of investment (capital) cost by generating technology [3].

As with any capital intensive investment, a major challenge in the development of a new NPP is the
mobilization of the resources to finance it. A key factor that may make the financing process very intensive in terms
of time and effort process is the sheer scale of the financing required. An additional factor is that the financing
payback periods for a new build NPP project are typically relatively long, creating a requirement for similarly long
term financing (which may not be readily available); in this context it is important to note that although refinancing
(or even phased financing — see Section 5.9) of the debt incurred to finance a project is a possibility, it results in
additional risk, in the form of a lack of clarity as to the terms and availability of replacement financing when any
current facility expires.
Notwithstanding the particularities of the new build NPP financing challenge, the ultimate sources of
financing for a nuclear new build remain those typically tapped for infrastructure projects in general; they are based
on a combination of equity and (long term) debt funding. Depending on the ownership and commercial structure
that is chosen to develop a new NPP, the proportion between these two components (i.e. the debt to equity ratio)
will vary. However, the availability of both sources is ultimately critical to fund the investment.
Crucially, the cost of equity is typically higher than the cost of debt: this is to reward the higher level of risk
associated with equity compared with that usually taken by the debt providers, in particular the senior lenders. The

6
relative riskiness of these two broad types of financing reflects the fact that ‘priority lenders’ (i.e. debt providers)
have priority in being repaid over the equity shareholders if the borrower goes into liquidation.
Given that debt is more expensive than equity as a source of funding, it is unsurprising that developers of a
new build NPP project will (and should) expend substantial effort in order to finance as much as possible of their
project through debt (i.e. to maximize the debt to equity ratio) when preparing a funding plan for their investment
proposal (although such attempts may face limits, depending on the ownership structure chosen to develop the
investment proposal).
A useful metric for gauging whether such efforts have been successful is the WACC [4], which is often
calculated on an after-tax basis. It is based on Eq. (1):

WACC = (k E ×C E ) + (k D ×C D )×(1 − t ) (1)

where

CD is the cost of debt

CE is the cost of equity
K is equity + debt
kD debt divided by K
kE is equity divided by K

and t is the corporate tax rate.

To summarize, given the sensitivity of new build NPP project economics to the cost of capital (as captured,
for example, using Eq. (1)) it is crucial that project developers should seek to secure as low a cost of capital as they
can. Typically, this will involve maximizing the debt to equity ratio in overall project financing.

2.4. THE INVESTMENT SCREENING PROCESS

The decision to invest will typically be based on a set of key basic principles and steps with regards to the
identification, assessment and structuring of the investment opportunity. A phased and rigorous analysis process
needs to be undertaken in order to review and assess the merits of an investment opportunity before a final decision
can be made by the future owner, its shareholders and various other key stakeholders (including the government of
the host country).
This is usually a lengthy process, which is based on a detailed and comprehensive analysis of a broad range
of characteristics of the investment proposal. The fact that the asset under consideration is an NPP makes the
exercise even more exhaustive and complex owing to the specifics of the nuclear sector; the project development
phase for a new NPP typically takes several years once the key principles of a base case have been identified and
validated, and the feasibility of the investment proposal established.
This analysis is typically divided into a succession of steps, each punctuated by key milestones, on the
occasion of which various series of facts and/or assumptions need to be validated, and thresholds met before
moving to the next stage in the development process. The overall objective of this iterative approach is for the
owner of the new NPP and its equity shareholders to eventually define and assess in detail the investment proposal
through a rigorous process. It is also to have a number of occasions during the year-long review cycle to filter,
test and challenge the merits of the investment proposal, before an informed decision is made to carry it out.
In particular, there are various stages embedded into that process, during which the owner of the new NPP, and
ultimately any equity investors, has the option to go (or not to go) to the next level in the project analysis. Although
each investment proposal has its own particularities, Table 1 provides a high level illustration of the path that is
traditionally followed by an equity shareholder when screening an investment proposal.

7
8
TABLE 1. ILLUSTRATIVE EXAMPLE OF AN INVESTMENT SCREENING PROCESS

Step No. Stage Primary objective(s) Outcome Move to next step?

1 Project concept — Screening of any fatal flaw and identification of the most onerous requirements/features of the potential investment. No go 
review (Scope of high level review to be relatively narrow and to include: political environment, legal environment,
technology options, technically related constraints, reputational issues.) Go 

2 Preliminary — Analysis of the key features of the investment project under consideration and preparation of a business plan. No go 1 
feasibility study (Scope of review to be broader and to include: social, legal and regulatory environment; technology, industrially,
site and technically related options; identification of corporate and commercial options; assessment of reputational
issues, as well as preliminary assessment of project costs, financing options.) Go 1 
— Definition of a framework to assess the investment’s profitability and resilience to risk.

3 Detailed — Detailed analysis of the investment project under consideration and finalization of an investment plan. (Scope of No go 1 
feasibility study review to be exhaustive and comprehensive, including: detailed analysis of social, legal and regulatory environment,
technology, industrially, site and technically related aspects, as well as assessment of project costs; identification of
most relevant corporate and commercial structure(s), procurement and contracting strategies; reputational issues.)
— Detailed testing of the project’s economics and resilience to risk, leading to the finalization of the financing plan and
Go 1 
of the investment case.

4 Investment — Review of the investment case and the underlying business plan (including sensitivity cases). No go 1, 2 
decision
Go 1, 2 

5 Project — Negotiation and finalization of the project’s costs and underlying contractual structure, including the various No go 1 
development financial arrangements.
— Finalization of the key underlying assumptions (costs, prices, etc.) for the investment case. Go 1 

6 Final investment — Review of the final investment proposal. No go 1, 2 

decision3
Go 1, 2 

1
A ‘go’ decision takes the assessment and the analysis of the investment proposal to the next step; a ‘no go’ decision results in the termination of the analysis process, and ultimately the
abandonment of the investment opportunity.
2
Although it is most likely that the senior management and the board of the owner of the new NPP and its equity shareholders would be consulted and informed regularly owing to the sensitivity
attached to a new build project opportunity, formal board approval would be sought for a selected number of milestones only, when the allocation and/or the commitment of important financial
resources would be sought.
3
A positive final investment decision leads to financial close, the trigger point for debt to be available for drawdown and construction of the NPP to start.
 3.  FRAMING THE FINANCIAL RISK ASSOCIATED WITH
NEW NUCLEAR POWER PLANT PROJECTS

3.1. FINANCIAL RISK AND COST OF CAPITAL

The high upfront capital cost of an NPP means that the cost of capital is a fundamental factor in determining
whether such an asset will be economically competitive in a country’s energy mix (this has been explored in terms
of IDC in Fig.  3). All other things remaining equal, the lower the cost of capital, the more competitive a new
plant will therefore be. In turn, it may also be noted that the cost of capital of an NPP is a function of the financial
dimension of the risk associated with the investment project. This is because said risk will exert a major impact on
the availability of capital (e.g. equity and debt) and subsequently on its pricing.
In the rest of this publication, it is proposed that financial risk be defined as the combination of different risks
associated with the financing of an asset, the occurrence of which would increase the probability of a financial
loss that would subsequently impair the ability of the investment to provide an appropriate return to its key
stakeholder(s).
Insofar as financial risk is perceived as being a major threat to profit making for an NPP investment proposal
— both during the construction and the operation periods — it will negatively impact project economics. The
impact of two key risks on project profitability and the cost of capital are illustrated in Fig. 5.
The financial risks illustrated in Fig. 5, if not managed properly and actively, may result in financial risk
having a particularly dramatic impact on a new build’s profitability during the construction phase, principally by
increasing the upfront cost of the investment and/or impairing its ability to generate sufficient cashflows during its

Base case Construction cost overruns

Reduced profit!

Base case Reduced electricity price

Reduced profit!

Project investment cost Electricity price

Production cost Profit

FIG. 5.  Illustrative examples of the impact of financial risk on profit.

9
economic life. In the case of a new NPP, that would typically be the consequence of either an increase in the cost
of construction (including increases in prices of supplies of goods and/or services, and additional works), or delays
(including delays in supplies, poor management of construction schedule, themselves leading to extra costs). As a
result of such additional expenditures (all pointing towards increased funding requirements), it is very likely that
the cost of production of the electricity delivered by the NPP from the commercial operation date (COD) onwards
would be higher than the price originally envisaged in the investment’s business case. Subsequently, it is also to be
expected that the price at which electricity would need to be sold in order to recoup the investment while preserving
the economics of the investment would eventually need to be increased.
Such pressure points and requirements have to be set in the context of the specificities of the electricity
markets. Arguably, such markets do not support an automatic pass-through of such additional costs, for the
following reasons in particular:

—— Public authorities recognize that electricity sale prices carry a high social impact. As a result, governments
have traditionally been cautious with policies supporting or leading to tariff increases, which would affect the
public. They have therefore proven to be prompt at exerting some form of control, directly or indirectly, in
order to cap electricity price hikes as a way of addressing issues of energy poverty (notwithstanding the fact
that the removal of such caps coupled with the targeting of support to vulnerable customers might arguably
be a preferable approach). Similarly, governments are also mindful not to excessively burden their industrial
actors with high electricity prices, which would penalize them against their international competitors in both
their home and export markets.
—— During the past 20 years, many countries have experienced some form of liberalization of their electricity
markets, with prices being set (or sometimes partially set) by market forces. As a result, there are various
instances where full cost recovery is not — or cannot be — considered or cannot be achieved for an
investment facing cost overruns. This is primarily because the price at which the electricity would need to be
offered would not be cleared on the market.

3.2. A PRELIMINARY VIEW OF THE NATURE OF FINANCIAL RISK

The list of risks typically associated with the development, construction and operation of capital intensive
investment projects in the infrastructure sector is a long one; insofar as all risk is financial risk (i.e. all risk will
impact the quantity and variability of income streams available to finance providers, as described below), equity
and debt providers will be concerned about all the risks on that list. This is one of the reasons why public authorities
were originally regularly and actively involved in the development and financing of infrastructure assets.
However, private sector involvement in the development, construction, operation and financing of such
projects has also been successfully mobilized in parallel to procure and deliver this kind of large investment. As a
consequence, there exists an established track record of complex capital intensive projects successfully delivered,
with good understanding and management of their risks — including financial risk — by the various stakeholders
from the public and the private sectors involved during their procurement and throughout their economic lives.
In the case of a nuclear new build project, the risks exerting an impact on the feasibility, deliverability,
procurement and delivery of an investment proposal are numerous, but they fall into a number of already well
identified categories that apply to most projects. These include: the political, legal and regulatory risk; the
permitting and licensing risk; the construction risk; the risk relating to electricity sales (e.g. volume and price being
less than predicted); and the funding risk. In that context, the following can already be noted at this stage for the
financial risk associated with the development and the financing of a new NPP:

—— Financial risk is to be found at the level of:

●● The asset itself (e.g. performance of construction works, for example);
●● The corporate and commercial structure carrying the project (the selection of a funding strategy, or of
suppliers of equipment or services, for example);
●● The contractual framework supporting it (e.g. choice of construction arrangements or of electricity sale
contracts).

10
 —— Its occurrence is to be expected throughout the life cycle of the investment, for example, during the three
typical phases identified for an NPP (the construction, the operation and the back end periods).3
—— Its occurrence may have, in the context of the magnitude of the financing requirements of an NPP, a dramatic
impact on the financeability and the bankability of the investment.

It is important to recognize that, in essence, all risk is financial risk. This includes risks that might more
typically be thought of as being of a purely technical or engineering nature, such as the risk of poor turbine
performance. Such poor performance will lead to poor project economics (perhaps an electrical capacity somewhat
less than was expected) and result in a poorer financial risk profile (viewed from the perspective of potential
financial stakeholders); Fig. 6 should be viewed in this context.

CONSTRUCTION OPERATION DECOMMISSIONING

Exchange rate Interest rate

risk risk
Design
performance
not achieved Inadequate
Schedule Construction financial
delay cost overrun provision
Inadequate
demand
Design
Regulatory
capacity not
delays
achieved

FIG. 6.  Extent and reach of financial risk over the project life cycle.

3.3. CONTROLLABLE VERSUS UNCONTROLLABLE RISK

In considering risk allocation between a new build NPP’s stakeholders (as will be done in Section 4.2) and
in discussing the general principle underlying such allocation — that risk should be borne by the stakeholder best
able to manage it — it is important to recognize that some risks are inherently outside the control of any of the
stakeholders typically found in such a project. Such uncontrollable risks include those due to natural phenomena
(such as flooding or earthquakes), civil societal phenomena (such as general strikes or revolutions) and, perhaps
most interestingly, those that involve exposure to volatile prices set in global markets.
Figure 7 illustrates the placement of a range of potential risks along a notional continuum of controllability.
In principle, the risk of, for example, schedule delay is controllable (by careful planning and management by the
EPC contractor); in contrast, it is unlikely that any of the stakeholders in a new build NPP project will be able to
influence the volatility of global interest rates in any way (though stakeholders may be able to reduce the impact of
such volatility using the instruments outlined in Section 4.2.5).

3
Indeed, a number of risks are present during a phase which may be thought of as preceding the construction phase, namely the
(project) development phase.

11
 Regulatory
Equipment delay SWU price
failure during Design escalation
operation performance
not achieved Exchange
convertibility
risk
Interest rate
Construction volatility
cost overrun Discharge
limits not met
Inadequate
demand Exchange rate
volatility
Fuel supply Change in
Schedule interruption taxation regime Project Temperature of
delay becomes tertiary intake
uneconomic water

Escalation in
Design price of
materials U3O8 price
capacity not
escalation
achieved

Controllable Uncontrollable

FIG. 7. Controllable and uncontrollable risks.

An important takeaway from any consideration of the relative controllability of any particular risk associated
with a nuclear project is that it may only be the very largest stakeholders (in terms of financial capacity) who are
willing and able to bear such risks. In the case, for example, of exchange rate volatility, if a project developer
succeeds in inducing a counterparty to a contract to bear the exchange rate risk associated with that contract
(in the first instance), it is likely that the counterparty will then seek to shift that risk (via hedging, etc.) on to
participants in global foreign exchange markets.
In general, the larger and more uncontrollable the risk (e.g. prices set in global markets) the more likely that
only parties with very high financial capacity will be willing to bear it at a price that allows the project to remain
economic (see the discussion of risk premiums in Section 4.2.2. for more on this point). Such parties will likely
include:

—— Host governments (with recourse to their domestic tax base);

—— Off-takers (with recourse to their customer base via an electricity off-take agreement or contract for difference
type of arrangement);
—— Multilateral agencies;
—— Vendors with strong national support;
—— Financial markets such as exchange rate markets (via hedging instruments).

12
3.4. IMPORTANCE OF RISK ASSESSMENT

Financial risk is a function of the other risks related to an investment, irrespective of their nature and
magnitude. It affects the availability on the market of competitively priced long term capital (measured, among
other methods, via the WACC) enabling an NPP project to compete with other sources of long term electricity
supply for access to funding.
Whatever the ownership and commercial structure chosen to deliver the investment, financiers of a nuclear
new build will, as a matter of principle, rely upon the NPP’s ability to generate a stable and predictable cashflow
over its lifetime, in order, inter alia, to pay interest and repay the principal of any debt element within the capital
structure, and to provide an adequate rate of return or yield on the equity or equity-like element of the capital
structure. Analysis of the risks in their broadest form is, therefore, fundamental for all finance providers, who will
rely extensively on various risk analysis tools, such as the risk register and the findings of their due diligence.
Their line of enquiry typically focuses on understanding — and arguably, challenging — the financial metrics
of the project that have been prepared for the investment case, based on a full understanding of the assumptions
supporting those metrics. Financial analysis aims to identify and examine the project related risks or events that
could impact the base case forecast and cashflow profile of the NPP. Financiers will therefore rigorously scrutinize
the risk profile of a project investment proposal before they are in a position to provide a meaningful view on the
terms, conditions and pricing of their capital, let alone make a commitment to invest in or lend to the project.
For any external investor or lender, the risk assessment will, by nature, be comprehensive, thorough and
potentially intrusive. It will most likely involve obtaining independent advice and due diligence reports from a
combination of expert technical, legal, market and industry, and financial consultants. Armed with a risk register
and quantification of key project risks, investors and financiers will be keen to know what strategies can be
implemented by the owner of the NPP and its shareholders in order to mitigate and manage those risks. Given
this information, they will be in a position to assess the degree of residual risk exposure, undertake scenario
analysis in relation to those risk events and consider the implications for the project’s financial structure and hence
its cost of capital. As noted, all risks are financial risks, which means ultimately that the risks involved in the
development, construction and operation of an NPP will manifest themselves in the project’s capital structure and
associated pricing if they are not fully mitigated or transferred to competent third parties. As such, the economic
competitiveness of an NPP is arguably a direct function (via its WACC) of the final level of risk it retains.

4.  MANAGING AND ALLOCATING FINANCIAL RISK

The primary focus of Section 4.1 will be on the set of tools that can be used to carry out one of the key risk
management functions, that of risk mitigation. Risk mitigation can be defined as the introduction by a risk ‘owner’
(i.e. an NPP project stakeholder who is exposed to the risk in question) of specific measures aimed at minimizing
or even — to the extent possible — eliminating it. In general, these measures may be aimed at the reduction of: the
impact of risk materializing, the probability of the risk occurring, or the owner’s own exposure to risk.
It should be borne in mind that at the outset of the NPP project, all risks will by default be owned by the
project developer. Over the course of the project development process, the project developer will seek to induce
other project stakeholders to take ownership of the risks for which they might appear to be the natural owners —
those that they are well placed to manage and control. The type of tools outlined in Section 4.1 can be employed
by the project developer as it inventories risks prior to their allocation, by project stakeholders as they manage the
risks they come to own and by the project developer (again) in managing the risks that it retains.
It should be noted that risk mitigation does not only rely on the ‘one off’ identification of risk and the
introduction of control measures to mitigate it. Rather it is a dynamic process, which also implies a constant and
consistent monitoring of risk in general, including: the tracking of risks already identified; the identification of new
risks, if any; and the evaluation of the effectiveness of the risk process throughout the economic life of an asset.

13
 In Section 4.2 the focus shifts to risk allocation. The way in which particular risks are allocated to different
project stakeholders (who then become the ‘owners’ of those risks) and the nature of the inducement that must
be given to those stakeholders in order to persuade them to accept responsibility for those risks (and the financial
exposure that comes with such responsibilities) are discussed in Sections 4.2.1 and 4.2.2, respectively. The
notions of efficient risk allocation, and the (closely related) topic of project stakeholders’ differing objectives —
and how these shape their risk ‘appetites’ are the subject of Sections 4.2.3 and 4.2.4, before attention switches in
Sections 4.2.5–4.2.8 to different approaches to allocating particular risks. Finally, Section 4.3 provides examples of
risk allocation possibilities within a number of different project structures.

4.1. IDENTIFYING, ASSESSING AND MONITORING FINANCIAL RISK

As noted, a nuclear new build project offers a range of risks (e.g. technical, political, reputational, contractual,
construction related, operational), the crystallization of some or all of which will ultimately have financial
consequences for the economics of the investment under consideration.
It is therefore very important at the outset of an NPP new build project for the developer of the new NPP to
identify and define the various risks associated with the project (each of which is a ‘project risk’), which will need
to be analysed and dealt with. An exhaustive list of the project risks will typically be drawn up, and will constitute
the basis for performing a comprehensive analysis of the project in order to develop a business case in support of
the investment proposal for the new NPP.
At a later stage, a more detailed review of each project risk is typically undertaken by the new NPP developer
with a view to: assessing the probability of its occurrence and identifying and assessing the financial consequences
associated with it. The outcome of such analysis is incorporated into a document (the project risk register (PRR))
where each and every risk related to a new build project is consigned, analysed, and rated (typically for likelihood
of occurrence and/or likely impact in the event of occurrence). The PRR constitutes a very valuable tool to assist
the owner of the new NPP in the planning of the discussions and the negotiations with the various additional
stakeholders involved in the development and the management of the project (e.g. equity shareholders, suppliers,
contractors, finance providers, government of the host country).
Later still, the owner of the new NPP often uses the input of the PRR in order to: identify and define the
party (or the parties) best able to competitively manage any given project risk at each stage in the life of the
investment; identify the tools and/or outline any contractual option that may be considered in order to deal with
or mitigate a project risk; subsequently plan for the efficient and economic allocation of the project risks between
the various stakeholders throughout the economic life of the NPP; and monitor said allocation throughout the
life of the project. This results in the preparation and regular updating of a risk allocation matrix — effectively
an augmented PRR — that is tailor-made for the investment. This will remain a key document after the decision
to invest has been made by the equity shareholders with its regular update to assist the owner of the new NPP to
monitor the procurement and the delivery of the NPP. This is particularly the case throughout the period leading
to financial close. This is because the relevant stakeholders will negotiate the various contractual arrangements in
connection with the construction of the NPP and the supplies of equipment and services etc. during that period.
The risk allocation matrix will also be a powerful tool providing critical assistance to the owner of the NPP in its
discussion and negotiations of the finance documents with the finance providers (e.g. equity and debt sources).
The preparation of that critical document requires, therefore, the greatest attention from the various stakeholders
involved in the planning and development of an investment case in a new NPP. The party or parties originating
such investment proposals typically start this process at an early stage.

4.1.1. Identifying project risk

As a matter of principle, the process for identifying risk is the same for a new NPP as it is for the financing
of any large (greenfield) infrastructure project. While certain broad risk categories are common for every project
(e.g. cost overrun, delay, operational performance, revenue), the individual risk components for each sector
(e.g. rail, road, power generation) and indeed for each project can be very different.

14
 From an investor’s or lender’s perspective, a typical list of generic key risks for a new build NPP will most
likely include those listed in Sections 4.1.1.1–4.1.1.4.

4.1.1.1. Development and construction related project risks

Design and technology selection: For a new NPP, the owner can choose an established design and a
technology that has an operational track record at at least one reference plant domestically or internationally, and
is proven to be fit for purpose. Alternatively, it may strive for improved operational performance and/or safety by
selecting a new type of reactor, which incorporates technological enhancements or design adjustments based on the
experience of existing plants, but is not broadly commercialized, licensed or implemented in the relevant market.
The risks associated with first-of-a-kind (FOAK) units can be significantly greater than for follow-on units.
Permits and licences: A delay to the start of operations related to permits and licence issues may, in principle,
have a significant impact on the economics of an NPP. This is principally because capital costs (and associated
financing charges) are a large part of the overall investment budget. The risk events of an NPP project suffering
from delays in the issuing of permits and licences (for construction and/or for operation) are multiple, including
situations where the legal and regulatory framework in the host country are not sufficiently developed and clear;
the level of unpredictability of the regulatory process makes external challenge and the over-turning of decisions
possible (likely); and the approval process remains untested or has not been used for a number of years.
Site characterization: Site selection poses technical, environmental and planning risks. Features such
as seismicity, availability of cooling water, proximity to population centres and environmentally sensitive
issues, inter alia, will impact on the detailed design, licensing and safety requirements, as well as on the level
of public acceptance. Furthermore, construction related considerations (e.g. availability of access roads and local
infrastructure) will also have important effects on the risk profile of a new investment.
Cost overruns: The length, complexity and magnitude of the construction works to be performed, and
the nature and volume of the equipment to be supplied for a new NPP make its procurement a major industrial
challenge, the costing of which remains a very difficult exercise. Furthermore, it is not only important to ensure
that the capital expenditure (CAPEX) budget is adequately detailed and sized, but also to define an appropriate
level of contingency in order to deal with the type of variations that typically tend to happen during the construction
period of any large infrastructure project. The fact that the economics of a new NPP are particularly sensitive to the
quantum of upfront CAPEXs and associated financing costs puts, therefore, a fresh focus on the potential for cost
overruns and their dramatic impact on the investment proposal.
Delays in construction: In addition to the series of construction and supply chain challenges to be typically
expected in the context of a large, capital intensive investment project, additional causes for delays can be
encountered, which are more specific to a nuclear new build. These include legal challenges, delays in the issuance
of permits or licences, and political events. As for cost overruns, the impact of a delay in construction is particularly
significant for an NPP. This is because additional costs, including capitalized IDC or financing costs, are likely to
be incurred for the period of the delay on the total amount of CAPEXs already incurred.
Plant completion: The completion of the commissioning, startup and testing of an NPP is a critical milestone,
during which the plant’s technical and operational performances are thoroughly tested. When such a completion
test has been passed, a formal handover of responsibilities can take place on the COD, which transitions the asset
from construction to the start of the commercial operation phase. Any failure to reach that milestone as originally
planned will have adverse effects on the investment’s profitability; such failures include delays or re-rating of
available capacity (e.g. reduced), which in turn are likely to lead to losses of revenues for the owner of the NPP.
Availability of associated infrastructure: The availability and reliability of the necessary infrastructure
required to support a new NPP — notably adequate grid capacity (through the rehabilitation of the existing grid
system, or the construction of new high voltage transmission lines) to dispatch the plant’s electrical output —
are critical components of plans to develop and finance a new NPP; any delay in dispatching a new NPP would
lead directly to a loss in sale revenues.
Project procurement and project delivery: The nature, complexity, length and magnitude of the development
and construction programme for a new NPP makes its procurement and the underlying contracting framework
to be developed a very challenging and critical matter. A different contracting approach to conventional power

15
projects is subsequently required, in particular with the signing of a ‘fixed price, fixed term’ EPC contract being a
relatively remote prospect. Ultimately, a comprehensive and cohesive contracting strategy needs to be developed
and implemented in order to, inter alia, establish prices and price escalation mechanisms; avoid any disruption in
construction activities (e.g. performance of works, deliveries of equipment and services), which could create delays
and/or cost overruns; and allocate the rights and obligations of the various relevant parties involved during the
period in question.

4.1.1.2. Operation related project risks

Plant performance: Although various completion tests need to be passed for an NPP to be completed and
to formally start its commercial operations, poor plant performance or management may subsequently occur
during operations, which may lead to loss of revenues. The risk of such underperformance can be increased if new
(modified) technology is employed, or if operating personnel are insufficiently experienced, for example.
Sales of electricity (volumes and prices): The (long term) contracting of electricity off-take is a key factor
supporting an investment proposal in a nuclear new build. Long term electricity off-take agreements have
traditionally offered a route to market, with a relative certainty as to the quantities of electricity to be sold and
predictability as to the price at which they will be sold. These contractual arrangements largely depend, however,
on the structure and regulation of the energy market in which an NPP operates. Any regulation or de-regulation
that would, in effect, increase merit order competition and priority dispatch for other technologies could, therefore,
shift an NPP into an increasingly load-following mode, which is characterized by lower dispatch levels and weaker
plant efficiency. As a consequence, its income would be put under pressure and the underlying profitability of the
investment proposal would be challenged.
Fuel supplies: The availability and stability of fuel supplies on a long term basis is critical for an NPP,
particularly in the context of the duration of the economic lives envisaged for the most recent reactor types
(e.g. Generation III). As with long term electricity off-take agreements, fixed term fuel supply agreements have
traditionally been used to ensure a relative certainty as to the quantities of fuel to be supplied and a predictability, in
this case as to the price at which these quantities will be purchased. However, these contractual arrangements also
usually incorporate certain particulars of the nuclear fuel market, which may have an impact on the economics of
the NPP and subsequently challenge the underlying profitability of the investment proposal.

4.1.1.3. Commissioning and operating related project risks

Insurance and insurability: As for any large scale investment in the infrastructure sector, a series of events
can occur during the construction or operation of an NPP, for which insurance coverage is available and, in certain
instances, even required. During the development, construction and operation phases, the insurance market will
typically provide similar types and levels of coverage as it would for insuring ‘conventional’ risk during the same
periods. However, certain risks to be covered by insurance arrangements change dramatically in nature, extent
and quantum as soon as nuclear fuel arrives on-site and is loaded. Nuclear risk exclusion clauses then apply for
the conventional market, and the national or international (re-)insurance pool takes over all nuclear and fire perils.
Such handover risk provides a potential exposure to coverage gaps, which may adversely impact on the appeal of
an investment proposal for a new NPP. Similarly, a nuclear new build project developed in a country where the
depth of insurance (and re-insurance) capacity available from the pool of insurers on the market (nationally or
internationally) would become insufficient could face large additional insurance related costs for its operations,
which would eventually put its margin from operations under stress, limiting its profitability.
Nuclear liabilities: Nuclear liability legal frameworks channel the responsibilities and liabilities for a nuclear
accident solely to the operator (e.g. the holder of the operating licence), exonerating other stakeholders, such as
vendors and contractors, from financially punishing nuclear liabilities in case of a nuclear accident. However,
national frameworks tend to differ with respect to liability thresholds and claims practices, which contribute to
developing the risk of insufficient or uncompetitively priced insurance capacity available worldwide. Under such
circumstances, the operator of an NPP could find it difficult to secure adequate insurance coverage for its operations,
and any such limitation would be likely to have a negative influence on the assessment of the investment proposal
by potential finance providers.

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 Commercial counterparties: In common with most investment projects, an important element of risk
management is, in principle, the sharing of risks, or the allocation of certain risks to third parties (e.g. contractors,
insurers or even financial markets) via contractual arrangements, depending on the nature of the risks and which
party is best able to manage them. However, such an approach is only effective if the party to which a particular
risk is transferred has not only the necessary technical capability and the relevant experience to fulfil the transferred
obligations (the nature, complexity and specificities of a nuclear project mean it would be challenging in most
cases to replace key contractors or suppliers easily, in particular during the construction phase), but also the
financial capacity to fulfil the financial commitments attached to these obligations (in particular, a key difference
betwen an NPP project and other projects relates to the quantum of risk transferred and the length of the obligations
undertaken).
Political risk: The specific exposure of an NPP to a broad range of events associated with, inter alia,
discriminatory changes in laws, regulations, policies and taxes means that, in addition to any readily available
political risk cover that may exist on the market, there is often a requirement for greater ‘tailor-made’ involvement
of the government (including quasi-governmental agencies and regulatory bodies) of the host country in the
context of a nuclear new build project, in particular in countries starting a nuclear programme. As a consequence,
the potential level of disruption to the development and the operations of an NPP — and thereby to the economics
of the underlying business case — that may result from the crystallization of any risk of a political nature can,
therefore, be dramatic.
Reputation: Public debate about nuclear energy remains polarized in many countries. It is also still considered
insufficiently mature (or developed in certain instances) by various stakeholders that are involved, directly
or indirectly, in the life of a nuclear project, in particular representatives of civil society and non-governmental
organizations. As a result, developing a new NPP usually triggers a broad range of discussions and debates in
connection with the reputational aspects of the project, both during its construction and its operation phases,
including the compliance with and the monitoring of strict health, social and environmental requirements.
Ultimately, a change in public attitudes can drive a change in a country’s (long term) energy policy, which can have
a severe impact on the long term economics of an NPP, or even on the whole industry itself, as illustrated recently
after the accident at the Fukushima Daiichi nuclear power plant in March 2011.
Force majeure: Force majeure events include in particular: war, acts of terrorism, civil unrest, general strikes,
earthquakes, flooding, etc. These events usually have heavy consequences for an investment, which could not be
foreseen in advance, and no particular stakeholder can be held directly responsible for their occurence.

4.1.1.4. Financing and funding related project risks

Capital structure: Whatever the model of funding structure pursued by the entity developing a new build
project, meeting the funding requirements of a new NPP is typically achieved through a combination of equity
and (long term) debt financing. The choice of an appropriate debt to equity ratio is, therefore, a critical structural
decision, which will not only exert an influence on the level of approach to the debt market needed, but will also
have an impact on a variety of key project indicators, including the WACC of the investment and its long term
profitability. Conversely, a misreading of the status of the markets (e.g. debt capital and banking markets) may lead
to a miscalculation of this ratio, which could leave a project exposed to a misallocation of the resources available
on the market and hence subject to funding stress, higher than expected profitability requirements, etc.
Availability of funds: Without fully committed funding in place at the outset and an adequate source of
contingent funding available, a new investment project can suffer from funding shortfalls during construction,
leading to programme delays and a deterioration in the economics of the project, or, at worst, an inability to
complete the plant. As noted, this risk is accentuated in the case of a nuclear new build project because of the long
construction periods involved and the magnitude of the overall funding requirements, the subsequent risk of delays
or cost overruns, and multiple extraneous factors, which can impact on the original commitments of the project’s
funders (both equity and debt).
Equity availability: Equity infusion by equity investors (e.g. shareholders) depends on their own ability to pay
their equity commitment in a timely manner and hence to access the necessary funds through corporate banking or
the capital markets, as and when needed and on acceptable (e.g. competitive) terms. Therefore, a credit and market

17
risk exists, which may have an impact on the economics of an NPP and subsequently on the attractiveness of the
underlying investment proposal.
(Long term) debt provision: Similarly, the commitment from debt providers is only as good as their ability to
lend to a project and the terms of the loan agreement(s). Even a fully committed debt plan from a group of strong
relationship banks remains subject to an element of financial risk until financial close. For example, a change in the
social and environmental policy or in the financial standing of a bank could see it take a very different view on a
nuclear project, including a revision of the level of its commitment, the financial terms and conditions it requires to
meet its internal profitability objectives, and the terms of its in-house approvals.
Foreign exchange and interest rates: The typical features of a large, capital intensive investment project
in infrastructure naturally point towards the need to assess the risk generated by (sudden) variations in currency
foreign exchange (FX) and interest rates, and their impact on the overall quantum of investment. For a nuclear
new build project, such risk arguably carries a bigger importance, in particular because in most cases the host
country will rely on imports of foreign technologies and services, as well as on foreign debt financing, to develop
a new NPP. As a result, it is likely that a substantial proportion of the total capital cost of the new NPP will be
denominated in a different currency from that of the host country; this may have a critical impact on a project’s
long term economics and hence on the underlying project investment proposal.

4.1.2. Developing a risk matrix

Risk may usefully be viewed as the combination of the probability of an event and its consequences, and in
particular, its financial impact. This combination can form the basis for the development of a risk matrix such as
that shown in Fig. 8. This shows a very common graphical approach to identifying the risks that are of particular
concern in the project. Clearly there is a sense in which the most critical risks to a project (those that should be the
focus of the most monitoring and mitigation efforts) are those that are both likely and damaging — i.e. those found
towards the top and right of the risk matrix. This is reflected via the coloration of the risk heat map, which depicts
the upper right hand of the matrix in red.
Those risks that, after consideration, are categorized as falling in the red area of the risk matrix would be the
primary focus of a prudent project risk management team. In the example in Fig. 8, Risk No. 12 is shown to be
judged such a risk. A typical risk matrix associated with a project would have a large number of risks (represented
by their numbers) scattered across the matrix shown, rather than just a single number.

4.1.3. Risk register I

Although the risk matrix shown in Fig. 8 is a simple intuitive tool for focusing attention on key project risks,
more information can be presented and acted upon in the form of risk register(s). The PRR, as shown in Table 2,
draws on the information in the risk matrix but provides more detail on the nature of the risk.

4.1.4. Risk register II

Based on, inter alia, the commercial and contractual environment envisaged for building and financing a new
NPP, the PRR shown in Table 2, the results of the financial projections and the various sensitivity tests derived
from the financial model, an allocation of the project risk needs to be developed between the various stakeholders
in order to define a base case for the investment proposal.
The development of an augmented PRR such as that shown in Table 3 — quantifying an economic allocation
of the various project risks between the stakeholders — is therefore a critical milestone in the path towards
structuring an investment in order to be in a position to raise long term financing in due course. It might also include
initial guidance for mitigating each high level risk, and the costs and responsibilities of the prescribed mitigation
strategies. As a consequence, the augmented PRR will evolve and be amended throughout the development
and preparation phase, with changes and modifications being incorporated as and when required (for example,

18
 VH

H 12
Probability

VL

VL L M H VH
Impact
FIG. 8.  Example of a risk matrix; in this example, Risk No. 12 is being evaluated. (Key: VH — very high; H — high; M — medium;
L — low; Vl — very low.)

depending on the progress made during negotiation with suppliers, contractors, etc.). Ultimately, the augmented
PRR would usually include:

—— An outline description of each project risk, and how it will affect the investment proposal;
—— An identification of the parties that should be responsible for managing each project risk and of the party or
parties best able to absorb the residual risk attached to such project risk (where the residual risk is any risk
left after allocation and mitigation of a project risk through contractual arrangements and/or the use of risk
management instruments; an example of such an arrangement is an ECA, which typically provides up to
95% insurance cover for commercial and political risk, leaving 5% residual risk);
—— The strategy and/or the various tools available in principle to mitigate each project risk.

Table 3 illustrates how an augmented PRR might be used to capture some of the high level risks of a new
NPP project.

Text cont. on p. 32

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TABLE 2. EXAMPLE OF A PRR

Category Risk Probability rating Impact on project costs

DEVELOPMENT PHASE

Licensing, permitting Substantive issues with generic design leading Medium to high Medium to high
to licensing and/or permitting related issues
(including delays, extra costs, etc.)

Site characterization Substantive issues with selection of site Medium Medium

Social and environmental Substantive issues (including process related) Medium to high Medium
with social and environmental aspects of (depending on political environment and
the project attitudes of general public)

Reputational Substantive issues with reputational aspects of Medium to high High

the project (including nuclear proliferation, (depending on political environment and
underperforming technology) attitudes of general public)

Reservation of long lead materials, Delayed availability of long lead materials Low Low
production slots (including extra costs) (but could have cost impact, if decision
is made to purchase critical components early,
Delayed availability of production slots
as expenditures will be moved forward in the
project schedule)

Political List of events to be agreed by the parties, Medium to high Medium

but to include discrimination against supplier (depending on political environment, attitudes
of foreign technology, foreign investments of general public and of surrounding countries)

Commercial and contractual structure Substantive issues with regard to the integration Low to medium Medium
and management of various contracts for the (but very adviser intensive and a critical area
construction phase (and also of contractors), for project success, in order to create proper
leading to onerous project procurement and management and commercial structure to
challenging project management attract foreign investors)

CONSTRUCTION PHASE

Design Substantive issues with detailed design choices Low (if reference plant) to medium Low (if reference plant) to medium
leading to construction or operation related
issues (including extra costs, lower
performance, etc.)
 TABLE 2. EXAMPLE OF A PRR (cont.)

Category Risk Probability rating Impact on project costs

Technology Substantive issues with choice and/or Low (if reference plant) to high Low (if reference plant) to high
combination of technologies selected

Technical Higher than expected costs and/or longer time Low (if reference plant) to high Low
to completion, leading to higher borrowing
requirements, lower returns, etc.

Cost overruns Higher than expected costs leading to higher Medium (subject to reference plant experience High
funding requirements, lower returns, tighter and execution model, if it can be replicated) to
debt service cover ratios, greater exposure for high (given nuclear power’s overall history)
the government of the host country, etc.

Delays Longer than expected time to completion, Medium (subject to reference plant experience High
leading to higher costs, higher funding and execution model, if it can be replicated) to
requirements, lower returns, greater exposure high (given nuclear power’s overall history)
for the government of the host country, etc.

(Equity) funding Lack of sufficient funds for reaching Medium to high High
completion (if seeking foreign equity — project Lower (if looking to refinance after COD)
structuring will be critical in attracting
‘outside’ equity)

FX Adverse movements in local currency and/or Low to medium Low to medium

other currencies (appropriate hedging strategies to be
implemented)

Interest rates Higher than expected all-in interest rate leading Low to medium Low to medium
to larger investment costs (e.g. IDC), higher (appropriate hedging strategies to be
than expected borrowing requirements and implemented)
thinner cover ratios

Insurance Higher than expected insurance costs and/or Low Low

(business and property) non-availability of proper insurance cover
(excluding acts of terrorism)
Higher than expected insurance costs and/or
non-availability of proper insurance cover
(acts of terrorism)

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TABLE 2. EXAMPLE OF A PRR (cont.)

Category Risk Probability rating Impact on project costs

Political List of events to be agreed by the parties, Medium to high Medium

but to include in particular discriminatory (depending on political environment, attitudes
changes in law, including changes in taxes of general public and of surrounding countries)
or project abandonment

Force majeure List of events to be agreed by the parties, but Low Low to medium
typically including events outside the control of (common risk for all major infrastructure
either party such as catastrophic weather related projects)
events such as flooding and earthquakes

Social and environmental (Non-nuclear) incident (during construction or Medium to high Medium
testing phase) (depending on political environment and
attitudes of general public)

Reputational Substantive issues with reputational aspects of Medium to high Medium to high
the project in connection with construction
(including poor monitoring of health, social,
environmental requirements)

Nuclear incident Major pollution and/or hazard to population Low Low

(very unlikely at this stage) (very unlikely at this stage)

Construction completion Reduced performance (capacity available, Low to medium Medium

plant efficiency) of the newly built units,
leading to lower than expected cashflows
stretching the overall profitability of the
completion project

Commissioning (e.g. period between Authorizations not all being granted on time by Low to medium Medium
plant completion and start of the relevant control/safety authorities etc. (given proven technology, but depending on
commercial operations) prior experience of nuclear regulatory
authority)
 TABLE 2. EXAMPLE OF A PRR (cont.)

Category Risk Probability rating Impact on project costs

OPERATION PHASE

Operation Reduced performance, leading to lower than Low Low

(reduced availability and/or expected level of electricity generated and/or
reduced dispatch) increased operation and maintenance (O&M)
expenses stretching the overall profitability of
the completion project

Fuel supply Increased fuel related expenses stretching the Low Low
(quantities and prices) overall profitability of the completion project

Electricity sales Lower than expected cashflows stretching the Medium to high Medium to high
(quantities and prices) overall profitability of the completion project

FX Adverse movements in local currency and/or Low to medium Low

other currencies (appropriate hedging strategies to be
implemented)

Interest rates Higher than expected all-in interest rate leading Low Low
to more important debt service obligations and (appropriate hedging strategies to be (appropriate hedging strategies to be
thinner cover ratios implemented) implemented)

Insurance Higher than expected insurance costs and/or Low Low

(business and property) non-availability of proper insurance cover
(excluding acts of terrorism)
Higher than expected insurance costs and/or
non-availability of proper insurance cover
(acts of terrorism)

Insurance Higher than expected insurance costs and/or Medium Medium

(civil liability for nuclear damage) non-availability of proper insurance cover

Political List of events to be agreed by the parties, Medium to high Medium to high
but to include in particular discriminatory (depending on political environment, attitudes
changes in law, including changes in taxes or of general public and of surrounding countries)
project abandonment

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TABLE 2. EXAMPLE OF A PRR (cont.)

Category Risk Probability rating Impact on project costs

Force majeure List of events to be agreed by the parties Low Low

Social and environmental (Non-nuclear) incident (during operation phase) Medium Medium

Reputational Substantive issues with reputational aspects of Medium to high Medium

the project in connection with operations
(including poor monitoring of health, social,
environmental requirements)

Nuclear incident Major pollution and/or hazard to population Low High

(proven Gen. III technology, with experienced
operator (assumed))

Spent fuel / waste management Ultimately, higher than expected financial Low Low to high
obligations (as long as being performed in accordance
with international best practices)

Decommissioning Ultimately, higher than expected financial Low Low to high

obligations (as long as a plan is developed in accordance
with international best practices)

International professional Changes in (international) standards Medium Medium

externalities (as it is an unknown and could result in
additional project costs)
 TABLE 3. EXAMPLE OF (AUGMENTED) PRR

Parties likely to be best positioned to

Category Risk Risk mitigation tools available
manage and mitigate risk

DEVELOPMENT PHASE

Licensing, permitting Substantive issues with generic design leading — Vendor (e.g. supplier of nuclear steam — Procurement strategy
to licensing and/or permitting related issues supply system (NSSS)) — Project management
(including delays, extra costs, etc.) — Safety authority of vendor’s country and/or
safety authority of host country

Site characterization Substantive issues with selection of site — Owner/Owner’s engineer — Project management

Social and environmental Substantive issues (including process related) — Owner of the NPP — Procurement strategy
with social and environmental aspects of the — Vendor — Project management
project — Communication strategy
— Financing strategy (close relationship with
ECAs in order to raise long term debt
financing)

Reputational Substantive issues with reputational aspects of — Owner of the NPP (shareholders may also — Procurement strategy
the project (including nuclear proliferation, be instrumental) — Project management
underperforming technology) — Vendor — Communication strategy
— Government of host country — Financing strategy (close relationship with
— Safety authority of host country and/or ECAs in order to raise long term debt
safety authority of the vendor’s country financing)

Reservation of long lead materials, Delayed availability of long lead materials — Owner of the NPP — Procurement strategy
production slots (including extra costs) — Vendor/supplier of turbine island — Project management
Delayed availability of production slots — Supplier(s) of key components — Insurance coverage

Political List of events to be agreed by the parties, — Vendor — Insurance coverage

but to include in particular discrimination — Owner of the NPP — Comfort, undertakings, etc. provided by the
against supplier of foreign technology, — Insurers (including ECAs) government of the host country
foreign investments — Government of host country

25
26
TABLE 3. EXAMPLE OF (AUGMENTED) PRR (cont.)

Category Risk Parties likely to be best positioned to Risk mitigation tools available
manage and mitigate risk

Commercial and contractual structure Substantive issues with regard to the integration — Shareholders of the owner of the NPP — Procurement strategy
and management of various contracts for the — EPC contractor (if any) — Commercial strategy
construction phase (and also of contractors), — Vendor (if relevant) — Contracting strategy
leading to onerous project procurement and — Government of host country — Financing strategy
challenging project management (if contractual structure derived from — Comfort, undertakings, etc. provided by
its requirements/demands) the government of the host country

CONSTRUCTION PHASE

Design Substantive issues with detailed design choices — Vendor — Choice of reactor type
leading to construction or operation related — EPC Contractor (if any)
issues (including extra costs, lower — Owner of the NPP
performance, etc.) — Safety authority of host country
— Government of host country
(if design faults resulting from changes
ordered by host country’s agencies)

Technology Substantive issues with choice and/or — Owner of the NPP — Procurement strategy
combination of technologies selected — Government of host country
(if choice resulting from demands by host
country’s agencies)

Technical Higher than expected costs and/or longer time — Vendor — Procurement strategy
to completion, leading to higher borrowing — EPC contractor (if any) — Project management
requirements, lower returns, etc. — Owner of the NPP — Contractual arrangements (including
— Shareholder(s) of the owner of the NPP provisions for penalties, liquidated damages
— Financiers (LDs))
— Insurers — Financial products (including letters of
credit, suppliers’ guarantees, standby equity
and loans)
— Insurance coverage
 TABLE 3. EXAMPLE OF (AUGMENTED) PRR (cont.)

Category Risk Parties likely to be best positioned to Risk mitigation tools available
manage and mitigate risk

Cost overruns Higher than expected costs leading to higher — Vendor — Procurement strategy
funding requirements, lower returns, tighter — EPC contractor (if any) — Project management
debt service cover ratios, greater exposure for — Owner of the NPP — Contractual arrangements (including
the government of the host country, etc. — Shareholder(s) of the owner of the NPP provisions for penalties, LDs)
— Financiers — Financial products (including letters of
— Insurers credit, suppliers’ guarantees, standby equity
and loans)
— Insurance coverage

Delays Longer than expected time to completion, — Vendor — Procurement strategy

leading to higher costs, higher funding — EPC contractor (if any) — Project management
requirements, lower returns, greater exposure — Owner of the NPP — Contractual arrangements (including
for the government of the host country, etc. — Shareholder(s) of the owner of the NPP provisions for penalties, LDs)
— Financiers — Financial products (including letters of
— Insurers (including ECAs) (relevant credit, suppliers’ guarantees, standby equity
insurance coverage) and loans)
— Insurance coverage

(Equity) funding Lack of sufficient funds for reaching — Shareholder(s) of the owner of the NPP — Contractual arrangements (including
completion — Financiers provisions for standby equity and loans,
— Insurers shareholders’ loans)
— Government of host country (funding of — Financial products (including letters of
local portion) credit, shareholders’ guarantees)
— Insurance coverage

FX Variations of local currency and/or other — Contractor(s) — Procurement strategy (including maximized
currencies — Shareholder(s) of the owner of the NPP portion in local currency in contractual
— Owner of the NPP arrangements, match between currencies of
— Financiers sources of funds and currencies of expenses)
— Contractual arrangements (for purchases and
sales, if any)
— Financial products (including FX hedges,
currency swaps)

Interest rates Higher than expected all-in interest rate leading — Contractor(s) — Contractual arrangements (possibly)
to larger investment costs (e.g. IDC), higher — Shareholder(s) of the owner of the NPP — Financial products (including interest rate
than expected borrowing requirements and — Owner of the NPP hedges, interest swaps)
thinner cover ratios — Financiers

27
28
TABLE 3. EXAMPLE OF (AUGMENTED) PRR (cont.)

Category Risk Parties likely to be best positioned to Risk mitigation tools available
manage and mitigate risk

Insurance Higher than expected insurance costs and/or — Contractor(s) — Insurance strategy and insurance coverage
(business and property) non-availability of proper insurance cover — Shareholder(s) of the owner of the NPP
(excluding acts of terrorism) — Owner of the NPP
— Government of host country (in particular
Higher than expected insurance costs and/or
for insurance against acts of terrorism)
non-availability of proper insurance cover
(acts of terrorism)

Political List of events to be agreed by the parties, — Insurers — Insurance coverage

but to include in particular discriminatory — Independent safety authority and/or — Comfort, undertakings, etc. provided by the
changes in law, including changes in taxes or regulator in host country government of the host country
project abandonment — Government of host country

Force majeure List of events to be agreed by the parties, but — Insurers — Insurance coverage (to some extent)
typically including events outside the control of — Government of host country (subject to
either party such as catastrophic weather related contractual arrangements)
events, e.g. flooding and earthquakes

Social and environmental (Non-nuclear) incident (during construction or — Vendor — Project management
testing phase) — Owner of the NPP — Insurance coverage (if any)
— Insurers

Reputational Substantive issues with reputational aspects of — Owner of the NPP — Project management
the project in connection with construction — EPC contractor (if any) — Communication strategy
(including poor monitoring of health, social, — Vendor
environmental requirements) — Government of host country
— Safety authority of host country and/or
safety authority of the vendor’s country

Nuclear incident Major pollution and/or hazard to population — Owner of the NPP — Project management
— Insurers — Insurance/re-insurance strategy and
— Government of host country insurance coverage
— Potential recourse to the government of the
host country under certain circumstances
 TABLE 3. EXAMPLE OF (AUGMENTED) PRR (cont.)

Category Risk Parties likely to be best positioned to Risk mitigation tools available
manage and mitigate risk

Construction completion Reduced performance (capacity available, — Vendor — Project management

plant efficiency) of the newly built units, — EPC contractor(s) — Procurement strategy
leading to lower than expected cashflows — Owner of the NPP — Contractual arrangements (including
stretching the overall profitability of the — Insurers provisions for performance guarantees, LDs)
completion project — Insurance coverage

Commissioning (e.g. period between Authorizations not all being granted (on time) — Vendor — Project management
plant completion and start of by the relevant control/safety etc. authorities — EPC contractor (if any) — Contractual arrangements (including
commercial operations) — Owner of the NPP provisions for performance guarantees)
— Insurers — Insurance strategy and insurance coverage
— Safety and/or regulatory authority

OPERATION PHASE

Operation Reduced performance, leading to lower than — Owner of the NPP — Contractual arrangements (for O&M,
(reduced availability and/or reduced expected level of electricity generated and/or — O&M service supplier with provisions for penalties, LDs)
dispatch) increased O&M expenses stretching the overall — Insurance strategy and insurance coverage
profitability of the completion project

Fuel supply Increased fuel related expenses stretching the — Owner of the NPP — Contractual arrangements (for supplies,
(quantities and prices) overall profitability of the completion project — Fuel supplier(s) with provisions for penalties, LDs)
— Insurance strategy and insurance coverage

Electricity sales Lower than expected cashflows stretching the — Owner of the NPP (diversification of sales — Contractual arrangements (for sales,
(quantities and prices) overall profitability of the completion project arrangements) with provisions for penalties, LDs)
— Insurance strategy and insurance coverage

FX Variations of local currency and/or other — Owner of the NPP — Contractual arrangements (for sales and
currencies against units of account — Insurers purchases, including diversification of
purchase/sales arrangements to match
currencies of revenues with currencies of
expenses)
— Financial products (including FX hedges,
currency swaps)
— Insurance strategy and insurance coverage
— Dividend policy (flexibility in dividend
requirements)

29
30
TABLE 3. EXAMPLE OF (AUGMENTED) PRR (cont.)

Category Risk Parties likely to be best positioned to Risk mitigation tools available
manage and mitigate risk

Interest rates Higher than expected all-in interest rate leading — Owner of the NPP — Contractual arrangements (possibly)
to more important debt service obligations and — Financial products (including interest rate
thinner cover ratios hedges, interest swaps)

Insurance Higher than expected insurance costs and/or — Owner of the NPP — Insurance strategy and insurance coverage
(business and property) non-availability of proper insurance cover — Insurers
(excluding acts of terrorism) — Government of host country (in particular
for insurance against acts of terrorism)
Higher than expected insurance costs and/or
non-availability of proper insurance cover
(acts of terrorism)

Insurance Higher than expected insurance costs and/or — Owner of the NPP — Insurance/re-insurance strategy and
(civil liability for nuclear damage) non-availability of proper insurance cover — Insurers insurance coverage
— Government of host country

Political List of events to be agreed by the parties, — Insurers — Insurance coverage (including ECA,
but to include in particular discriminatory — Government of host country PRI cover)
changes in law, including changes in taxes or — Independent regulator — Comfort, undertakings, etc. provided by
project abandonment the government of the host country

Force majeure List of events to be agreed by the parties — Insurers — Insurance coverage (to some extent)
— Government of host country (subject to
contractual arrangements)

Social and environmental (Non-nuclear) incident (during operation phase) — Owner of the NPP (well specified O&M — Contractual arrangements (including well
guarantees) specified O&M guarantees)
— Insurers (relevant insurance cover) — Project management
— Insurance coverage (if any)

Reputational Substantive issues with reputational aspects of — Owner of the NPP — Project management
the project in connection with operations — O&M service company (if any) — Communication strategy
(including poor monitoring of health, social, — Government of host country
environmental requirements) — Safety authority of host country
(and/or safety authority of vendor’s
country)
 TABLE 3. EXAMPLE OF (AUGMENTED) PRR (cont.)

Category Risk Parties likely to be best positioned to Risk mitigation tools available
manage and mitigate risk

Nuclear incident Major pollution and/or hazard to population — Owner of the NPP — Insurance/re-insurance strategy and
— Insurers insurance coverage
— Government of host country — Potential recourse to the government of
the host country under certain circumstances

Spent fuel / waste management Ultimately, higher than expected financial — Owner of the NPP — Project management
obligations — Insurers — Financing strategy
— Government of host country — Insurance strategy (subject to any relevant
insurance cover being available on the
market)
— Potential recourse to the government of
the host country under certain circumstances

Decommissioning Ultimately, higher than expected financial — Owner of the NPP — Project management
obligations — Insurers — Financing strategy
— Government of host country — Potential recourse to the government of
the host country under certain circumstances

International professional Changes in (international) standards — Owner of the NPP — Contractual arrangements (including
externalities — Financiers (flexibility in coverage ratios, flexibility in commercial and contractual
granting extension of mitigation periods, structure)
etc.)
— Government of host country

31
 Finally, it may be noted that beyond the search for the ‘best’ allocation of the project risk possible between
the various stakeholders, the owner of the new NPP — and also to a great extent, its equity shareholder(s) — must
acknowledge early in the new build development process the need to develop a bankable investment proposal.
Under current market circumstances, such a proposal is ‘typically’ most likely to be supported by a robust ownership
and commercial structure backed by an appropriate mitigation plan. In most cases,4 bankability is a critical hurdle
that needs to be overcome.

4.2. RISK ALLOCATION

Risk sharing and risk allocation are key aspects of the developing and the financing of a nuclear new build
project, in particular during the period running up to the completion of the NPP — as well as during the early years
of commercial operations, during which ‘typical’ teething problems for a new NPP are rectified. In that context, a
key principle when allocating risk is to transfer all, or part of it to the party best able to manage it. Based on that
underlying principle, the party to which a risk is transferred takes ownership of it, e.g. becomes responsible for the
performance of the underlying rights and obligations, including any of the financial liabilities attached to them.
This notion — of efficient risk allocation — will be discussed in Section 4.2.2.
A typical approach towards risk mitigation relies on the combined use of a set of different tools, namely:
(a) financial instruments; (b) appropriate procurement strategies; and (c) tailor-made contractual arrangements in
connection with the delivery of the investment (discussed in greater detail in Section 4.2.8.).

4.2.1. Risk allocation via contract language

In discussing the allocation of risks between different stakeholders in a new build NPP project, it is clearly
important to understand how these risks are allocated — i.e. the use of contract language to identify the ‘owners’ of
particular risks.
The following (annotated) language may be found in a contract between a project developer and an EPC
contractor:

The contractor undertakes to construct a power plant with a (net) capacity of 900 MW(e) [Point A in Fig. 9]
for the sum of US $4 billion [Point B in Fig. 9].

The contractor will pay for replacement power for each day in excess of ten in any year in which unplanned
outages exceed 10 days [Point C in Fig. 9].

The contractor will also pay for replacement power for every day on which the plant is not synchronized
to the grid after 1 January 2025 [Point D in Fig. 9], except for delays caused by unreasonable regulatory
performance [Point E in Fig. 9].

The way in which contract language is used to define risk ownership (i.e. who is exposed to a particular risk
under the terms of the contract) may be understood by referring to Fig. 9, which illustrates the allocation of several
risks between a project developer (who may also take on an owner–operator role after the commissioning of the
new NPP) and an EPC contractor. As reflected in Fig. 9, the risk that the 900 MW(e) design capacity envisaged
for the NPP is not achieved is assigned to the EPC contractor via the language that precedes [A] in the pro forma
contract language above. The risk of construction cost overruns is also assigned to the EPC contractor, via the
‘fixed price’ language marked [B].
The risk that design performance is not achieved is allocated to the EPC contractor via the requirement that
they pay for replacement power in the circumstance described in [C]; the EPC contractor also owns the risk of
schedule delay [D] except insofar as such delay is due to regulatory delay (per the ‘carve out’ in [E] which assigns

4
With the exception of the sovereign model, the other ownership and commercial models have recourse, either directly or
indirectly, to (long term) debt in order to part-finance the investment.

32
 Regulatory
delay

Project
Inadequate Developer/OO Exchange rate
demand risk

F G

Design
Schedule
performance
delays
not achieved
D EPC Contractor C

Design capacity Construction

not achieved cost overrun
A B
FIG. 9.  Allocation of EPC risks. (OO — owner–operator.)

this risk to the project developer). Insofar as they are not mentioned in the contract language, demand (market) risk
and exchange rate risk default to the developer, as shown by [F] and [G].

4.2.2. Concept of the ‘risk premium’

The idea that a project developer who seeks to allocate risk to another stakeholder in a new build NPP project
will have to pay a risk premium in order to do so is best introduced by way of an example.
An example is the development of a 15 year agreement between a project developer (who intends to own and
operate the NPP, at least initially) and a nuclear fuel supplier. The price of U3O8 (as well as the prices of separative
work units during the enrichment process, the price of zirconium etc.) is somewhat volatile; if the developer were
to insist on a price for fuel that was fixed throughout the duration of the contract, the fuel supplier would demand a
risk premium. This risk premium would be reflected in the fuel price. Supposing that the U3O8 price for the duration
of the contract was projected to average US $100/kg, and that this was consistent with fuel price of p* per fuel
assembly, if the fuel supplier agreed to own the risk it would insist on a price of p' where p' > p*. In this example,
p' − p* is the risk premium.
Typically, the size of risk premium demanded by a party will depend on a range of factors, including:

—— The size of the risk (in terms of its volatility and absolute monetary value);
—— The financial capacity of the potential risk owner’s relative size of the risk;
—— The potential risk owner’s ability to control the risk (discussed further in Section 4.2.3).

33
 In the course of the canonical negotiation process that was shown in Fig. 1, it is important for the project
developer to recognize that although a small stakeholder with limited financial capacity might be willing to bear
a large volatile risk that it cannot control, it will demand a large risk premium for doing so. In that context it
would likely be preferable for the developer to retain that risk itself. In general, the developer should avoid forcing
ownership of particular risks on to reluctant stakeholders if it wishes to avoid incurring a set of risk premiums
which are so large as to render the project’s economics non-viable.

4.2.3. Efficient risk allocation

A frequently quoted principle of risk allocation is that a given (type of) risk should be allocated to the
stakeholder best able to manage it. For example, as far as schedule delay risk is concerned, it should be borne by the
EPC contractor as the project stakeholder best placed to ensure that the project is delivered on time (and, hopefully,
on budget). However, in practice, schedule delay risk is often shared between the EPC contractor and others
(typically the project developer).
One instance in which this ‘golden rule’ of risk allocation may be broken is discussed in Section 3.3; sometimes
risks are simply unmanageable or uncontrollable by any of the stakeholders in a project. In addition, three other
circumstances can arise in which the usual rule of efficient allocation may have only limited applicability.
Firstly, the nature of some activities that will determine the success or failure of a project is such that the
outcomes are jointly determined. For example, both the EPC contractor and operator will determine post-completion
operational performance, through the quality of the construction carried out and the operating practice, respectively.
In this circumstance, it may be challenging to induce the contractor to agree to be held generally responsible for, for
example, the frequency of unplanned outages. More broadly, it could be argued that in fact it would not be desirable
to have the EPC contractor solely at risk of financial loss (through, for example, the inclusion of liquidated damage
provisions in the EPC contract language). Where joint effort is necessary for a project activity to be carried out
successfully it is often desirable for all parties to be exposed to at least some financial risk, i.e. to be incentivized
(through potential financial loss) to carry out the subactivities for which they are responsible in a diligent fashion.
Secondly, it may be possible that even where a project activity is in principle controllable by a project
stakeholder, the potential losses that may fall to the risk owner in the event of the potential harm occurring are so
great as to lead to significant financial distress, or even bankruptcy. This may lead to reluctance on the part of, for
example, EPC contractors and/or the nuclear steam supply system (NSSS) vendors with whom they often form
consortia, to carry out a project to stake their organization’s future on projects being completed on time and on
budget.
Thirdly, where the costs likely to arise from activities to be carried out during the life cycle of a project are
extremely uncertain — defying quantification, perhaps because no data exists that would allow such quantification
— stakeholders may be very reluctant to own them. One example of such uncertainty may be said to surround the
costs of spent nuclear fuel disposal. While a preferred technical approach to this problem has enjoyed considerable
support (deep geological repository approach), no civilian deep geological repository has yet been constructed, and
the costs of such an approach are highly uncertain. Fear of potentially being exposed to such unknown costs has
been suggested as a factor underlying the reluctance of some commercial banks to become involved in new build
NPP projects; the innovative waste contract approach of the Government of the United Kingdom may be viewed as
an attempt to address this reluctance by placing an upper limit on potential spent nuclear fuel disposal costs.

4.2.4. Key stakeholders’ objectives and risk appetites

In addition to the factors outlined in Section 4.2.2, differences in key stakeholders’ willingness to bear risk
— as reflected in the size of the risk premium that they will require in order to induce them to bear that risk — will
be driven in part by their differing objectives in participating in an NPP project, as well as the different nature of
such participation. For example, a long term equity investor has a different economic rationale when investing in a
nuclear new build than a contractor providing a defined service on a fixed term basis has; the former can expect to
share in the project’s success if it proves more profitable than anticipated, while the latter has no such expectation.
Similarly, utility and non-utility investors (such as vendors, electricity off-takers and suppliers) will have different
objectives and hence will demand different risk premiums in return for bearing particular risks.

34
 The basic relationship between different stakeholders’ objectives and their willingness to bear risk is
relatively straightforward: insofar as stakeholders aim and expect to receive benefits of a non-financial nature
from participating in a project, they will be willing to accept somewhat reduced financial benefits (including lower
risk premiums) for bearing a given share of a particular risk, or to accept a greater share of that risk, or both. For
example, an NSSS supplier that wishes to sell its technology into a particular jurisdiction or region for the first
time — thus demonstrating its acceptability or perceived safety — may be more willing to demand a lower risk
premium for providing short term financing to an NPP project than would a commercial bank that stands to benefit
at best from interest payments and the return of the principal.
Acknowledging the objectives of different key stakeholders — and the likely limits of their risk acceptance
and return requirements — will help the developer (and potential future owner–operator) of the new NPP to define
and predict the overall cost of capital of the investment under consideration. Such an understanding will generally
be of assistance to all potential stakeholders during the project development phase when the investment proposal
is structured and the roles and responsibilities of the various stakeholders are defined and subsequently contracted.
A brief outline of the broad range of objectives that can be pursued by various key stakeholders is provided
in Table 4 for illustrative purposes.

TABLE 4.  EXAMPLE OF SELECTED KEY STAKEHOLDERS’ PRIMARY ECONOMIC CONSIDERATIONS

Key stakeholders
Selected key
objectives/requirements Host country
Shareholders Debt providers Owner of NPP Contractor
government

Dividends  1

Capital appreciation 

Interest payment 

Technology transfer 

Security of supplies  

Asset diversification   

Construction works EPC contractor

Vendor, equipment
Supplies (goods and services)
suppliers

Management services O&M operator

Fuel services  Fuel supplier(s)

Supplies of electricity  Off-taker 

Waste management services (service provider) 2

Decommissioning services (service provider)

1
The government of the host country can also be a shareholder.
2
It is assumed here that the government of the host country is ultimately responsible for the final disposal of waste.

35
4.2.5. Risk allocation via international financial and insurance markets

Certain classes of risks, particularly those that are typically thought of as being the most purely financial
in nature, such as the risk of adverse exchange rate or interest rate movements, may be most efficiently allocated
to participants in international financial and insurance markets. To accomplish this, the NPP project developer
— or any project stakeholder who has assumed this type of risk — may enter into contracts (‘instruments’) such
as those that are typically traded on major international exchanges. A broad range of insurance and financial
instruments are readily available on the market, including forward contracts, futures contracts, swaps and options
(these terms are defined in the Glossary).
The selection and use of appropriate tools to mitigate risk is a complex task, which depends not only on
the particulars of a project, but also on, inter alia: the nature of the risk to be mitigated; the overall ownership
and commercial structure selected to develop and procure the investment; the contractual obligations of the
various stakeholders and their risk profile; and the contractual arrangements agreed to support the delivery of the
investment.
It is, therefore, challenging to define generic guidelines for combining appropriate products and strategies
that would be applicable in all instances. However, when focusing on selected a number of risks of an arguably
‘purer’ financial nature, the use in principle of the relevant instruments may become more straightforward, as
shown in Table 5. This is primarily because instruments have been developed and standardized to that effect, and
these are traded on various market places, thereby commoditizing them. Table 5 provides an outline of the different
approaches that may be followed to mitigate risks of a more purely financial nature; procurement and contractual
strategies will be discussed in Section 4.2.8.

TABLE 5.  EXAMPLES OF RISK MITIGATION TOOLS

Risk mitigation tool Risk covered

Off-the-shelf products
Financial products such as forward contracts, ——Changes and variations in:
futures contracts, swaps and options ●●Commodity prices
Insurance products ●●Interest rates
●●Foreign exchange rates
●●Credit standing
——Currency transferability (repatriation)
——Change in legal, regulatory and political environment with a financial impact
(e.g. change in tax regime, etc.)

Tailor-made products

Escalation formulas ——Changes and variations in:

●●Commodity prices
●●Interest rates
●●Foreign exchange rates

Procurement and contractual strategies

Procurement strategies ——Changes and variations in:

Commercial and contractual arrangements ●●Commodity prices
●●Interest rates
●●FX rates
——Currency transferability (repatriation)
——Financing (sourcing)
——Delays in investment delivery
——Funding shortage
——Change in legal, regulatory and political environment with a financial impact
(e.g. change in tax regime, etc.)

36
4.2.6. Risk allocation via ownership

As already mentioned, there are various factors and circumstances that have an impact on the degree of risk
transfer that can be sought, and that is actually achieved between the parties, and hence on the allocation of the
financial risk between the various stakeholders. Among them, the choice of an ownership and corporate structure to
develop and finance a new project is a critical decision with important consequences, in particular the decision on
the commercial and contractual environment to be put into place in order to deliver the investment proposal. The
choice to opt for a corporate based financing structure, or for a transaction based (‘project finance’ type) structure
is, therefore, a structural decision.
In principle, there are three models of ownership and commercial structure that can be envisaged for an
investment in a nuclear new build project: (a) the sovereign model; (b) the corporate model; and (c) the project
finance model. A brief description of each is provided below.
Under the sovereign model, the investment proposal for a new NPP is undertaken under the leadership of
the government of the host country. The investment is financed through contributions from the state budget and/or
national borrowing. In most cases, any borrowing will take place as part of the government’s overall borrowing
programme (by selling medium to long term bonds to institutional investors), rather than being tied to a specific
project. Government debt has traditionally been regarded as being ‘safe’.5 This is because most governments
are highly likely to repay their debt, since they have the power to raise (increase) taxes, hence ensuring an
uninterrupted access to a reliable source of stable revenues. Under the sovereign based model, the financial risk
that the investment will not generate revenues sufficient to cover its costs and deliver a return is ultimately borne
by the taxpayers in the host country. A relatively straightforward contractual framework is needed to structure an
investment proposal in that context.
Under the corporate model, the investment proposal is undertaken by a corporation, which can be public
or private. The new investment will most likely be financed through a combination of debt and equity, and the
investment will appear on the balance sheet of the owner of the new NPP. Under that model, debt will be raised on
commercially driven terms, and the lenders will most likely have a claim against the company’s entire cashflow,
unless it is secured against a particular asset. As a result, the financial risk that the investment will not generate
sufficient revenues to cover its costs and make a profit is borne by the various finance providers (although such
risk is borne primarily by the shareholders, since the lenders have a priority claim on the revenues and the assets
of the borrower). Similarly to the sovereign based structure, some contractual framework is needed to structure the
investment proposal. It may need, however, to be more comprehensive and detailed than in the case of a sovereign
structure.
Under the project finance model, a special purpose vehicle (SPV) is established by a group of shareholders
in order to procure and finance the investment: the new NPP will be the main asset on the SPV’s balance sheet.
As with the corporate based model, the project will typically be financed through a combination of (long term)
debt and equity. However, a key difference is that during the operation phase the lenders will only have recourse
to the revenues generated by the new NPP and the assets of the project company. They will not have access to
other revenues and/or assets of the shareholders of the SPV, although some form of (limited) recourse to said
shareholders is often be found during the construction period. This ring fencing is achieved through a set of detailed
contractual arrangements whereby the lenders have no right, in any circumstances, to revenues or assets other than
those of the project itself. The contractual environment to be considered under that model needs, therefore, to be
comprehensive and very detailed in order to define exhaustively and precisely the rights and obligations of the
various stakeholders. It is important to note that no NPP in the world has ever been project financed to date owing
to, inter alia, the complexity of this corporate model and the difficulty to put it into place for a nuclear new build
project.
It should be noted that the ownership and commercial structures presented above are neither definitive nor
exclusive. Combinations and/or variations may be considered, which may provide some flexibility and room for a
degree of financial innovation in order to suit the specific requirements of a particular investment.

5
Until 2008, sovereign debt was seen by investors as ‘safe’ as a matter of principle (although there was obviously a different
perception of the credit quality, and hence of the risk, of e.g. the government of a stable developed country when compared with that
of an emerging country); as a consequence of the financial crisis that has been shaking the financial markets since then, investors have
rediscovered the reality of the sovereign risk, and have subsequently re-priced it.

37
 It should also be noted that the economic, legal and regulatory environment in which the owner of the new
NPP will operate and in which the new build project must be developed places de facto limits around these models.
This is because such an environment directly frames the contractual relationship between the different models
relative to risk, hence impacting on the possibility to freely allocate risk between the stakeholders in a project. This
is illustrated in Fig. 10.
Depending on the degree of unbundling (i.e. separation of the different functions typically to be found in a
vertically integrated utility, e.g. the electricity generation, transmission and distribution activities) and liberalization
of the electricity market in the host country, a new build investment proposal may (or may not) be more likely to
be developed based on the sovereign or the corporate model, rather than on an ownership and commercial structure
shaped by project finance techniques — although it is important to note that no new NPP has been project financed
to date.
Depending on the level of risk that can be transferred from the public to the private sector, a new build
investment proposal may (or may not) be developed based on the corporate model, rather than on the sovereign
model. Furthermore, more risk transfer could be considered, depending on whether the corporation in charge of
such investment would be state owned (or controlled) or owned by shareholders in the private sector.
The degree of recourse to shareholders is also a strong marker, with the corporate and sovereign based models
supporting, as a matter of principle, less transfer away from the shareholders (with the government being viewed
as a shareholder in the sovereign model) towards external parties (e.g. contractors, suppliers, debt providers)
compared with a project based ownership and commercial structure.

Project finance (SPV)

model

Corporate
Degree of market model
Risk transferability from
‘liberalization’ public to private sector
Sovereign
budget
model

Degree of recourse to
shareholders
FIG. 10.  Different ownership and commercial structures.

38
4.2.7. Risk allocation via credit enhancement

Credit enhancement is the process whereby a financially stronger party (one with an ability to meet financial
demands on it) stands behind a financially weaker party (whose ability to meet such demands is less certain) in the
sense of agreeing to be ultimately responsible for that party’s liabilities. In other words, if the weaker party defaults
— wholly or in part — on its financial obligations, its creditors will be able to recover what they are owed from the
stronger party. A successful credit enhancement, by enhancing lenders’ confidence in their ability to recover what
they are owed, can lead to lower cost of capital for a project, and thus improved overall project economics.
Sovereign credit enhancement can be crucial to a new build NPP project. This is where a host government
undertakes to act as the ultimate guarantor of the financial liabilities of, for example, a project developer. Such a
host government might, alternatively, act as guarantor for an off-taker’s liabilities, thereby giving reassurance that
obligations incurred by that off-taker under the terms of an electricity off-take agreement or contract for difference
(CfD) arrangement (perhaps as outlined in a ‘take-or-pay’ clause that guarantees the plant’s owner a steady revenue
stream, thereby reassuring its creditors) will be met.
Regardless of the exact nature of a given credit enhancement, it is important to recognize two things. Firstly,
the credit enhancement is only as valuable as the perceived financial strength of the enhancer, as measured, for
example, by the rating afforded to its bonds by rating agencies. An agreed willingness by a host government whose
own rating is no better than that of the off-taker, for example, might do little to reassure potential lenders to a
project.
Secondly, while a host government’s willingness to provide credit enhancement to a project will likely have
benefits in terms of improved project viability (as a result, for example, of reduced cost of capital), the improved
viability comes at a cost: the exposure of that government’s taxpayers to the risk that they will be held liable for
creditors’ claims in the event of poor project performance.
Notwithstanding these caveats, credit enhancement by a host government (a ‘sovereign guarantee’) of some
form is commonly discussed and addressed in the course of the new build NPP project development process, and
can be a strong factor in realizing such a project.

4.2.8. Risk allocation via commercial contracting

Careful commercial contracting can be a way of achieving successful risk allocation between the various
stakeholders in a new build project.
Early consideration needs to be given by the owner of the new NPP to the overall objective pursued when
calling for bids to deliver, build and possibly finance a new NPP. This is because it will have an influence on the
expected results of a tender: in some instances, this is all about building a new power plant in order to correct an
imbalance in the energy mix of a country; in other cases, this may be the beginning of a long term national effort
to develop a new national industry basis. Furthermore, this is because it will also have a critical influence on the
choice of the underlying requirements of a tender. For example, the development of a request for proposals (RfP)
may subsequently be based on input or on output based specifications.
During the preparation of RfPs for the supply of equipment and/or services, the owner of the new NPP
needs to consider the merits of requiring quotes based on fixed or variable prices, or dates. Similarly, detailed
consideration should be given to any sourcing and localization requirements, particularly if these may affect the
choice by would-be suppliers of the currency they would choose for quotation purposes. This might not fit well with
the funding and financing strategies retained by the owner of the new NPP; for example, any resulting currency
mismatch might impact negatively on the economics of an investment proposal over the medium to long term, or
prove to be challenging to manage.
During the discussion about long term contractual sales or purchase arrangements, the owner of the new NPP
should give proper consideration to the definition and the negotiation of any price setting and/or price escalation
mechanism or formula, and ensure that their long term effects on price (cost) variations are fully understood and
duly mitigated, as and when required.
Whatever the ownership and commercial structure retained to develop a new NPP, numerous and detailed
contracts — as shown in Fig. 11 — are a typical standard feature of the general contractual framework supporting
the development of large, capital intensive investment projects. This is principally because a large number of
parties are involved in the supplying of equipment, goods and/or services at all stages during the life of the NPP,

39
 Fuel supplier

Lenders
Fuel supply
agreement Loan &
Security
agreements

EPC contractor Project

EPC contract
Developer/OO

Equity
agreements
PPA/CfD Shareholders

Off-taker

FIG. 11.  Outline NPP project contractual environment. Key: revenues (green), commercial costs (red) and returns to lenders and
shareholders (yellow).

making it necessary to establish appropriate contractual arrangements in order to properly and accurately reflect the
nature and extent of their involvement (e.g. rights and obligations) over time. Figure 11 illustrates an example of a
standard contractual arrangement; it is similar to Fig. 1 but indicates the different flows — revenues, commercial
costs and returns to lenders and shareholders — that will occur through a project’s life.
The contractual obligations of the parties described above (and the financial liabilities attached to them)
are also stretched over (very) long periods of time. This is principally because nuclear power generation assets
have long life cycles, with extended construction phases and operation periods spanning many decades. It is also
because, from a funding provision point of view, the economics of an NPP require that long term financing solutions
be put in place in order to support the investment base case. As a result, financial risk remains a constant parameter
for the owner of the NPP to monitor throughout the life of an NPP, from its inception to its decommissioning
(and arguably beyond, owing to the time horizon to be considered for spent fuel storage). As the overall risk profile
of a new build project varies over time, such fluctuation needs to be incorporated and reflected in the wording
of the various (long term) contracts negotiated to support the procurement of the investment. In this context, the
room for financial risk to materialize is broad and needs to be carefully factored into the contractual discussion
and negotiation surrounding the allocation of risk and responsibilities between the parties. This is to ensure that
appropriate mitigation and monitoring measures are duly incorporated in the agreements ultimately contracted.
Finally, in addition to the mitigation of risk through contracting, it is also worth taking note of the fact that
a degree of financial risk can be generated by the architecture of the overall contractual structure itself. From a
technical and a practical point of view, this is particularly the case during the construction phase, where hundreds
of contracts have to be integrated in order to ensure seamless performance of the various workflows involved in the
building and delivery of an NPP. It is also to be noted that the same applies from a financing related standpoint: the
funding of the investment is generally of a different nature (e.g. equity and debt) and usually comes from various
sources (e.g. equity capital markets and shareholders’ own funds for equity; debt capital markets and banks for
(long term) debt). The timely availability of all funding sources therefore also needs to be ascertained.

4.3. EXAMPLES OF FINANCING STRUCTURES AND RISK ALLOCATION

As explained above, risk allocation is impacted by various factors, including the ownership and commercial
structure developed by the owner of the new NPP in order to finance and procure the investment.

40
 Sovereign financing (100%)

State tax and other revenues

Sales of
Off-taker
Owner/Operator Electricity

Nationally-owned utility

Permitting & Licensing Arrangements

Operation & Fuel Supply/ Waste

Project Development & EPC Insurance
Maintenance Service Management Disposal Decommissioning
Arrangements Arrangements
Arrangements Arrangements Arrangements Arrangements

FIG. 12.  Illustrative sovereign ownership and commercial structure.

Based on an augmented PRR (Table 3) and the ownership and commercial models introduced in Sections 4.2.6
and 4.2.8, respectively, the high level allocation of the project risk between the key stakeholders developing a
nuclear new build investment proposal may typically vary as described in Sections 4.3.1–4.3.3 and in Ref. [5]).

4.3.1. Sovereign model

In the example outlined in Fig. 12, a new NPP is entirely developed, built and operated by a State controlled
entity, and the investment is financed based on allocations from the State budget. The electricity output is sold on
the market to one or more off-takers, which can be entities from either the public or the private sector.
Under this scenario, although the owner of the NPP practically bears the primary responsibility for the
development, construction and operation of the NPP, the overall financial responsibility for delivering the
investment lies with the State, acting as the main (sole) shareholder of the owner of the NPP. In that context,
the government of the host country ultimately bears all (or most of) the project risks, and the financial liabilities
attached to these are borne by the state budget. Risk transfer is, therefore, kept at a minimum, in particular when it
comes to the financial risk.

4.3.2. Corporate based model

In a variation of that model, shown in Fig. 13, the new NPP is developed, built and operated by a corporate
entity operating along (market based) commercial principles.6 The owner of the new NPP is, therefore, in charge of

6
Such a corporation could be controlled by the public sector, or have shareholders from the private sector. Furthermore, such
a corporation could be a utility with an ongoing business activity, or a joint venture company established by its shareholders for the
purpose of developing a new NPP. (However, that joint venture company would not raise its debt financing on a purely project finance
basis, but on a more classical corporate finance basis).

41
 Corporate financing (100%)

Shareholder A

Sales of
Shareholder B Off-taker
Owner/Operator Electricity

Shareholder C

Permitting & Licensing Arrangements

Operation & Fuel Supply/ Waste

Project Development & EPC Insurance
Maintenance Service Management Disposal Decommissioning
Arrangements Arrangements
Arrangements Arrangements Arrangements Arrangements

FIG. 13.  Example of a corporate ownership and commercial structure.

the overall preparation and the delivery of the new build asset. Subsequently, it is its responsibility to procure and
finance the investment plan associated with it.
In that context, the owner of the NPP will likely bear arguably the largest proportion (if not the entirety) of
the overall project risks, particularly the financial risk during the construction phase. However, during the operation
phase, sales of the electricity output to one or more off-takers under long term arrangements are likely to mitigate
to some extent the electricity price and the volume risks. Ultimately, the degree of risk transfer achievable remains
relatively constrained under that scenario.
Another variation of that model, illustrated in Fig. 14, may be envisaged, whereby the new NPP is developed,
built and operated by a corporation, the shareholding and operating principles of which are organized as a
cooperative.7 Again, the owner of the new NPP remains in charge of the overall preparation and the delivery of the
new build asset and is responsible for the financing of the investment.
In this example, the owner of the new NPP also bears a large proportion of the overall project risks, including
the financial risk during the construction phase, and the degree of risk transfer achievable during the operation
phase remains relatively limited. However, the risk of variations in the electricity price and/or the volumes of
output sold are mitigated to some extent from the debt providers’ standpoint, with the shareholders’ long term
commitment to off-take the electricity generated at cost.

4.3.3. Project based model

A typical example of the project based approach can be derived from the independent power producer (IPP)
model that was successfully developed in the 1990s and has been used since then to build and finance new thermal
capacity on a worldwide basis. However, as noted earlier, it is to be recalled that no NPP in the world has ever

7
It is assumed that such an entity would also operate along commercial principles.

42
 Corporate financing (100%)

Shareholder A Shareholder A

Sales of
Shareholder B Shareholder B
Owner/Operator Electricity

Shareholder C Shareholder C

Permitting & Licensing Arrangements

Operation & Fuel Supply/ Waste

Project Development & EPC Insurance
Maintenance Service Management Disposal Decommissioning
Arrangements Arrangements
Arrangements Arrangements Arrangements Arrangements

FIG. 14.  Illustrative corporate (cooperative) ownership and commercial structure.

been project financed to date. This is due to, inter alia, the contractual complexity of this corporate model and the
difficulty of putting it into place for a nuclear new build project.
Under the project based model, illustrated in Fig. 15, a new NPP is developed, built, financed and operated
by an SPV, which has been established for that purpose. Therefore, the SPV (e.g. the owner of the new NPP) is in
charge of the overall preparation (including the financing) and the delivery of the new build asset.
In this scenario, the degree of risk transfer ultimately achievable remains subject to the SPV’s capability to
allocate and mitigate the project risks through the various project agreements to be signed to implement the project
based ownership and commercial structure (including the contractual arrangements for the construction of the NPP,
the supply of fuel and the sales of electricity). Although never implemented in practice, the various attempts to
date to develop variations of this model have clearly exposed the difficulty in satisfactorily allocating the financial
risk between all the parties, a measure of any such satisfaction being the ascertaining of the bankability of such a
structure.
An alternative project based ownership and commercial structure is illustrated by the concession model shown
in Fig. 16, whereby the government of the host country outsources the procurement, and possibly the operation,
of a new build NPP. Under such a scenario, the government of the host country typically defines the obligations
and contractually grants the rights to build, own and transfer (BOT) or build, own, operate and transfer (BOOT) a
new NPP to a corporate entity that has the skills, resources and experience to procure and deliver the investment
within the context of a concession agreement. At the end of the contractual period envisaged in the agreement, the
NPP is transferred to the government of the host country, or to the entity identified in the concession arrangements,
according to a contractually pre-agreed transfer mechanism including the payment of a transfer price, which would
be in line with the residual value of the asset.
Under this scenario, the concessionaire is contractually in charge of the overall preparation and the
procurement of the new build asset. Subsequently, it is its responsibility to manage and allocate the project risks
(including the financial risk) to the various stakeholders involved in the delivery of the investment, including
the government of the host country. The three main types of ownership and commercial structure summarized in

43
 Corporate financing (30%) Debt financing (70%)

ECA(s)/Banks
Shareholder A

Sales of Off-taker/
Shareholder B
Owner/Operator Electricity Shareholders

Shareholder C

Permitting & Licensing Arrangements

Operation & Fuel Supply/ Waste

Project Development & EPC Insurance
Maintenance Service Management Disposal Decommissioning
Arrangements Arrangements
Arrangements Arrangements Arrangements Arrangements

FIG. 15.  Example of a project based ownership and commercial structure.

100% Project Financing

(via SPV)

ECA(s)/Banks

Concession Concession
Sales of
awarding Concession awardee Owner/Operator awarding
Electricity
entity entity

Shareholders

Permitting & Licensing Arrangements

Operation & Fuel Supply/ Waste

Project Development & EPC Insurance
Maintenance Service Management Disposal Decommissioning
Arrangements Arrangements
Arrangements Arrangements Arrangements Arrangements

FIG. 16.  Illustrative project based ownership and commercial structure.

44
Sections 4.3.1–4.3.3 (and their respective variants) outline the close relationship that exists between the selection
of a financing model, the contractual environment that is typically required to support it and the room subsequently
available for allocating risk between the various stakeholders involved in the investment proposal.

5.  SOURCES AND COSTS OF FINANCING

5.1. INTRODUCTION

The first part of this publication has focused on the way in which risk allocation — via commercial contracts,
credit enhancement and ownership structures (and associated recourse implications) — can be used to effectively
allocate risk between various commercial stakeholders. In the process of negotiating various agreements such as
electricity off-take agreements and EPC contracts with these commercial stakeholders, the NPP new build project
developer will also effectively be determining the nature (amount, time profile, risk) of the residual revenue
available to pay the financial stakeholders.
In Section 5, the focus will shift to the way in which rights to this future residual revenue stream are allocated
to those financial stakeholders in return for their providing the financing that any NPP project will require.

5.1.1. Revisiting the conceptual framework

To provide a framework for thinking about this issue it will be useful to revisit the overall conceptual
framework introduced in Section 1. Figure 17 is based on Fig. 1, Section 1.1, and is designed to focus attention
on the idea that the difference between (1) the revenues that a project developer or owner will receive from its
customer(s) — in this case an electricity utility — and (2) the costs that it will incur can be identified, and that this
difference represents (3) the residual income that will be available to pay its financial stakeholders. This residual
income will be referred to as the cashflow available for debt service (CFADS), following project finance practice,

FIG. 17.  Residual income available for financial stakeholders (CFADS).

45
although it is important to recognize that this cashflow will also be available to remunerate equity investors as well
as to service debt (i.e. to repay principal and interest).
Given that the costs shown include payments to an EPC contractor — and that such payments will typically
occur during a nuclear new build project’s construction phase — Fig.  17 is perhaps best regarded as showing
revenues, payments and residual income that will arise over the course of a project’s entire lifetime. It should also
be recognized that the residual income shown will in general be risky. In fact, it will inherit its risk characteristics
from the framework of contracts between the project developer or owner and the counterparties shown on the
left of Fig. 17; if the developer succeeds in pushing most of the project risk on to those counterparties within that
framework, the residual income will be relatively stable, otherwise it may exhibit considerable volatility.
Figure 18 illustrates the division of this residual income between lenders and equity investors (shareholders),
and five different types of claim on that residual income that they might hold (these types of claim, or ‘instruments’
are discussed further in Section 5.2). This residual income — and the risks associated with it — can be shared in
various ways between a project’s financial stakeholders (via loan agreements, equity agreements etc.). In the search
to identify sources for the amount of financing required to make a project viable, a project developer will offer
different shares of the available residual income to different financial stakeholders; the developer will attempt to
sculpt the division of this residual income to induce different stakeholders to offer amounts of financing that will,
in aggregate, be sufficient to finance the project.
A key thread running through this section is that in order to induce these different stakeholders to offer
financing they must be offered a return that is in excess of some minimum threshold of acceptability. This minimum
threshold will be referred to in what follows as a ‘hurdle rate’. The hurdle rate notion will be useful in allowing the
simple conceptualization of stakeholders’ willingness to provide financing. It will be argued that conceptually a
stakeholder’s ‘basic’ hurdle rate will reflect its own cost of capital; factors that tend to lead stakeholders to be willing
to lend at rates of return that differ from this basic hurdle rate can be conceptualized as leading to adjustments to
that basic hurdle rate, resulting in an ‘adjusted’ hurdle rate. Typically, this adjusted hurdle rate might be expected to
be higher than the stakeholder’s own cost of capital, reflecting the inherent riskiness. Additional factors tending to
raise the adjusted hurdle rate further could reflect, for example, concerns that the CFADS projected to result from
a proposed risk allocation would leave financing stakeholders with a high level of risk exposure. Factors tending to
reduce the adjusted hurdle rate could include benefits from involvement expected to be received by the stakeholder.
Again, conceptually, the notion of an adjusted hurdle rate can be useful in thinking about aspects of a deal that may
be prohibitive for a particular type of stakeholder; the presence of such an aspect may be regarded as essentially
adjusting the basic hurdle rate to infinity.

FIG. 18.  Dividing residual income (CFADS) between financial stakeholders.

46
 As implied by Fig. 1, the process of devising an acceptable allocation of risk and reward — in this case one
that induces potential financial stakeholders to provide the finance needed for the project — will be an iterative
one. In fact, given the link between the volatility and volume of the residual income available to be divided among
lenders and equity providers and the degree to which risk can be shifted on to commercial stakeholders such as
the EPC contractor, the process of arriving at a viable financing plan must be regarded as part of the more general
process of arriving at agreements with non-financial stakeholders.
It is often natural to envisage the negotiations that constitute this iterative process as being primarily
concerned with cost minimization — i.e. with shifting risk on to commercial stakeholders such as the fuel supplier
or EPC contractor at the minimum cost that can be achieved — while treating the revenue side (captured in the
electricity off-take agreement) as essentially fixed.
However, it is important to recognize that in most cases the project development process around an NPP new
build project will include discussions with an electricity off-taker; the merchant plant model has not proved to be
an attractive one for NPP developers. Insofar as these discussions involve power price, they will typically lead
to developers — and particularly their financial modelling teams — developing the project from a perspective
different to that found in most textbooks. Specifically, rather than treating the cost of electricity as an input to
a modelling exercise designed to calculate the return that an investor could expect from financing a project
(and comparing that return with its hurdle rate), the modelling exercise will rather treat the return to investors as an
input that is designed to calculate the resulting cost of electricity. As will be discussed further in Section 5.8.2, the
financial modelling that will typically be carried out to quantify the cashflows and general economics of a project
will typically take place on a cost recovery principle, meaning that the new NPP’s cost structure determines the
revenue requirement (or cost recovery tariff, or electricity price) in each calculation period.
To reiterate, the development of a new NPP project can be regarded — from a financing perspective — as a
search to agree all the necessary contracts with key stakeholders with conditions such that all are satisfied that the
return they will receive is acceptable given the risk they are taking. In that context, a number of key questions arise
in considering this process, including:

—— What are the sources of financing available to new NPP projects (e.g. banks, ECAs) and are these available at
every stage of the life cycles of such projects?
—— To what extent will the returns typically regarded as ‘acceptable’ by different sources of financing
(i.e. by different financial stakeholders) differ?
—— To what extent will different financial stakeholders make their participation in a new NPP project contingent
on other requirements being met?
—— What determines financial stakeholders’ acceptable returns, i.e. the minimum returns that they will accept in
return for providing financing?
—— How will the cost of finance provided by different financial stakeholders affect project economics?

5.1.2. Overview

The structure of Section 5 is as follows. In Section 5.2, a summary of types of financing is provided, along
with some stylized facts on financing costs. The key role of the priority of the claims on residual asset values that
different types of financial instruments offer their holders is discussed. Section 5.3 introduces the idea that the cost
of financing from a particular financial stakeholder can be characterized by means of a hurdle rate — a minimum
return that stakeholder will require if they are to contribute finance to the project. The discussion will be intuitive
and informal, introducing the general hurdle rate idea in Section 5.3.1, moving on in Section 5.3.2 to describe the
determinants of stakeholders’ hurdle rates, and describing the way in which stakeholders will decide whether or not
to provide finance to a project by comparing the return on offer to their own hurdle rate in Section 5.3.3.
Section 5.4 emphasizes the different nature of the risks faced by a nuclear project during different phases of
its life cycle, and the reluctance of some potential stakeholders to be exposed to the risks associated with particular
phases. These differing appetites for the risks arising during different project phases will necessarily help determine
the ‘field of the possible’ within which risk can be allocated to different stakeholders. Section 5.5 introduces the
notion of ‘debt to equity’ — the ratio of debt financing to equity financing in the overall financing of a project —
stressing the relative conservatism of successful nuclear financing to date.

47
 Having dealt with many of the general considerations relevant to the question of sources and costs of financing
in preceding sections, Section 5.6 addresses some of the specific issues that arise in the context of the equity
component of any financing package, with Section 5.6.1 outlining the types and sources of equity and introducing
some ways of thinking about what constitutes a reasonable and/or likely cost of equity (i.e. benchmarking the cost
of equity).
Section 5.7 focuses on the other component of financing packages for nuclear projects, i.e. debt, starting by
outlining the types and sources of debt in Section 5.7.1 before going on to outline the key liquidity metrics that
lenders will use to evaluate the riskiness of a given project in Section 5.7.2, and ending by examining approaches
to benchmarking the cost of debt.
Section 5.8 emphasizes the idea that the process of identifying and negotiating financing for an NPP project
will be an iterative and challenging one. The process of locating the point at which all the financial stakeholders in a
project (equity investors and lenders) are satisfied with the returns they will receive for their financing contribution
to the NPP project is properly viewed as part of the broader process of satisfying all (potential) project stakeholders,
not least because shifting various risks on to non-financial stakeholders will be a vital prerequisite for mitigating
the risks to which financial stakeholders and lenders in particular will be exposed. Such mitigation will be vital
for ensuring the participation of (conservative, risk averse) stakeholders. Finally, Section 5.9 explores the possible
advantages of a phased approach to financing nuclear projects.
It should be noted that throughout this section the discussion will rely on many of the ideas and concepts
of a true project finance approach; while no new build NPP project has yet been financed on such a basis, the
key issues and challenges that will attend any type of financing for such a project are best explained within such
a project finance framework. For clarity, however, the pure project finance approach focuses exclusively on the
project under consideration (the NPP project) as the sole source of revenues, and the only asset to which lenders
and investors will have recourse in the event that the project falls into financial distress. This contrasts with the
corporate financing model, under which investors and lenders can expect to have access to corporate revenues
generated by the project developer, and to other assets on that developer’s balance sheet in the event that revenues
from the project are not sufficient to meet financial commitments. It also contrasts with the sovereign model,
in which a sovereign host government takes an equity stake in the project, as well as potentially providing debt
financing directly, or facilitating debt financing via the provision of a sovereign guarantee, and in which taxpayers
constitute another potential source of revenues.
Although no NPP project has ever been project financed, this financing model is discussed extensively in
this publication because many of the key ideas that underlie the financing of NPP projects (whether in pure project
finance, a corporate or a sovereign context) are best explained within a project finance context. For example, one of
the key messages of this publication — regarding the relationship between the efficient allocation of risks between
project stakeholders and its potential for reducing the cost of finance — can be most clearly set out in a framework
without the additional complicating factors present in a corporate financing model (such as the financial strength of
the corporation or the rating of its debt by rating agencies).

5.2. STYLIZED FACTS ON FINANCING COSTS

Nuclear new build projects (with the exception of those developed and therefore financed on state budget
allocations) are generally financed based on a combination of equity and debt funding. For each of these two
components, various instruments exist, as outlined in Table 6.
Based on Table 6, the following stylized facts may be noted:

—— As a matter of principle, access to equity is more onerous than access to debt, owing to the direct relationship
that exists between exposure to risk and the cost of capital.
—— The same reasoning applies to the pricing of debt, which depends on, inter alia, tenors and the degree of
seniority; (senior) corporate debt market is historically the cheapest source of liquidity in the global capital
markets.

48
TABLE 6.  SUMMARY RANGE OF FINANCIAL INSTRUMENTS

Financial instrument Funding source

Equity

Pure equity

  Shares (common and preferred) Shareholders

 
Rights issues
Risk of exposure to bankruptcy →

Quasi-equity

  Convertibles Shareholders, capital markets

 
Shareholders’ loans Shareholders

Debt

Junior debt

  Bonds Capital markets

Loans (short and medium term) Banks
 

Senior debt

  Bonds Capital markets

Loans (short, medium and long term) Banks
 

—— Beyond the level seniority, the pricing of debt is also influenced by the degree of structuring involved in its
arranging: in most instances, an unsecured loan in its simplest and most standardized form is going to be
cheaper than a secured one for a given maturity. This is essentially due to the fact that the risk associated with
such structuring8 will typically generate a premium, which will subsequently be reflected in the price of that
secured facility.

Figure 19 arranges potential types of finance along a continuum that ranks them a priori from relatively high
cost to relatively low cost. This ranking embodies some of the stylized facts noted above (e.g. both long term and
short term senior debt are less expensive than subordinated debt, but long term senior debt is more expensive than
short term senior debt).

FIG. 19.  Sources of finance.

8
For example, the risk of a fault in the design/implementation of the structure put in place, or in the mechanism to execute it.

49
5.3. CHARACTERIZING FINANCING COSTS

In considering the cost and sources of financing for an NPP project a useful distinction can be drawn between
direct and indirect sources. This distinction recognizes that finance to an NPP project will usually be provided via
entities that must first themselves raise finance in some way. Those entities may either borrow or issue shares to
raise that finance. Their cost of doing so (i.e. their own ‘cost of capital’) will play a large part in setting the price
they will charge for providing financing to the NPP project. When they do advance financing to the project they
may or may not choose to retain some of the risk profile; it is conceivable that a financing entity might borrow in
order to fund an equity injection into an NPP project — effectively transferring additional risk on to its existing
shareholders (since the lenders from whom it borrowed will enjoy priority over those shareholders should it come
to resolving claims on the company’s residual value in the event that the NPP project causes it financial distress).
The distinction outlined above will be reflected in the difference between the organization of the material
in Section 5.3 and in Sections 5.6 and 5.7. The remainder of Section 5.3 will focus on the costs of finance of
the financing entities (cost of capital) as a key determinant of what they will charge an NPP project developer
for financing. Specifically, it will argue that financing entities will make financing decisions on the basis of a
comparison between the returns available from the NPP project and hurdle rates, which may be viewed as
consisting of a basic hurdle rate corresponding to their own cost of capital, and an adjustment reflecting both
particular risk/return type considerations that arise in the context of a particular NPP project and other factors.
In Section 5.3.1, a (strictly heuristic) introduction to the hurdle rate notion is introduced. In Section 5.3.2, the
determinants of financing entities own cost of capital are examined, and in Section 5.3.3, a simple model of the
decision whether or not to provide financing to an NPP project is introduced. It is important to note that this
decision will be based on the adjusted (rather than basic) hurdle rate for each potential financing entity; however,
the discussion of key determinants of actual financing costs (which will, of course, implicitly be a discussion of
adjusting basic hurdle rates) will be postponed until Sections 5.6 and 5.7.

5.3.1. Hurdle rates: An intuitive introduction

The degree to which a (potential) financial stakeholder may be willing to lend to, or take an equity stake
in, a nuclear development project can be characterized by employing the notion of a hurdle rate. A (potential)
stakeholder’s hurdle rate is the minimum rate of return it must expect to earn on the amount of financing it is
contemplating providing for it to be willing to provide that financing.
It is important to recognize that a very wide range of considerations will factor into a financing stakeholder’s
hurdle rate.
Many of these will be recognizably related to risk/return factors. For example, an equity investor will
generally set a lower hurdle rate (i.e. require a lower rate of return to induce it to take an equity stake in a project)
when considering a less risky project than it would when considering a more risky project. Such an investor would
be more likely to invest in (i.e. would set a lower hurdle rate for) a nuclear power project whose revenue risk had
been allocated away from the project per se and on to electricity consumers via some form of electricity off-take
agreement.
However, not all determinants of hurdle rates will be so evidently of this risk/return nature. Different potential
stakeholders may perceive benefits from taking a financial stake in a project that extend beyond, for example,
the dividends that an equity investor might expect to earn on its shares. As a further example, a consortium of
energy intensive consumers might be willing to set a somewhat lower hurdle rate than might be justified on
purely risk/return grounds insofar as it wishes to obtain benefits in terms of energy supply security from such an
investment. Figure 20 illustrates a simple conceptualization of the hurdle rate idea. The basic rate shown will reflect
the potential financial stakeholder’s own cost of capital, an idea that will be discussed further in Section 5.3.2. Some
factors that may to lead to the actual hurdle rate diverging from this basic rate are also shown. It should be noted
that in general, the hurdle rate applied to a potential finance provider will tend to exceed the basic rate by a risk
premium reflecting the risk inherent in providing finance (i.e. the risk of non- or only partial repayment of the
finance provided and/or agreed return) even before any of the adjustments shown.

50
 20%
‘Basic’ hurdle rate,
reflecting finance
provider’s own cost of
capital
Factors tending to increase
hurdle rates might include: 18%
Adverse ‘structuring’ of
claims on ‘residual’ income
(e.g. ‘subordinated’ status
of debt instrument)
16% Factors tending to reduce hurdle
rates might include:
Potential for domestic GDP/
employment benefits if project
goes ahead (Government);
14% Potential for revenues from
NSSS sales (NSSS vendor/
‘strategic investor’)

FIG. 20.  Factors influencing financial stakeholders’ hurdle rates.

5.3.2. Determinants of stakeholders’ hurdle rates

In essence the basic hurdle rates employed by financial stakeholders contemplating providing financing to a
nuclear project are based on those stakeholders’ own cost of capital — i.e. the cost of raising the capital they will
provide. At the stage at which they are deciding whether or not to make such an investment, those stakeholders
will typically rely on benchmarking their cost of capital, i.e. estimating its likely cost ex-ante. Only after a final
investment decision has been taken will the true cost of capital become known — when stakeholders actually raise
that capital in the market by issuing debt or equity, or when the opportunity costs of providing financing from their
own reserves can be computed based on observing the returns available on those reserves elsewhere. It should
be noted that the implicit assumption here is that the project will follow a corporate financing model rather than
an alternative project financing model (which would involve the issuance of debt and or other instruments by a
specially set up SPV whose assets would likely be just those of the project itself as opposed to those of the project
stakeholders’ balance sheets).
The cost of capital borne by such sponsors is usually benchmarked by: (a) estimating the cost of equity,
which represents purely the cost of raising incremental equity from existing or new shareholders; (b) estimating
the cost of debt; and (c) assessing the WACC based on the assumed proportions of debt and equity in the overall
amount that will be financed.
The remainder of Section 5.3.2 will focus on the estimation of the cost of equity (Section 5.3.2.1), the
estimation of the cost of debt (Section 5.3.2.2) and the calculation of the WACC (Section 5.3.2.3).

5.3.2.1. Estimated cost of equity

The cost of equity to a company can be estimated in various ways. In its most basic form, the cost of equity
can be calculated from a dividend capitalization model that estimates the cost of equity as a rate given by Eq. (2):

Cost of equity = [Current dividend payout per share] + [Dividend growth rate] (2)

51
 This approach relies on a strong correlation and linearity of future dividends to current ones, which may be
appropriate for a business in a very steady market with a high level of predictability of earnings (and by extension,
the components of earnings: revenues, operating expenses, financial costs, depreciation, one off and exceptional
gains and losses, taxes and, of course, retained earnings and cash levels).
Though certain utilities operate in environments that can be considered highly stable and predictable from
a financial perspective, financial and energy market liberalization (in various forms) has, over the past 30 years,
forced most of the world’s utilities and their investors into a less predictable business environment. Over the past
20 years, many of the world’s nuclear utilities have been exposed to increasing levels of market risk, as well as
political intervention in domestic energy markets. Imposing increasing market pressure on once publicly owned
businesses, such as power and water utilities, highway operators and airport owners, has proven one of the most
pervasive developments of the global political economy over the past 25 years.
As governments have increasingly turned to investors and external lenders to finance infrastructure
(or, alternatively, as they realize their dependence on external finance to deliver new infrastructure investments),
it has been increasingly necessary for them to clarify and establish the cost of equity (or required return) for such
investments.
An arguably more sophisticated approach to estimating a company’s cost of equity than the dividend
capitalization model is the capital asset pricing model (CAPM), which is perhaps the most commonly used tool
to assess (or establish) the cost of equity for new infrastructure and energy investments. Under the CAPM model
shown in Eq. (3):

Cost of equity = Risk free rate + β [Market premium] (3)

The principle of CAPM is that investors will seek a return on their equity investment that is a function of
(a) the risk free rate, and (b) the riskiness of the investment itself relative to other equity investments. The risk free
rate, as described above, represents the lowest risk investment in the market, typically government local currency
borrowings. The market premium is the difference between the expected (equity) market rate of return and the
risk free rate of return. Beta (β) represents the correlation of a company’s share price with the broader equity
market. A company whose shares move in perfect tandem with the broader equity index would carry a β of 1.
A company whose share price reacts more sharply to broader movements in the equity market would have a β value
greater than 1. When assessing a new business or investment, it is common to use the historical relative share price
movements of a peer group to benchmark the beta value of the investment.
Governments may occasionally become equity shareholders in a new build project for various reasons.
However, unlike corporations, they do not have shareholders, and subsequently fund themselves essentially from
public sector resources (e.g. taxation, borrowing and money printing). For the purposes of this publication, the
public sector’s cost of capital may be taken to be represented by the cost of the domestic government debt.

5.3.2.2. Estimated cost of debt

In order to estimate its own cost of debt, a potential financial stakeholder in a nuclear development project
may either draw on its own recent experience in securing debt financing (likely from either banks or via bond
issues) or else may attempt to identify a recent debt financing that has taken place on terms comparable to those
that it is considering (in terms of tenor, structure, etc.).
Arguably the simplest approach will be to assess the cost of its own recent borrowings. It is important to
recognize, however, the relatively unusual nature of the commitment (either equity or debt) that would typically
constitute part of a nuclear new build project financing, in particular its likely (very) long term nature. Some
potential stakeholders (e.g. power utilities) may be familiar with borrowing for the purpose of making such long
term commitments; others may not be.
If the potential financial stakeholder has issued bonds in the past, and if these are trading in a reasonably liquid
secondary market, yields on these bonds relative to others will provide useful information on likely borrowing
costs.
Furthermore, and — again — insofar as the potential financial stakeholder has issued bonds in the past, the
credit rating of these bonds (if any) will provide important guidance as to the likely cost of borrowing. Credit
ratings are an indicator of lender requirements, but are not a complete tool to estimate or predict debt costs. They

52
are developed from a qualitative and quantitative analysis of the likelihood of a borrower’s defaulting on its debt
obligations. The credit rating scales published by the major agencies are shown in Fig. 21. Broadly, the higher a
bond is rated, the lower will be the yield associated with it; the yields associated with the bonds issued by any
particular potential nuclear finance provider will provide some guidance to what such an issuer might expect to pay
were it to seek to (partially) fund its financing of that project via the issuance of similarly structured bonds.
In terms of quantifying the spread between the yield on investment grade versus high yield (or ‘junk’) bonds
— and hence the likely additional cost of borrowing by an entity whose financial health (current balance sheet
strength, outlook) justifies only a junk status — Fig. 22 is informative. The bond market generally follows the trend
set by the risk free sovereign issuers, therefore, after 2008, bond yields fell steadily in both subinvestment grade
and investment grade markets. However, the financial crisis of 2007–2008 showed the higher volatility of low-rated
bonds, whose yields briefly exceeded 20%. Unrated sovereign and quasi-sovereign borrowers can typically rely on
the bilateral credit arrangements with other sovereign borrowers, multilaterals and their agents (such as ECAs).
If it does not have recent borrowing experience, a would-be borrower may attempt to identify a recent debt
financing that has taken place on terms comparable to those that it is considering (in terms of tenor, structure, etc.).
Clearly this latter approach depends to a high degree on the transparency of relevant recent debt financing
transactions, and it may be challenging for the potential financial stakeholder to identify a recent debt financing
transaction that matches the one it is contemplating itself in all significant details, such as tenor, whether the loan
is denominated in domestic or foreign currency terms, whether the associated rate will be fixed or floating, etc.
If no information that permits the matching of a transaction is available, it might be thought that the use of a
non-matching transaction may be of limited value. Concretely, for example, to what extent should a utility that
is not based in the United States of America rely on the terms of a recent debt issuance by the United States
Government, in US dollar terms, as guidance regarding how much it should expect to pay for its own borrowing in
domestic currency terms?

FIG. 21.  Credit rating classes used by different rating agencies.

53
FIG. 22.  Spread between ‘investment grade’ and high yield (junk) bonds 2006–2016 (Source: Federal Reserve Bank of St. Louis
FRED Data [6]).

Although an obvious answer to this question might be that the utility should not rely on this guidance,
it is possible that the terms and cost of the US Government issuance may contain valuable information, if only that,
for example, the fact that the issuer had offered a 50 basis point higher coupon relative to that that it had offered
18 months ago might suggest (all other things being equal) that the likely cost of all forms of debt might have
increased by roughly a comparable amount over the same period. The basic underlying idea here is that the cost
of debt can be viewed as being composed of a number of components — or premiums — added to a risk free rate.
If the risk free rate can be observed, and if these premiums can be regarded as having been stable over a period,
then the size of the movement in the risk free rate over the last 18 months can be viewed as a good benchmark for
movements in the cost of different types of debt; in other words, the cost of debt for a project of given riskiness
may be expected to be 50 basis points higher today than the cost of the debt for an equally risky project 18 months
ago.
As far as the observability of the risk free rate is concerned, the rate paid on US Treasury Bills of a given
tenor is typically treated as a proxy for the risk free rate for US dollar denominated debt of that tenor.
Additional information may be inferred if it is possible to identify, or even price some of the premiums that
together might add up to the spread between the risk free cost of debt (US Treasury bill rate, in US dollar terms)
and the cost of, for example, a debt financing by a non-US utility in domestic currency terms. In such a case, and
if the borrower were to undertake only to repay an amount denominated in domestic currency terms, it might be
expected that its cost of borrowing would certainly exceed an amount equal to the US Treasury bill rate plus the
cost (expressed in percentage terms) of the lender insuring (e.g. in the futures market) against an increase in the
value of the US dollar relative to that of the domestic currency.
Similarly, turning to a consideration of whether the rate associated with a debt financing will be fixed or
floating, the cost of obtaining a loan with a fixed rate (essentially transferring the risk of interest rate movements to
the lender) might well be estimated by notionally decomposing that cost into an (observed) cost for a floating rate
loan plus the (observed) cost of swapping a floating rate for a fixed rate loan.
The main point of the preceding discussion is that even where lack of transparency prevents a would-be
borrower from identifying a recent debt financing transaction that exactly matches the one it is contemplating itself
in all significant details, it may nonetheless be possible to develop a notional synthetic debt financing transaction
that will match its own closely enough to provide some benchmarking type guidance on likely costs.

5.3.2.3. (Estimated) WACC

The WACC, which was introduced in Section 2.3, is the overall cost of financing that would be incurred by
a (potential) financial stakeholder raising the amount that it will provide to the nuclear new build project in some

54
form, and may be regarded as the basic hurdle rate. The calculation takes into account the relative weightings
of equity and debt in the overall amount of financing, and is represented on an after-tax basis by Eq. (1). It will
correspond approximately to the basic hurdle rate shown in Fig. 20. As noted in Section 5.3.1, however, this basic
rate may be viewed as being adjusted by prospective financial stakeholder to reflect additional factors, including
those factors that are not necessarily reflected in the nuclear development projects pure risk/return profile.

5.3.3. Modelling the basis of financial stakeholders’ decisions: Project returns versus hurdle rates

A (potential) financing provider’s decision on whether or not to provide financing to a project can be modelled
as a simple comparison of the return expected from providing finance to that project versus the provider’s adjusted
hurdle rate. The nature of the adjustment that the potential provider will make to its basic hurdle rate (which will
be based on its own cost of capital, WACC) has been touched on in Section 5.3.2, and will be discussed further in
Sections 5.6 and 5.7. However, before discussing the metrics that different NPP finance providers will compare
to their hurdle rates in deciding whether to provide financing, it is important to note that — in principle — any
adjustment to reflect project specific risk/return characteristics could be made either to the basic hurdle rate or to
the metric that (potential) finance providers will compare to the adjusted hurdle rate.
For example, in taking into account the risk involved in a particular project, a potential equity investor
could either risk adjust its basic hurdle rate by increasing it by an appropriate amount, or else adjust the metric
by decreasing it (i.e. computing the equity IRR (see Section 5.3.3.1.) based on risk-adjusted net revenues). This
equivalence of approach can lead to confusion and should be borne in mind, particularly in considering the
risk-adjusted return on capital (RAROC) metric outlined in Section 5.3.3.1.

5.3.3.1. Returns of interest to different financial stakeholders

Equity internal rate of return (equity IRR) is arguably the key metric for equity investors. In general, the IRR
of a project is the discount rate that makes the net present value (NPV) of all (e.g. positive and negative) cashflows
arising from a particular investment or project equal to zero. Focusing more specifically on equity, the equity IRR
is the discount rate that makes the NPV of an equity injection (negative cashflow from an investor’s perspective)
and subsequent returns on that injection (e.g. dividends) equal to zero. This measure is typically expressed as a
post-tax, deflated (real) value in percentage terms.
RAROC is a key metric for lenders. It is calculated the same way as an IRR is calculated, with the important
distinction that the risk profile of the borrower will generate a risk adjustment to project revenues, based on
an estimate of the probability of that borrower’s defaulting — often as embodied in its credit rating (a further
discussion of RAROC can be found in Ref. [7]).

5.3.3.2. Comparing project returns with stakeholders’ hurdle rates

In general, and as is stated in most finance textbooks (e.g. Ref. [8]), the decision on whether to finance
any project, including a new build NPP, can be modelled as a comparison of the internal rate(s) of return (IRR)
generated by the particular debt instruments or form of equity used to finance that project and the potential
financer’s (or respective provider of such instrument’s) own hurdle rate (see Fig. 23). So, for example, the potential
provider of a senior debt tranche will design or analyse the terms of the loan agreement in order to calculate the IRR
implied by those terms (including any fees, etc.). If the IRR exceeds their own hurdle rate, they will — according to
the model — provide the senior debt.
As discussed in Section 5.3.1, the hurdle rate may not always be strictly defined by the financing party’s
own cost of capital (as defined by their own WACC). For example, an equity investor, or a (partial) project owner,
may choose to invest equity with an expected return that is lower than their own cost of funds. This is often the
case for nuclear utility project owners, whose broader businesses include assets of varying risk profiles and return
levels. Project owners may opt to accept a lower notional or expected return than their own cost of capital, in the
expectation that an upside event would be likely to materialize. Alternatively, the project owner may be prepared to
accept a lower expected return because the project provides other, non-dividend-related benefits, such as electricity
supply to an affiliate within the group (the utility’s supply business, for example); the development or construction
aspects are seen as an important learning curve by the utility’s head office; or there may be other revenue streams

55
 IRR

Hurdle
rate

FIG. 23.  IRR versus hurdle rate as a model of the financing decision.

that are not accounted for in the equity IRR, such as operation and maintenance (O&M) fees, fuel supply and
servicing fees, and development fees, all of which would be paid out (to the owner’s affiliates) above the dividend
line. Such arrangements are common, as they enhance an owner group’s returns while ensuring further control and
protection of the project through the provision of such ancillary services. In all cases, the adjustments made to a
stakeholder’s hurdle rate can be conceptualized to reflect such considerations in the framework provided in Fig. 20.

5.4. FINANCING SOURCES AND TYPES AVAILABLE IN DIFFERENT PROJECT PHASES

The choice of an ownership and commercial structure defines, to some extent, the scope within which risk,
including financial risk, may be transferred and allocated. This choice also influences the shape of the financing
plan that needs to be put into place in order to deliver the investment proposal successfully. Ensuring bankability is
a critical factor of success for procuring a new NPP. In that context, the early development of a resilient financing
plan resulting from those choices contributes to managing the financial risk that is embedded in them, and supports
its successful execution.
In that context, it is essential for the developer of the new NPP, and more broadly for the various stakeholders,
to develop early in the investment planning process a clear understanding for the appetite and the tolerance for risk
that potential finance providers, and more particularly debt providers, tend to typically display in the case of a
nuclear new build project. Table 7 provides a generic summary of those appetites, and in particular how they may
differ by project phase.
The terms used in Table 7 are defined as follows. Tier 1 shareholders are assumed to be core investment
shareholders with an active role in the preparation, financing, delivery and operation of the investment, based on
their skills, expertise, experience, etc. These would typically be utilities with experience in nuclear generation,
for example. Tier 2 shareholders are assumed to be minority shareholders with a secondary, although active, role
in the preparation, procurement, delivery and possibly the operation of the investment. These would typically be
utilities without nuclear generation experience, or large suppliers (e.g. the vendor of the NSSS). Tier 3 shareholders
are assumed to be minority shareholders with no appetite for a role in the preparation, procurement, delivery and
operation of the investment. These would typically be financial investors (e.g. hedge funds, infrastructure funds,
individual investors) buying on the primary or secondary equity capital markets, and looking for an income stream
based on long term (revolving) cashflows.

56
TABLE 7.  APPETITE OF (LONG TERM) FINANCE PROVIDERS FOR NEW NPP FUNDING

Project phases

Funding sources Development Construction Operation Back end

EQUITY

State budget
← Decreasing capital loss exposure

   

Tier 1 shareholders    ?

Tier 2 shareholders ?  

Tier 3 shareholders ?2 

DEBT1

Bond markets ?3 

Bank debt  

1
It is assumed that the debt under consideration is senior. It may be unsecured or secured (e.g. backed by a collateral, which can be
sold to repay the senior debt holders in case of default from the borrower to meet its debt service obligations).
2
Depending on the ownership structure and the undertakings of the Tier 1 shareholders (notably with regards to completion), selected
infrastructure funds might have some (limited) appetite for investing in a new build project during its construction phase.
3
Depending on the ownership structure and the undertakings of the Tier 1 shareholders (notably with regards to completion), selected
investors might have some (limited) appetite for lending money to a new build project during its construction phase.

Based on Table 7, and for simplicity purposes, the following may be noted:

—— Risk encountered during both the development and the construction periods is primarily an equity risk from a
funding perspective, e.g. a risk to be borne mainly by the owner of the new NPP and its shareholders.
—— As a follow-up, providers of debt financing are not prepared, under existing market conditions, to take the
risk of construction for a new build project. The onus is, therefore, primarily on the owner of the new NPP and
its shareholders, but also on the other stakeholders with a critical role during construction (e.g. contractors,
suppliers) to provide satisfactory undertakings with regards to cost overruns and delays, and completion
(including a completion guarantee).
—— During construction, commercial banks and, to some extent, certain ECAs are the main source of debt
financing. This is mainly due to their experience in financing large capital intensive infrastructure projects
and in managing the changes and variations typically encountered during the long construction periods of
such projects. The pool of banks is, however, more limited when it comes to financing nuclear new builds,
which is due to the specifics of that industry.
—— After COD and during the operation period, and in line with the risk profile of an NPP, the universe of
(long term) finance providers is broader (including funds and institutional investors), with more debt products
available on the market (notably long dated bonds).

5.5. DEBT TO EQUITY RATIO

Among the various issues to be considered when preparing a funding plan for a new investment, the choice of
an appropriate debt to equity ratio is, therefore, of critical importance, in particular in the context of the development
of a new NPP based on a corporate or a project based ownership structure.
To date, successful financing structures for nuclear new build projects have been conservative (as opposed
to, for example, more innovative project finance type approaches). This is due to the fact that historically most

57
nuclear power projects have been developed on the basis of either sovereign programmes or corporate structures.
Typically, the features likely to be found in most corporate structures9 include relatively low debt to equity ratios10;
strong and long lasting commitments from the owner of the new NPP, in particular during the development and
construction phases; and (in most instances), direct recourse to the shareholders of the owner of the new NPP. That
type of structure may arguably be more expensive from a strict WACC point of view as the infusion of more equity
will increase the WACC. It may also prove to be more onerous for the owner of the new NPP and its shareholders,
who would need to factor into the overall capital cost of the investment the cost of any (direct or indirect) guarantee
and/or undertaking they would provide in addition to their equity commitment. Furthermore, it may not maximize
the provision of (long term) debt financing by financing sources from the private sector (e.g. commercial banks).
However, it generally tends to support a successful and timely delivery of the investment as well as speedier raising
of the debt financing. The increased speed is primarily because although the lenders would look at the economics
of the new NPP project, they would ultimately be looking at the overall business activities and creditworthiness
of the owner of the new NPP, and, if need be, at the credit standing of its shareholders. Any such analysis is likely
to be relatively straightforward. By comparison (using the example of the IPP model developed for financing new
conventional thermal power plants), lenders would be looking into the details of, inter alia, the economics and the
contractual arrangements of a new NPP project, which would be developed on a project based structure. This is
because, as noted, the lenders would only have limited recourse to the shareholders for a defined period of time
(usually the construction phase), and would then only rely on the investment’s future cashflows from operation to
service their debt (e.g. payment of interest and repayment of principal).
A brief focus may be introduced at this stage on the recent attempts seen in nuclear new build projects to
develop a more sophisticated underlying contractual basis for a selected number of corporate based ownership and
commercial structures with a view to improving the debt to equity ratio of the underlying investment proposal.
Although not project financing per se, it is broadly understood, although few details on the structure of these
transactions are available in the public domain at present, that those investment proposals have been trying to
allocate a degree of construction and operation related risk to third parties, which would otherwise have been borne
entirely by the owner of the new NPP and its shareholders.
These attempts are based on a series of detailed risk sharing contractual arrangements, which have been
developed to support what remains otherwise essentially a corporate based ownership of the assets. Furthermore,
it may also be noted that these ownership structures have themselves become more complex, e.g. not dependent
on one single shareholder, but shared between a number of equity stakeholders. While the final balance of the
obligations and responsibilities of the various parties involved remains to be ascertained with more clarity, it may
be noted that the leverage targeted by some of these investment proposals has been somewhat higher than that
typically found in straightforward corporate based transactions, with debt to equity ratios in the region of 70:30.

5.6. EQUITY FINANCING

5.6.1. Types of equity, sources of equity and qualitative benchmarking of equity cost

Careful and early planning of an appropriately sized funding programme is critical to support the construction
of a nuclear new build project, owing to the quantum of the investment. The owner of a new NPP needs, therefore,
to attract a broad range of finance providers (e.g. equity investors and debt providers) over the life cycle of the
plant. However, the owner needs to acknowledge upfront in the process that said financial partners will have
different requirements and rationale for considering an involvement in the financing of a nuclear new build project.

9
The following discussion focuses on the corporate based structure. This is to highlight the focus and the importance given by
the finance providers to sound and bankable metrics. (From a lender’s perspective, a sovereign based structure arguably relies on a less
detailed analysis, since it is recognized that the residual risk ultimately lies with the credit standing of the host government.)
10
While IPP projects for conventional thermal power plants have typically been developed worldwide based on debt to equity
ratios of up to 90:10 for contracted plants and 70:30 for merchant plants, corporate based transactions have been more accustomed
to ratios in the region of 60:40. For NPPs, although no project financing has been successfully put into place to date as noted, recent
attempts to develop more structured corporate based schemes (e.g. corporate structures with an extended contractual basis in order
to allocate risk, to some degree and under certain circumstances, to third parties) envisaged debt to equity ratios in the 60:40 to
70:30 range.

58
In particular, it is important to remember that for equity investors that such rationale will most likely have little to
do with their assessment of a pure risk/return analysis only11; other factors will drive their decision, as illustrated in
Table 8.

TABLE 8.  RANGE AND MOTIVATION OF POTENTIAL EQUITY INVESTORS IN  A  NUCLEAR NEW
BUILD PROJECT

Would-be investor Selected key drivers

Government ——National interest (e.g. development of national programme)

——Political support
——Risk sharing
——Partnership (sovereign, commercial, technological, etc.)
——Energy diversity and security

Nuclear utility ——Geopolitical relationship between sovereigns

——Partnership opportunity with local incumbent
——New build construction and project management role
——Long term rationale for country risk

Non-nuclear utility ——Capacity expansion through diversification

——Partnership with owner/operator
——New build experience
——Political relationship building

Contractors ——Finance of equipment purchase by client

(primarily vendor of NSSS and supplier of large equipment ) ——Equity in lieu of collateral/performance security
——Temporary (e.g. bridge) finance (e.g. until COD)

Energy users ——Certainty of long term supplies

——Economics of pooled purchasing power
——Avoiding of offshoring manufacturing facilities

Distribution company ——Certainty of long term supplies

——National interest, strategic sector

Trader ——Access to long term supplies

——Economics of pooled purchasing power

Financial investor ——Consistency with long term investment strategy

——Relationship rationale
——Financial return versus risk profile

A number of the would-be investors listed in Table 8 would be regarded as contributors of so-called strategic
equity — as strategic partners in an NPP project. An important example of the strategic equity that is increasingly
sought by NPP project developers is vendor equity. Vendor equity represents an increased degree of commitment
by vendors (e.g. NSSS suppliers) over and above that made when vendors, for example, facilitate financing from
sources such as relationship banks or ECAs, or when they provide short term credit (e.g. construction loans).
In providing equity — i.e. in providing financing in return for a share in future net incomes generated by a
project — a vendor takes on more risk than would be the case if it were to restrict itself to merely facilitating
financing or providing short term credit; from a risk perspective, shareholding is a riskier proposition than lending,
and much riskier than simply selling. Compared with other sources of finance, vendor equity may be expected
to be relatively expensive; however, it may have the added advantage in ensuring that a key contributor to the

11
Even a financial investor, if acting as a shareholder, would almost certainly only do so as part of a broader commercial
(or financial) arrangement within the context of a long term relationship with the owner of the new NPP or its shareholders.

59
success of an NPP project has an interest in ensuring that project’s success. Vendor equity is likely to constitute a
relatively small part of overall financing in many cases; it may also be contingent on provision of an exit strategy
(e.g. the guaranteed right to sell shares to other shareholders after a certain point in the project life cycle).
The utilities in Table 8 might be potential sources of incumbent or local partner equity. Joint ventures are
often the preferred approach for nuclear investors, and in that context, a utility that is incumbent in and familiar
with a particular market can be an attractive partner for an NPP project developer. Incumbent and local partners
may have experience with dealing with local regulators, and can often make an in-kind equity contribution (such as
site and/or infrastructure).

5.7. DEBT FINANCING

The nature of the debt financing negotiation (between project developer and potential lender) will typically
reflect the nature of the broad risk/return profile that lenders accept in agreeing to participate in the financing of
a project. Lenders enjoy a potentially more limited downside than equity investors (since they enjoy priority in
claims on residual project value in the event that a project suffers financial distress, resulting, for example, in the
need to seek additional financing, or even bankruptcy). However, lenders also suffer from a more limited upside; in
the event that the project is more successful than anticipated it is the equity investors who will enjoy the resulting
economic benefits. In a sense, the best outcome lenders can ever hope for is that will be repaid (both the money
they lend and the interest that was agreed).
In this context, potential lenders to an NPP project (or any project) will focus considerable attention on a
given project’s ability to service its debt, i.e. to repay the principal and interest. In general, lenders’ appetites to
take on risk regarding such repayment will be limited. Insofar as a project’s ability to service its debt is uncertain,
lenders will typically be unwilling to lend to that project, regardless of the interest rate that is offered.
This downside risk aversion manifests itself in the two step nature of the debt financing process, and in a
focus (during the first of those two steps) on the evaluation of liquidity metrics designed to assess a project’s ability
to service its debt.
During the first step of a lending process, lenders will focus primarily on allocating and mitigating risks.
Depending on the ultimate risk allocation and security package agreed, they will negotiate remuneration, but this
discussion comes after the risk profile of the project has been agreed.
However, there are risks that banks will not enter into. This implies that said risks would need to be borne by
the equity providers, if the transaction were to reach financial close (for example, banks would likely be unwilling
to take the completion risk of a nuclear new build project, even if the sponsors were to double the margin of the
senior debt).
Much of Sections 2–4 has covered the issue of risk allocation, and during the first step of a lending process
many of the issues and approaches discussed will be relevant to providing lenders with assurance that their exposure
to various risks will be limited. After briefly introducing the types and sources of debt in Section 5.7.1, the focus
of Section 5.7 will turn in Section 5.7.2 to a discussion of the metrics that lenders use to assess projects’ viability
in terms of their ability to service their associated debt. By way of an example of how these (and other) liquidity
metrics are employed in the lending sphere, Fig. 24 sets out the boundaries of what is typically acceptable to banks
contemplating lending to a power utility, as well as the range of metrics that would qualify a utility’s bonds for
different ratings.
The ways in which the cost of debt can be benchmarked are discussed in Section 5.7.3. The first part of this
discussion is perhaps most relevant to a consideration of how a bank or other lender might benchmark its own cost
of capital and, in particular, the way in which a basic hurdle rate can be viewed as being modified in light of a range
of factors.

5.7.1. Types and sources of debt

There are two main sources for raising debt in order to finance large, capital intensive infrastructure projects,
namely the bank market and the debt capital markets. Within that context, there is a broad range of debt instruments
that can be used to finance the construction of a new NPP; commercial bank loans and bonds are the most
commonly used instruments to raise the sort of long term financing that is needed by a nuclear new build project.

60
 FIG. 24.  Financeability metrics for power utilities.

In addition to raising equity, the owner of a new NPP will, therefore, draw major benefits by deploying these tools
in a complementary way, based on their respective advantages and relative disadvantages. Although it is difficult to
enter into greater detail at this stage,12 the following may still be noted in connection with loans and bonds.
Based on the expertise and experience of their teams, commercial banks can usually bring valuable
structuring skills to bear, which may lead to more tailor-made loan financing solutions to support the specificities
of an investment. Furthermore, commercial banks can display some flexibility during the construction phase, when
the original disbursement schedule of their loan may need to be revisited in order to adapt to a revised construction
schedule. However, under the prevailing market circumstances, banks have little incentive at the time of writing13
to stretch the maturities of their loans to their fullest extent; they may eventually do so but at a (relatively) higher
price. Nevertheless, certain combinations of bank loans and insurance coverage may allow for longer maturities, in
particular for the financing of exports through the use of export credits.14
Compared with bank loans, bonds offer (very) long tenors of up to 40 years,15 which are well suited, as a
matter of principle, to the financing requirements of assets such as nuclear new build projects, which have long
economic lives. However, the money raised through a bond is typically made available to the borrower in one
single (large) lump sum, which may not fit well with a new build project’s spending curve and may subsequently
trigger an onerous cost of carry. Furthermore, bonds have a rather non-flexible amortization profile, which makes
them arguably ill-suited to adapt to changes in an investment’s cashflow stream due to a longer than expected
construction phase, for example.

12
The specifics of an investment proposal may impose particular requirements and/or restrict the use of certain financial
products, for example.
13
No increase in incentive is expected for the years to come, notably owing to the new regulatory environment for banks and
financial institutions (e.g. Basel III, Solvency II).
14
See the appendix of Ref. [2] for a more detailed presentation of ECA backed loans for the financing of nuclear (new build)
projects.
15
As noted, the world of corporate bonds is very developed, with standard tenors at 3, 5, 7 and 10 years; certain issuers with
a strong financial credit history can raise bonds with 20, 30 and even 40 year tenors. Project bonds have been widely discussed for a
number of years; however, these instruments are more suited to the refinancing of projects in activity than of projects in construction.

61
5.7.2. How debt providers measure risk acceptability using liquidity metrics

Debt service cover ratio (DSCR) represents one of the fundamental risk metrics for project lenders.
Defined generally as CFADS16 divided by the debt service requirement in the given period (interest and principal
repayments), the DSCR has a major impact on a project’s cost of capital. A risky project will attract a higher
DSCR requirement from the lenders, providing a strong period by period cashflow buffer against downside risks
(such as lower electricity sales and prices or lower plant availability). Lenders will assess and propose the DSCR
constraint within a broader debt sizing framework to assess the maximum credit capacity for the project. Other
things being equal, a high DSCR will have a scissor effect on a project’s cost of capital, since the excess cashflow
(if any) after debt is serviced will typically fall into the shareholders’ account (provided no other unfunded
liabilities exist in the project at that time). Hence, a DSCR of 2.0X would channel 100% of the full debt service
requirement (i.e. the amount of the unused DSCR cushion) into the shareholders’ accounts, providing a return in
that period. This can push up equity returns, making the project cost of capital uncompetitive. A variant of DSCR
is the average debt service coverage ratio (ADSCR), which is the average of the period by period DSCRs over the
life of a loan.
Loan life cover ratio (LLCR) represents another important variable in the assessment of a project’s credit
capacity. LLCR is the measure of a project’s expected CFADS over the remaining life of the debt (up to the
contractual maturity date). This represents another important cashflow based coverage measurement, which is
powerful because it captures total project CFADS and compares it with debt outstanding (the ratio would obviously
have to be greater than 1.0X at any point in time, and for large, stable cashflow infrastructure projects, it can usually
be seen in the 2–3X coverage territory). LLCR is less reliable than DSCR, however, as it uses forecast rather than
actual period CFADS, which are discounted to a present value figure. Importantly, however, LLCR is influenced
by the debt tenor, so the longer the repayment period, the longer the capture of CFADS under this calculation.
A variant of LLCR is project life cover ratio, in which lenders calculate the present value of the CFADS over the
full project life (beyond the final maturity date of the loan). This can be justified on the assumption that secured
lenders theoretically can control a project’s CFADS until the loan is fully repaid.

5.7.3. Benchmarking the cost of debt

Loans exhibiting the following risks will be subject to bankability analysis and premium pricing (i.e. lenders
will set a higher hurdle rate in contemplating lending involving these risks):

—— Structuring risk, for example, when cashflows may be encumbered or lenders are in a structurally subordinated
position;
—— Greenfield or construction risk, when project completion is necessary for debt to be repaid;
—— Documentation risk, when cashflows depend on the terms of asset specific agreements (such as concession,
or acquisition or divestment);
—— Due diligence risk, when the borrower’s risk profile and repayment capacity must be independently assessed
by the lenders (such as market risks, operating risks, regulatory risks);
—— Underwriting or syndication risk, when an arranger commits to and funds a loan or bond ahead of general
syndication (for loans) or book building (for bonds);
—— Liquidity risk, when a loan commitment is made and held over a long period of time, or the loan tenor is long,
and the asset cannot be profitably funded by the lender, usually owing to market disturbances;
—— Pricing risk, when market conditions or the borrower’s condition changes such that the loan or bond price
(a function of its margin or coupon and maturity profile) no longer reflects the original risk profile of the loan
or bond (which may force the lender or investor to take a mark to market write-down on the asset);
—— Asset–liability mismatch risk, when the loan or bond profile cannot be matched to the lender’s or investor’s
funding source (this can happen in amortizing loans or bonds, typically in long term project finance).

These and other factors are summarized in Fig. 25.

16
A somewhat related measure is that of the flow of funds from operations, which is the cashflow after meeting operating
expenses, including taxes, interest and preferred dividends but before inflows or outflows related to working capital.

62
 Adjustment to 'basic' hurdle rate

Sovereign/politicaI Loan legal &

Technical risks Commercial risks Financial risks Management Shareholders Liquidity
risks documentation risk

Corporate
F/X transfer & Access to/cost of Long term Market/secondary
Enforceability Plant/equipment Route to market structure -
convertibility equity commitment market appetite
governance

Locations/ Access to/cost of

Changes in law Governing law Demand risk Experience Reputation Pricing/ reliabiIity
infrastructure debt

Licensing,
Credit rating Financial
compliance Creditors' rights R&D Price risk Depth
migration strength
reputation

Least-cost
Payment risk Refinancing risk
operation

FX/tenor
Environmental
Supplier risk mismatch
impact
risk

Liquidity/
solvency

FIG. 25.  Adjusting the ‘basic’ hurdle rate.

63
5.8. FINDING AN ACCEPTABLE PROJECT RISK ALLOCATION

As illustrated in Fig. 1 in Section 1.1, the overall process for risk allocation for an investment in a nuclear
new build is sequential and iterative. It involves identifying, analysing and (re-)allocating the project risks between
the stakeholders in the new build project, and typically in return assigning parts of the project’s expected revenue
streams to these same stakeholders. This process can be viewed as a search for the point at which every project
stakeholder is satisfied with the share of the project’s overall revenue stream that the project developer has offered
them, given the risks that they have been allocated. The discussion in the context of the financial stakeholders
above suggests that this search can be viewed as a process whereby the project developer proposes revenue
shares to stakeholders and those stakeholders decide whether to accept or reject these proposals by comparing the
implied return metrics (e.g. equity IRR for equity providers) to their own adjusted hurdle rates. This idea will be
outlined further in Section 5.8.1, where the notion of the tendering authority, or utility negotiating an electricity
off-take agreement, as a third class of financing stakeholder that must be satisfied with the eventual risk allocation
(in addition to investors and lenders) will be emphasized. Section 5.8.2 introduces a broad framework for thinking
about the overall process of reaching an acceptable overall project risk allocation for all stakeholders (not only
financial stakeholders) in a project.

5.8.1. Introducing a third financing stakeholder

As discussed above, the risk/return profile that is eventually acceptable to the owner of the new NPP, and
more broadly to the various stakeholders involved in the procurement and the delivery of the investment, may
be thought of as the point of convergence of various factors, including the project economics, shareholders’ and
other stakeholders’ requirements, and market standards. In deciding whether to participate in a project, investors
and lenders will evaluate the key metrics that concern them, relative to their own adjusted hurdle rates. Figure 26
illustrates this idea by highlighting the metrics that will be of concern to the three different classes of financing
stakeholders, and the interdependence between the actions needed to satisfy each stakeholder. Assigning a larger
share of project revenues to lenders will, all other things being equal, lead to a lower share being available for
investors, and vice versa. Ensuring that all lenders and investors are satisfied when they assess the revenue streams
and returns on offer by the project developer (as captured by the metrics shown in Fig. 26) against their adjusted
hurdle rates is the key challenge in financing a nuclear new build project.

Electricity off-taker
Price paid per kWh
Equity IRR

Lender
Equity investor
RAROC
Equity IRR
DSCR
Debt IRR
LLCR
WACC
Debt/equity

FIG. 26.  Metrics of interest to different stakeholders.

64
 Figure 26 introduces a third class of financial stakeholder: the tendering authority or electricity off-take
agreement counterparty (labelled the ‘electricity off-taker’ in the figure). Clearly one approach to ensuring that all
lenders and investors are satisfied with their share of project revenue streams (i.e. their returns) is to increase the
value of the overall revenue stream by increasing the per kW·h payment terms in the electricity off-take agreement.
However, there may be some reluctance on the part of the tendering authority to allow the cost of electricity from
a new NPP to be out of line with, for example, current or projected wholesale electricity costs in the market. In
this sense, the challenge of reaching a point of equilibrium is a matter of reconciling three classes of financing
stakeholders to a set of arrangements that specify electricity price, returns to lenders and returns to investors.
Reaching the point of equilibrium is based on a combination of, inter alia, in principle expectations (in terms
of maximum exposure to financial liabilities, profitability targets, etc.) and a comprehensive and detailed analysis
of the specifics of an investment. A broad economic analysis is subsequently needed in order to determine the ‘field
of the possible’, which can bring together the different expectations and requirements from all the stakeholders
involved in the preparation and the procurement of the investment proposal. Such analysis will be refined during a
succession of phases and steps, each of which will move a succession of financing proposals closer to an eventual
point of convergence in an acceptable set of returns, as will be outlined in Section 5.8.2.

5.8.2. Locating financing in the overall search for acceptable risk allocation

The process of allocating risk to the financing stakeholders, and achieving agreement on the returns that those
stakeholders will receive, is essentially part of a broader process of allocating risk across all project stakeholders,
including commercial stakeholders (such as EPC contractors), financing stakeholders (such as ECAs) and parties
involved in guaranteeing the project’s revenue stream (for example, an electricity utility or set of electricity
wholesalers). This process can be viewed from the perspective of the project developer concerned as a series of
steps, as shown in Fig. 27.
As mentioned previously, the overall process of risk allocation is sequential and iterative, based on the various
stages identified above and the developments of the commercial and contractual negotiation between the various
stakeholders. Once the various contractual arrangements have been agreed and the project risks (including the
financial risk) have subsequently been allocated and adequately mitigated, an ultimate assessment of the investment
case is performed by the owner of the new NPP and its equity shareholders, before a final approval is given.
As noted already, the economic analysis of an investment opportunity for a nuclear new build is based on
an exhaustive due diligence process (covering legal, regulatory, technical, economic and financial matters) that
includes the definition of an investment base case; the preparation of (long term) financial projections to assess its
resilience; and the testing of a broad range of costs and price variation scenarios in order to stress test it. Financial
modelling is a tool to assist in that part of the decision making process. In fact, it is one of the key tools to be used
by the future owner of a new NPP in order to develop a bankable investment proposal for its construction and
financing; for an investment proposal to be bankable, it would need to demonstrate, inter alia, that it will generate
sufficient cashflows in the future, benefit from an appropriate collateral and have a high probability of success
(in its implementation and operation).
Long term financial projections will be developed by the owner of the new NPP very early on, and will
then be updated on a regular basis, as and when the ownership and commercially related input changes and/or the
technical, economic assumptions etc. vary. A financial model needs to be designed to that effect. The purpose of
the financial model is, inter alia, to illustrate how project risks and risk allocation (inputs) will flow through the
NPP’s cashflows and capital structure, and to generate a series of financial metrics that will allow key stakeholders
(e.g. primarily equity investors and lenders) to assess the project risk profile, and more broadly the economic sense
of the overall investment opportunity, notably in terms of both: (a) bankability (e.g. minimum investor and lender
thresholds); and (b) capital recovery risk (e.g. ability to service debt and pay dividends across various project
structures, and each structure’s ability to withstand downside risks).
When developed on a standalone basis, the financial model is typically designed on a cost recovery principle,
meaning that the new NPP’s cost structure determines the revenue requirement (or cost recovery tariff or electricity
price) in each calculation period. As the majority of the costs of an NPP are capital recovery related (e.g. equity and
debt), the revenue requirement (e.g. a cost recovery tariff) is calculated by the financial model at a level that must
satisfy the given risk parameters of the owner of the new NPP and the finance providers (in particular, the lenders).

65
 In Step 1, the various project risks are priced individually, based on a preliminary in
principle allocation to the relevant parties.

In Step 2, the combination of the various project risks leads to a specific risk profile for
the new build project, upon which a first assessment of the project’s cost of capital can
be undertaken by the owner of the future NPP.

In Step 3, now that the project has been assessed, its cost of capital can be
tested against any relevant benchmark(s).
A typical interval of acceptability for cost of capital would be between the minimum cost
of funding required for financing a business of a similar nature, including a premium for
the project (based on a conservative ownership and contractual structure) and the
maximum cost of funding that could be sustained by the project’s economics and would
be acceptable to the market.

Step 4 is a detailed assessment; based on the outcome of the preliminary round of

assessment of the project risks and the cost of capital, the owner and other stakeholders
(e.g. suppliers, contractors) enter into more detailed discussions about various key
parameters of the investment, including project and financing costs. Further to such
negotiation, a revised allocation of the project risks is likely to lead to the revisiting of
their pricing and hence of the cost of capital.

In Step 5, the project’s cost of capital, once re-assessed, can again be tested against
any relevant benchmark(s), as outlined in Step 3 above; it should be noted that the
outcome of Step 5 may lead to another series of iterations between the parties,
before an equilibrium may eventually be found between risk allocation and the cost of
capital.

FIG. 27.  Allocating risk across all project stakeholders, from the perspective of the project developer.

66
5.9. PHASED FINANCING

As a follow-up, it would subsequently be perfectly reasonable for the owner of a new NPP to give due
consideration to a phased approach to the financing of the investment. The objective would be to better match
the financing of the NPP with its risk profile in order to more carefully manage — and ultimately to reduce —
the overall cost of capital of the new build project. In particular, the differentiating of the funding structures during
the various phases of its life (as noted, there are four phases in the life of an NPP, including the development,
construction and operation period) could be envisaged. With such a strategy, the owner of the new NPP could
revisit the original balance of the funding sources used and the usage of the various funding instruments selected.
In that context, the development of a refinancing strategy needs to be considered early and factored into the overall
economic assessment of the investment proposal, which would — for example, after COD — lead to the reviewing
of the funding structure originally put in place in order to reach financial close.
As illustrated in Fig. 28, a nuclear new build project becomes a less risky investment proposal from both an
equity investor’s and a lender’s point of view once the NPP has started its commercial operations. This is because
the construction risk has disappeared, the NPP’s teething problems in its early years of operation have been
(or are being) rectified, and the NPP delivers more stable and revolving cashflows, based on its regular production
of baseload electricity.
A refinancing strategy may, therefore, be developed and implemented by the owner of the new NPP, whereby
some new long term debt could be raised, which would be used to repay: (a) the debt originally raised for the
project and replace it with new debt raised on the debt capital markets; and (b) a portion of the shareholders’ equity
invested in the project.
As a result, the shareholders should be able to improve the economics of the NPP project, and ultimately
the profitability of their investment in it. That overall objective would be supported by, inter alia, the following
benefits:

—— Better pricing for the newly raised debt, mainly because it would be borrowed after the NPP has achieved
completion and commercial operation has started. The construction risk would, therefore, no longer be
relevant to the assessment of the project risks, which should support a downward revision of the interest rate,
and more particularly of the margin charged to remunerate the risk.

FIG. 28.  Illustrative overall cashflow profile of a nuclear new build project.

67
 —— Longer tenors for the newly raised debt based on the replacement of the bank debt raised to reach financial
close with tenors of up to a maximum of 18 years. This is the longest maturity achievable to date for bank
debt through an ECA backed bank loan, based on the latest OECD rules [9] for export credits for the nuclear
sector, and a typical linear amortization17 profile by debt to be raised primarily on the debt capital markets
(e.g. bonds) with tenors of up to 25 or 30 years and with balloon or bullet18 repayment profiles.
—— Early equity release combined with an improved debt to equity ratio is achieved through the payment of
an early exceptional dividend further to the repayment of a portion of the shareholders’ equity invested at
inception and during the construction phase, using part of the newly borrowed debt to that effect.

Further, when put in the context of a de-risking of the investment,19 the combination of the replacement of
equity with (new) debt and the refinancing of the debt originally raised should eventually lead the owner of the
new NPP to seek to maximize to the fullest extent possible20 the debt to equity ratio of the project, subsequently
increasing the leverage of the transaction, and ultimately supporting a more favourable stream of dividends for the
shareholders over time.
Finally, depending on the ownership and commercial structure selected to procure and deliver a new build
project, it may be relevant, and necessary in some instances, to plan early for the refinancing of the investment
in a new NPP. As a consequence, there will likely be benefits (and, to a certain extent, a need) to reflect such a
possibility in the contractual arrangements supporting the delivery of the investment when they are drafted and
negotiated (e.g. during the development and the preparation phases). In particular, this would be very relevant in
the context of a structured corporate based scheme or a project based structure.

6.  CONCLUSION

A number of key themes and messages have pervaded this publication, and may perhaps be usefully revisited
in this conclusion.
One of these is that a nuclear new build project poses a set of unique challenges when compared with, for
example, a coal-fired generation project. Although these may originate in the technical, engineering, social, political
or regulatory spaces, they will potentially have a profound impact on the profitability of a project, and will thus be
of concern to both equity investors and lenders. It is in this sense that it can be argued that all risk is financial risk.
A second key theme of this publication is that the management of these risks is crucial to inducing investment
in — or lending to — a new build NPP project. From a project developer’s perspective, one way of managing these
risks is by allocating them via contract to other project stakeholders, particularly to those who are better placed
to manage them, while recognizing that it may be costly to do so (in that it is likely that a risk premium will have
to be paid to stakeholders who are willing to take ownership of such risks). Both the project developer (insofar
as they retain significant ownership of particular risks, which is highly likely) and the stakeholders to whom risk
has been successfully allocated by the project developer will typically attempt to employ a systematic approach
to risk identification and mitigation; there are a range of tools available to assist them in this. Insofar as it can be
demonstrated to potential investors and lenders, successful risk management (both allocation and mitigation) will
reduce the cost of financing a new build NPP project.

17
Amortization refers to the process of paying off a debt over time through regular payments, based on an amortization schedule
detailing each periodic instalment. For each, a portion is for the payment of interest (‘I’), while the remaining amount is applied to the
repayment of the principal (‘P’). There are two types of instalment: (a) the constant one, whereby (P + I) remains the same throughout
the amortization schedule; and (b) the one with a constant P.
18
In a ‘mortgage-style’ repayment profile, the debt is repaid following a straight line (e.g. linear) amortization profile; in the
case of a balloon payment, the debt repayment schedule combines a series of regular payments and a large end-payment; in the case of
a bullet repayment, the debt is repaid all at once at the end of its maturity.
19
As noted, after COD has been reached and the NPP is in commercial operations, the overall level of risk of the investment is
reduced substantially.
20
Based on the revised economics of the investment, when the NPP is to generate stable and revolving long term cashflows.

68
 A third central theme of this publication is that the key to obtaining financing for any project is providing
finance providers with a prospective stream or share of project revenues that meets their risk–return requirements
(as captured by their notional hurdle rates). As an NPP new build project developer seeks to obtain financing,
they may be viewed as exploring different approaches to dividing the CFADS (and equity compensation) between
potential sources of finance. In doing so, they are attempting to find the point at which all sources of finance
(e.g. banks, sovereign wealth funds) are satisfied with their prospective returns from involvement in the project.
If there is potential flexibility on the revenue side of the project (for example, via potential adjustment to the price
of electricity contemplated by an electricity off-take agreement with a power off-taker) then seeking such a point
becomes both more challenging and — arguably — more likely to succeed (since additional scope for flexibility
exists).
A fourth and final key theme may be simply stated as: risk drives (financing) structure, and structure drives the
cost of capital. This theme reflects the innate conservatism of lenders (whose only upside from lending to a project
is recovery of their principal and interest) rather than investors, the value they place on liquidity based risk metrics
and the relatively inexpensive nature of the financing they provide. Put simply, if a project can be structured in a
way that maximizes the share of debt in that project’s financial structure (perhaps to a figure of around 70%), it will
achieve the lowest possible cost of capital. A bigger share of debt in a project’s financing (and correspondingly
lower share of equity) will improve project economics, leading to (for example) a lower electricity price for
off-takers. This theme links to the earlier one regarding the unique nature of the financing challenges raised by
a new build NPP project; the capital intensive nature of such investments leads to their economics being highly
sensitive to the cost of capital. Once again, risk and its allocation is key to project economics.

69
 Appendix

THE ROLE OF EXPORT CREDIT AGENCIES IN THE

FINANCING OF NUCLEAR POWER PROJECTS

A.1. BACKGROUND

Nuclear new build projects are very particular investment proposals, which are unlikely to be undertaken on
a straightforward economic basis by equity shareholders and by lenders. This is due to, inter alia, their extended
life cycles, their very long term underlying commitments vis-à-vis waste management and decommissioning, the
evolving nature of their risk management and the magnitude of their financing requirements.21 In addition, other
factors also apply, all implying a degree of political involvement22 that makes the investment case even more
complicated.
As a result of the recent financial and economic crisis, the availability of sizable budgets from public sector
players for long term investments in NPPs has been under stress in various parts of the world for a number of
years now, and the situation is unlikely to change dramatically in the near future with many State budgets in need
of rebalancing, particularly in Europe. The capacity of private sector stakeholders to take over the responsibility
for funding such investments has also been challenged following the impact of, inter alia, the liquidity crunch on
banks’ funding strategies in Europe during summer 2011, the recent macroeconomic policies on leverage, or the
latest regulation that, ultimately, tends to re-direct the banks’ debt lending activities towards transactions requiring
financing with shorter maturities.
Within this context and among the range of financing instruments that are available and that offer long term
maturities, export finance remains a tool of reference for various stakeholders, including the providers (e.g. sellers)
of equipment and services and the lending banks. Furthermore, the characteristics of this product make it also
perfectly compatible with the requirements of the financing plans typically put in place to fund large, capital
intensive investments in infrastructure, such as NPPs.

A.2. THE BASICS OF EXPORT FINANCING AND THE ROLE OF ECAs

A.2.1. Export financing

As a matter of principle, export financing is related to the provision of financial solutions, risk cover and
advisory services associated with the financing of import or export contracts, with capital goods and/or services as
underlying assets. According to the prevailing general understanding, export financing is also closely associated
with the support provided by ECAs to the sellers, e.g. the companies signing export contracts of goods and/or
services with their clients, who are based in a different country to the ECA.

A.2.2. ECAs and their role

An ECA is a financial institution or agency that provides trade financing to domestic companies for their
international activities in order to promote exports. It can be a private entity or a (quasi-) governmental agency.
An ECA provides various, mainly long term (e.g. with repayment terms of 2 years or more), financing services to
these companies, including insurance covers, loan guarantees and direct loans.

21
The nearly unquantifiable nature (from a financial point of view) of any grave nuclear accident could also be noted, although
it would more likely be a critical issue for the equity shareholders or for the insurers than for the lenders to a new build project, who
would not lend money with such maturities.
22
Such involvement includes the quest for energy independence and energy security and the implementation of policies to
decarbonize the energy sector.

71
 For an exporter, the primary objective of the involvement of an ECA is to remove the risk and uncertainty of
payments from its clients when exporting outside its home country. Such uncertainty may come from: (a) the risk
of loss arising from manufacturing; or (b) the credit risks borne by either: (i) suppliers under their commercial
contracts; or (ii) banks under their credit agreements.
The ECA takes all or part of 23 the risk from the exporter, and shifts it to itself for a premium. Per the Knaepen
Package [10], such a premium must allow the ECA to cover potential losses and its operating costs. Finally, ECAs
can also underwrite the commercial and the political risks of investments in overseas markets that are typically
deemed to be high(er) risk.

A.2.3. What are the risks covered by an ECA?

Risk materializes when a buyer of equipment or services or a borrower does not fulfil its payment obligations
under the commercial contract or credit agreement, respectively. Through the provision of its cover, an ECA will,
therefore, mitigate risks generated by the occurrence of an event of a political, or of a commercial nature.
For that purpose, political risk would typically include the following:

—— A decision from the government of a foreign country (usually the country of the buyer) that prevents the
performance of the commercial contract or the credit agreement;
—— A general moratorium decreed by the government of the debtor country;
—— Political events, economic difficulties or legislative measures preventing or delaying the transfer of funds
paid by the debtor;
—— Force majeure (including war, riot, natural hazard).

As far as the commercial risk is concerned, the standard triggering events would be likely to include:

—— Insolvency of the debtor;

—— Default by the debtor;
—— Arbitrary repudiation or refusal.

An ECA undertakes a detailed analysis of risk during the due diligence process it carries out for each potential
transaction, and then decides to which of the eight categories of country risk and which of the eight categories of
buyer risk as defined in Ref. [11] it will eventually allocate an operation. Based on such a rating, the ECA will
subsequently define the terms and conditions applicable to its cover for an operation.

A.3. EXPORT CREDIT AGENCIES AND EXPORT CREDITS

A.3.1. A brief introduction to the OECD Arrangement

As a cornerstone of the trade finance business, the OECD Arrangement on Officially Supported Export
Credits (the ‘Arrangement’) [11] has been providing a framework of reference for the orderly use of officially
supported export credits since 1978. However, it is not legally binding, but is an informal agreement between the
various OECD member countries.
As a key objective, the Arrangement seeks to ensure a level playing field for official support [11]24 to export,
in order to “encourage competition among exporters [from the OECD exporting countries] based on quality
and price of goods and services exported rather than on the most favourable officially supported financial terms
and conditions”. Furthermore, specific appendices are provided for a limited number of sectors and financing
techniques, namely: NPPs, shipping, civil aircrafts, renewable energy and water projects, and project finance.

23
In the case of insurance or a loan guarantee, the percentage of cover provided by the ECA may vary, impacting on the level
of premium to be paid by the exporter. As a matter of principle, certain ECAs like to leave the exporter with a certain level of residual
risk (generally 5%) in order to have an alignment of their interest with those of the exporter and the lending banks.
24
As defined in Article 5 (a) of the Arrangement [11].

72
 The Arrangement therefore provides a detailed range of guidelines to determine what an export credit can
finance; identify the starting point of credit of a facility25; define the terms of repayment of a loan (for the principal
and the interest); detail the calculation principles of the insurance premium to be paid to the ECA; and provide a
‘safe haven’ clause for interest rates. A safe haven clause provides that export credit practice that conforms with the
interest rate provisions of an international undertaking is not considered a prohibited export subsidy, thus providing
some protection against the risk of action on the grounds of illegal subsidization.

A.3.2. The structure of an export credit

As illustrated in Fig. 29, an export credit26 financing structure implies the interaction of a number of different
stakeholders, each with a specific role.
In summary:

—— A company (the ‘exporter’, or the ‘seller’) signs a commercial contract with its client (the ‘buyer’), according
to the terms of which the seller will supply certain goods and/or services, and the buyer will pay for these
upon the attainment of certain milestones.
—— The buyer may have to borrow money from commercial banks in order to make the payments due under
the terms of the commercial contract. To that effect, the buyer (also known as the ‘borrower’) will enter
into a credit agreement with a group of lenders (the ‘lenders’) and undertake to, inter alia, service the debt
(i.e. pay interest and repay the debt principal) over a period of time agreed in advance, i.e. the repayment
period.

FIG. 29.  An export credit financing structure.

25
The starting point of credit of the facility is determined by the ECA on a case-by-case basis as being the date upon which the
exporter’s contractual commitments are fulfilled. The starting point of credit depends on the specification of the commercial contract,
and a (minimum) 15% down payment will be paid before the starting point of credit can be effective.
26
An export credit is also commonly called a buyer credit. This is because the facility that is arranged in favour of the borrower
per the terms of the loan agreement will provide financing to the buyer to perform its payment obligations under the commercial
contract. In the rest of this section, both terms are used indistinctly.

73
 —— The exporter and/or the lenders may want to protect themselves against the risk of non-performance by the
buyer of its undertakings, per the commercial contract or the loan agreement. As a result, both parties may
seek to put adequate risk insurance arrangements into place for the financing of the commercial contract. The
exporter may subsequently seek an insurance cover (against commercial and political risks) in the context of
its commercial contract and the loan facility attached to it. Against the payment of a premium by the exporter,
the ECA will issue an insurance policy, which will provide appropriate risk cover to the parties, essentially
against the risk of non-payment by the buyer.
—— Depending on various criteria, including the nature, extent and magnitude of the risks to be covered, the
standing of the borrower and the country risk category of the buyer or borrower, the ECA may require that a
third party (the ‘guarantor’) provide a guarantee for the performance of the borrower’s payment obligations.
—— Once the insurance arrangements are put in place to the satisfaction of the ECA and the lenders, and financial
close27 has taken place, the credit facility available under the loan agreement may be drawn down to pay for
the supplies of goods and/or services under the commercial contract.

A.3.3. The extent of export credit facility finance

As illustrated in Fig. 30, the amount of the export credit facility that can be arranged to finance a commercial
contract depends on, inter alia, the value and the amounts of the various components of the commercial contract
itself.
Therefore, based on the guidelines provided in the Arrangement, a distinction needs to be made in the
commercial contract between the exported part and the local part in order to size the loan facility. The exported part
mainly consists of the exportation of goods and/or services that will be sourced primarily in the country of origin of
the exporter (e.g. the national part), or also in other countries (e.g. the foreign part) that are neither the country of
origin of the exporter, nor the country of origin of the buyer. As far as the local part is concerned, it mainly consists
of the works that will be sourced in the country of the buyer.
In the commercial contract, the conditions of payment shall envisage a downpayment of no less than the
equivalent of 15% of the exported part, which will be paid by the buyer before any drawdown can be made by the
borrower under the export credit facility. An export credit facility can be arranged to finance 85% of the exported
part plus a portion of the local part for an amount equivalent to up to 30% of the value of the exported part.28 An
additional debt facility, e.g. a commercial loan, may also be arranged by the lenders in order to provide the buyer
with a complementary financing solution for the downpayment and of the portion of the commercial contract that
is not financed by the export credit (i.e. the portion of the local part that is not eligible for the buyer credit).29
However, such a loan facility will not benefit from any insurance or guarantee cover from the ECA.

A.4. THE ROLE OF EXPORT CREDIT AGENCIES IN INFRASTRUCTURE PROJECTS

A.4.1. Export credit agencies as a provider of large amounts of financing

Nuclear projects, whether they are new build or rehabilitation projects, are traditionally very large consumers
of equipment and services. In a new build project, lots such as the nuclear steam supply system, the turbine island
and the instrumentation and control package typically represent up to 80% of the total overnight costs of a project.
These packages are heavily reliant on expensive, large and/or sophisticated pieces of equipment, which are usually
manufactured by a limited number of specialized and experienced suppliers.

27
Financial close is the date of availability for initial drawdown of the long term financing required to fund the performance
of the commercial contract. It is taking place after the loan agreement has been signed, and any condition precedent to initial drawing
envisaged in such agreement has been duly satisfied.
28
It is to be noted that the decision to incorporate a certain proportion of the local part in the total amount of the export credit
facility ultimately depends on the ECA’s decision. (There have been instances in which the ECA accepted to incorporate a smaller
portion of the local part than originally requested by the exporter in its request for insurance.)
29
The combination of an export credit and a commercial loan can, therefore, provide a long term financing solution to the buyer
for the total amount of the commercial contract it has signed.

74
 Local Part

(100)

85% of Exported
Part (255)

Exported Part
(includes both national
part and foreign part)
30% of Exported Part
(300) (90)

Export Credit (345)

15% down payment of Exported

Part (45)

Portion of Local Part not eligible for

buyer credit financing (10)
Commercial Contract (400) Commercial Credit (55)

FIG. 30.  Potential amounts of export credit facility.

Those features provide, therefore, a natural field of application for ECA backed export credits; the ability to
offer a financing solution for an amount equivalent to 85% of a very substantial proportion of the overnight costs
of a new build project is indeed a very strong argument for the seller when negotiating a commercial contract with
its buyer.

A.4.2. Export credit agencies as a provider of long loan tenors with competitive terms and
flexible repayment terms

In 2009, the OECD revised certain key parameters of an export credit facility in order to make them more
in line with the sector’s specific requirements. Per the Sector Understanding for NPPs (see Ref. [9], appendix II),
the repayment period of an export credit for a nuclear project has been extended to 18 years (from 12 years for
standard export credits and 14 years for project financed transactions) in order to best reflect the requirements
of its economics. Therefore, the combination of: (a) a drawing period of 5 to 7 years and (b) a repayment period

75
of 18 years can push the overall duration of an export credit up to 25 years, and consequently provide an all-in
maturity more in line with other debt capital market instruments (e.g. bonds).
As noted above, the Arrangement provides a range of guidelines to ensure a fair competition framework
between officially supported export credits from the OECD countries. Such guidance includes a safe haven clause
for interest rates with the commercial interest rate of reference (CIRR) and a minimum interest rate for fixed rate
loans with ECA support; CIRR is not offered by all ECAs. A specific CIRR exists for the nuclear sector, with
longer maturities.
Among the CIRR’s key features, the following may be noted:

—— It is available for the currencies of the participants in the arrangement;

—— It is based on the yield of government bonds plus a spread of 100 basis points (100 basis points = 1.00%);
—— It changes every month;
—— It can be reserved for 120 days against the payment (by the borrower) of a reservation cost of 20 basis
points.30

Based on their construction (e.g. government bonds yield plus a spread of 100 basis points), CIRRs tend to be
very competitive, as illustrated in Fig. 31. However, in practice, the borrower will pay an all-in interest rate, which
will comprise the CIRR plus a margin charged by the lenders. Such margin varies from one transaction to the next
and depends on, inter alia, the lenders’ cost of liquidity (see Section 6), the tenor of the loan, the currency of the
loan and the credit risk of the transaction.
The attractiveness of the export credit offering is further enhanced by the choice (made by the borrower31)
between three possible types of repayment schedules for the buyer credit.

INTEREST RATE / REIMBURSEMENT

from 15 January 2015 to 14 February 2015
CURRENCY
<=5 years >5-8.5 years >8.5-10 years

EUR 0.96% 1.14% 1.38%

USD 2.06% 2.64% 2.98%

MINIMUM INTEREST RATE FOR NEW NUCLEAR POWER PLANTS

from 15 January 2015 to 14 February 2015
CURRENCY
<11 years >=11-12 years >12-13 years >13-15 years >15-16 years >16-18 years

EUR (*) 1.38% 1.70% 1.82% 1.99% 2.04%

USD (*) 2.98% 3.26% 3.33% 3.45% 3.50%

(*) CIRR according to article 20 of the Arrangement.

FIG. 31.  Commercial interest reference rates. (*) CIRR according to article 20 of the Arrangement.

30
Practically speaking, the CIRR that will be applicable to a loan agreement can vary between the date of application by the
exporter until the date upon which the ECA issues its insurance policy. In order to avoid variations that could eventually be costly
(a change in the CIRR by a few basis points could have a material impact in the context of the large quantum of financing involved for
NPP projects), the exporter may reserve (i.e.. lock) for 120 days the rate quoted in its application documents. As a result, the exporter
has a 4 month window to finalize its arrangements, instead of the standard monthly period.
31
That choice may, from time to time, be subject to the ECA’s approval.

76
 The repayment of the debt principal and the payment of the interest combine in equal instalments:

—— The repayment of the principal in equal instalments with variable payments of interest;
—— A tailor-made repayment profile is an option provided that:
●● The repayment of the principal takes place at least every 12 months;
●● No single repayment of the principal (or series of the principal repayments) within a 6 month period exceeds
25% of the total amount of the principal;
●● The first repayment of the principal occurs not later than 12 months after starting point of credit and is no
less than 2% of the total amount of principal;
●● The maximum weighted average life of the repayment period is 9 years, and the repayment period is limited
to 15 years;
●● The payment of interest takes place at least every 12 months, and the first payment of interest takes place
not later than 6 months after the starting point of credit.

As a consequence, and given the specific requirements of an NPP, the choice of a particular profile may
subsequently better support the operating cashflow profile of a nuclear (new build) project.

A.4.3. Export credit agencies as a provider of early support to large size and high value export projects

For exporters of capital equipment or project related goods and services, the ability to offer financing
solutions to their clients (i.e. buyers) has become an increasingly critical competitive advantage in gaining new
business, especially for exports to new and/or emerging markets. Often, this is because buyers in these markets
do not necessarily have access to sufficiently large sources of funding in their own capital markets. Furthermore,
the provision of long term financing solutions has now become an integrated part of most large capital intensive
projects, which are being tendered through international competitive bidding processes.
As a result, ECAs are usually keen and ready to support their exporters at an early stage, e.g. at bid stage,
or before the signature of a commercial contract. This is because one of the key roles for a country’s ECA is to
support sales from its exporters, and in particular the export of (high) value added products and services, which
subsequently broaden the employment of its workforce, promote the development of the latest production methods,
or the acquisition of new skills.
Typically, ECAs will therefore be able to provide relatively detailed and specific input (although such input
will be of indicative nature at this stage)32 with regard to the terms and conditions of their support, including
the level of cover envisaged for the political and the commercial risk, the estimated insurance premium and the
requirements to be expected in terms of security package.

A.5. SKILLS AND EXPERIENCE OF EXPORT CREDIT AGENCIES THAT ARE RELEVANT TO
NUCLEAR POWER PLANT PROJECTS

Like most large investments, NPP projects rely on a variety of sources for their financing based on a
combination of: (a) equity to be provided by the shareholders in a project; and (b) debt to be provided by the
lenders. Among the sources of debt funding, ECAs have been playing a key role for many years with the provision
of insurance products and/or long term financing instruments. They have subsequently developed a wealth of
experience in various fields, as detailed in Sections A.5.1–A.5.3.

32
Ultimately, said terms and conditions may be revisited prior to the finalization of a commercial negotiation and the arranging
of the underlying financing for it, depending on the results of the more detailed analysis of the transaction to be undertaken by the ECA
during its due diligence process. Furthermore, the final terms and conditions on offer eventually need to be validated by the senior
management of the ECA, and approved by representatives from the ministry of finance of the exporter’s country.

77
A.5.1. Extension of specific political support

NPP projects, and more particularly nuclear new build projects, present specific features that tend to
magnify the challenges faced by large capital intensive infrastructure projects. Among others, they have very long
cycles (approximately 100 years, notwithstanding the even longer requirements for the management of the waste
produced), a broader range of stakeholders, including the very particular role played by the government of the host
country of a project, and a strong dependence on public acceptance over the long term. In that context, ECAs often
tend to act as extensions of the political support that may be provided by the public authorities of the exporter’s
country, while acting within the guidance provided by the Agreement. As seen in recent examples of new build
projects, an ECA can, therefore, be involved in a project through the combination of various instruments, including
a direct loan, insurance cover to an export credit, and/or a supplier credit.33 In other instances, an ECA may, in
the context of a specific transaction, increase the quantum of its cover to such level that the prudential rules of
management of its portfolio of assets normally accepted are bypassed, hence increasing substantially its exposure
to a client, a country or even the nuclear sector for a certain period of time. Finally, an ECA may also provide
its guarantee to stakeholders investing in a particular project, if such investment is seen as being of strategic
importance by the public authorities of the exporter’s country.

A.5.2. Dedicated skilled human resources

In various respects, nuclear new build power plants present features that are similar to other major investments
in infrastructure projects, including lengthy and comprehensive preparation and development phases that may
stretch up to 10 years; long construction periods with multiple technical, human and organizational challenges,
etc.; the critical nature of certain key milestones, such as the award of construction permits and completion of the
works; complex contractual arrangements integrating a variety of stakeholders (including shareholders, suppliers,
contractors); and eventually the (very) large quantum of the investment.
ECAs have, therefore, developed dedicated teams, skills and expertise to analyse, structure, procure and
monitor financing solutions for nuclear transactions. These teams have also built good working relationships with
a number of commercial banks, which have historically been involved in the financing of the nuclear sector. Based
on such common ground, both ECAs and these banks are used to working together to finding and implementing
practical solutions to the requirements of long term financing to the sector and their resources can be deployed to
deal with the unforeseen events ‘typically’ to be encountered in such large investment programmes, namely delays,
changes in orders, cost overruns, etc. that may take place during the life of a project, and more particularly during
its construction phase.

A.5.3. Environmental and social aspects

As part of the Arrangement, the OECD has developed a series of detailed recommendations on environmentally
and socially related matters, which have to be taken into account by the various parties involved in a project if they
seek to obtain support from an ECA [12]. In view of the particularities of a nuclear project, these have a particular
relevance for transactions in this industry. Therefore, an ECA will follow a procedure strictly, before it can take a
decision and provide its support to a particular transaction.
In particular, the following may be noted:

—— Project categorization: Any project submitted to an ECA needs to be screened and categorized. There are
three categories (A, B and C), each varying according to the potential environmental and social impact of the
project. Nuclear typically belongs to category A, which is ‘high risk’.
—— Environmental and social review: A comprehensive assessment of a transaction’s potential environmental
and social impacts needs to be performed by an independent consultant who has, to the extent possible,
international standing and an established reputation. In the environmental and social review, the consultant

33
In the case of a supplier credit, the ECA provides its cover directly to a supplier, e.g. the exporter itself, or a subcontractor. The
cost of that credit (any fee to arrange that facility and the interest due) will subsequently be charged by the supplier to the buyer through
the incorporation of these costs in the price of to be paid by the buyer, per the terms and conditions of the commercial contract.

78
 shall, inter alia, review the standards, practices and processes that the parties (including the exporter, the buyer
and possibly the local authorities of the host country) intend to apply in order to mitigate and monitor the
impact of the project during its development, construction and operational phases. As a part of that exercise,
the results of any public consultation launched in connection with the preparation of such a project will also
need to be provided to the ECA and analysed by its teams. An outline of the broad scope of the ECA’s review
is presented in Fig. 32 for illustrative purposes.
—— Project evaluation: Based on the outcome of its environmental and social due diligence, the ECA will evaluate
each transaction. Should any issue, shortcoming or improvement be identified as a result, it may subsequently
require that additional research or preparation be undertaken, and that an environmental and social action
plan be designed, implemented and be monitored during the life of a transaction. When an insurance policy
is to be provided, the ECA may stipulate conditions to be fulfilled in relation with environmental and social
aspects, e.g. conditions precedent, monitoring, etc.
—— Communication: Finally, for category A projects, ECAs have an obligation to disclose general information on
the project, and require that environmental information be made publicly available.

For its evaluation, and as shown in Fig. 33, a civil nuclear project will be benchmarked against three levels of
standards, namely (a) those of the host country, (b) the International Bank for Reconstruction and Development’s
(aka the World Bank’s) safeguard policies if relevant to the transaction, or the International Finance Corporation’s
(IFC’s) performance standards, and (c) any relevant internationally recognized industry standards not addressed by
the World Bank Group34, including those of the IAEA.

Aspects of ECA Review

Social Environmental

Land acquisition process Sustainable use of natural

Public consultation resources
Cultural and historical assets Impact on ambient air (including
Resettlement (including economic emission of radionuclides)
and household aspects) Waste water treatment and
Site security (as applicable) disposal
Working conditions Hazardous material storage and
Safety and major hazards handling
assessment and management for Waste management and disposal
workers/communities Noise and noise abatement
Natural hazards, including Surface water and groundwater
project’s ability to cope with such quality
hazards Natural protected areas/
biodiversity
Liability

FIG. 32.  Broad scope of an ECA’s review.

34
The World Bank Group comprises the International Bank for Reconstruction and Development (IBRD), the International
Development Association (IDA), the IFC and the Multilateral Investment Guarantee Agency (MIGA).

79
 A nuclear power project will be measured against three sets of standards

Relevant Internationally
Host country standards World Bank or IFC Standards
Recognized Industry Standards

International Finance
Applicable environmental World Bank These will be other internationally
Corporation
laws and regulations recognized industry standards not
Other applicable laws and Environmental Assessment Assessment & Mg’t of addressed by the World Bank/IFC and
regulations [13] 4.01 Environmental and Social will likely include relevant
Nuclear laws and Natural Habitats [13] 4.04 Risks & Impacts international legal instruments
regulations (e.g. Pest Management [13] 4.09 Labour & Working adopted under IAEA auspices,
compliance with Indigenous peoples [13] Conditions including (but not limited to):
‘comprehensive nuclear 4.10 Resource Efficiency & Joint Convention on the Safety of
law’) Physical Cultural Resources Pollution Prevention Spent Fuel Management and on
Nuclear licensing [13] 4.11 Community Health, Safety the Safety of Radioactive Waste
processes and Security Management [14]
Cultural Heritage Convention on Nuclear Safety and
Indigenous Peoples Addenda [15]
Land Acquisition and Comprehensive safeguards
Involuntary Resettlement agreement – based on The
Biodiversity Management Structure and Content of
and Sustainable Agreements Between the Agency
Management of Living and States Required in Connection
Natural Resources with the Treaty on the Non-
Proliferation of Nuclear Weapons
[16]

FIG. 33.  Benchmarking a nuclear project against three levels of standards.

The procedures described above are of a relative prescriptive nature and may appear cumbersome from the
outset. However, they provide a sound basis for taking ethical decisions and actions for the various stakeholders in
a project, which may eventually prove to be very beneficial in the long run, in particular in the context of the strong
dependence of any nuclear project on public acceptance and cross-party political support.

A.6. THE CURRENT SITUATION OF EXPORT CREDIT AGENCIES

A.6.1. Support to long term bank debt financing

As a consequence of the financial crisis that started in 2008 and of the liquidity crunch that followed during
summer 2011, the recent changes that took place in the financial markets have led to a renewed emphasis on the
critical nature and the added value of the ECAs’ involvement in a long term debt financing plan.
Following the beginning of the crisis, the governments and regulatory authorities of the most advanced
economies promoted the revision of a series of prudential rules [17]35 applicable to providers of debt financing. As
a result, there has been a strengthening of the rules for most commercial and investment banks, which until then
had been active in the financing of large capital intensive investment in the infrastructure sector. Among others, the
guidelines for accounting and booking (long term) loans were revisited, and the banks’ cost of capital subsequently
increased substantially. This is primarily because banks now have to set aside larger amounts of capital (e.g. equity)
to match their liabilities (e.g. the loans they carry in their books). The main objective is, therefore, to improve the
banks’ short to medium term cash positions through tougher liquidity and solvency ratios. It is also to bolster their
longer term resilience to help them withstand any negative revision that might occur in the prices of their assets,

35
These rules are commonly referred to as Basel III [17] for the banking industry and Solvency 2 for the insurance industry.
Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the
regulation, supervision and risk management of the banking sector. Solvency 2 is a fundamental review of the capital adequacy
regime for the European insurance industry aiming at establishing a revised set of EU-wide capital requirements and risk management
standards in order to increase protection for policyholders.

80
which could lead to unsustainable imbalances between their assets and their liabilities.36 In that context, owing to
a more favourable treatment of ECA backed facilities under Basel III regulation, the involvement of an ECA in a
transaction ultimately promotes some form of additionality through facilitated access to a broader pool of banks.
Banks would otherwise be less likely to provide competitively priced large amounts of debt financing with long
tenors to large capital intensive operations.37

A.6.2. Export credit agencies’ support of market liquidity

As already noted, ECAs contribute to strengthening the economics of the projects they are involved in through
the enhancement of the terms and conditions of their credit facilities with, inter alia, their competitively priced
fixed interest rates in various currencies, the longer tenors they are in a position to offer to transactions with long
term economic horizons, or sculpted (profiled) repayment schedules that follow typical cashflows from operations.
As a result, and depending on the credit rating of their countries of origin, ECAs can, therefore, also support the
liquidity of the bank debt markets through access to securitization and broader distribution channels. For example,
some banks have been able to segregate high quality assets consisting of selected export credits backed by AAA
rated ECAs, which they carried in their books, to pool them into ad hoc structures, which could subsequently be
monetized, and eventually to sell those to long term investors, such as pension funds or insurance companies. By
doing so, banks have been able to reduce the volume of credits in their books, deleverage and free some capital for
extending their lending capacity to new transactions.

A.6.3. Export credit agencies’ support for financial innovation

Finally, ECAs have also undertaken a review their forms of support in the past few years, and certain of them
have been working towards the development of new products and/or services to adapt to the latest market trends.
Among the revised approaches that appear now to be taking ground for financing large infrastructure projects,
fresh effort are put to the development of funding structures based on bond financing, in particular with a focus
on the construction period, which is the riskiest phase in the life of a nuclear new build project from a financier’s
point of view.38 The stakeholders’ objective is to attract and tap a broader pool of providers of long term financing
outside the traditional group of lending banks (e.g. insurance companies, pension funds), which are looking for
long term investment opportunities offering revolving and stable cashflows in order to match their liabilities
(which themselves have distant horizons). In that context, it is possible that different capital structures could be
developed and put into place during: (a) the construction; and (b) the operational period, in order to raise the
amount of long term financing required by large infrastructure projects.39 Therefore, the ECAs are now developing

36
For example, a series of negative (and brutal) changes in the credit quality of a bank’s portfolio of clients would most likely
lead to a dramatic revision in the price of its assets, which would impact on the strength of its balance sheet, and ultimately on its share
price. It is likely that, as a result, a new round of valuations of the bank’s businesses would be triggered, which would eventually create
a new drop in its share price, and so on. Since banks have developed numerous and complex business relations, this sort of negative
spiralling effect could have dramatic consequences for the banking industry and force many of them to bankruptcy, hence creating a
systemic risk for financial markets worldwide. In 2008, this is precisely why governments of most countries took special measures in
order to avoid such a chain of events developing.
37
At its peak, the crisis led to the near shutting down of the bank debt market, and even after the most acute phases of the crisis,
banks were reluctantly considering committing substantial amounts of credit (above €50 million) with tenors superior to 10 years.
38
Although there are obviously many other technology, operation, organization related risks etc. throughout the life of a nuclear
(new build) power plant, the quantum of the financial risk reaches its peak during the construction phase for the finance providing
parties; this is because, in a worst case scenario, the total amounts of equity and of debt would have been infused and drawn down
respectively, while the NPP would not be completed and, therefore, could not start its commercial operations, hence not generating any
cashflow to service the debt and pay dividends.
39
Traditionally, a single capital structure was put into place to raise funding for new investments, which would remain the same
during the construction and the operation periods: debt was drawn during construction and repaid during operation. Looking forward, it
is likely that the debt originally drawn during construction would be refinanced soon after the start of commercial operations: new debt
would be borrowed in order to repay the original one. The new debt would most likely have better terms and conditions (since the
construction risk would no longer be relevant), and could be based on different financing instruments, including bonds with longer
tenors (up to 30 years versus a maximum of 18 years for ECA backed bank debt).

81
new approaches to ensure that the insurance coverage they have been able to provide to date to bank debt facilities
can also be applied to bond (re)financed structures.

A.7. CONCLUSION

As presented above, export credit is today a critical instrument to mobilize long term financing for large,
capital intensive projects in the infrastructure area, in particular for nuclear new build projects. Among others:

—— The recourse to export credit allows for longer term maturities, the mobilization of a large quantum of debt
financing (in particular during the sensitive construction phase of a project), the preservation of banking
limits, etc. in the context of stricter prudential rules to be applied by banks.
—— Export credit offers specific fixed interest rates with attractive all-in pricing, flexibility with drawing
schedules under the credit, which can match the constraints of commercial contracts.
—— Additional complimentary financing may be offered to finance 100% of the value of a commercial contract,
which can represent up to 80% of the total overnight cost of a nuclear new build project.

In addition to their traditional key role in backing export credit facilities, ECAs are now increasingly keen on
covering direct risks of corporate financing, or contemplating more project finance orientated types of structures.
In that context, it is reasonable to expect that they will become a pivotal partner for arranging and financing large
projects, such as NPP projects.

82
 REFERENCES

[1] INTERNATIONAL ATOMIC ENERGY AGENCY, IAEA Tools and Methodologies for Energy System Planning and Nuclear
Energy System Assessments, Information Brochure, IAEA, Vienna (2009).
[2] INTERNATIONAL ATOMIC ENERGY AGENCY, Model for Financial Analysis of Electric Sector Expansion Plans
(FINPLAN) (2015),
https://www.iaea.org/OurWork/ST/NE/Pess/PESSenergymodels.html
[3] INTERNATIONAL ENERGY AGENCY, OECD NUCLEAR ENERGY AGENCY, Projected Costs of Generating Electricity,
2015 Edition, OECD Publishing, Paris (2015).
[4] BREALEY, R.A., MYERS, S.C., ALLEN, F., Principles of Corporate Finance, 11th edn, McGraw Hill Irwin,
New York (2014) Ch. 19.
[5] INTERNATIONAL ATOMIC ENERGY AGENCY, Alternative Contracting and Ownership Approaches for New Nuclear
Power Plants, IAEA-TECDOC-1750, IAEA, Vienna (2014).
[6] BANK OF AMERICA MERRILL LYNCH, BofA Merrill Lynch US High Yield CCC or Below Effective Yield (2017),
https://fred.stlouisfed.org/series/BAMLH0A3HYCEY
[7] RACHEV, S., PROKOPCZUK, M., SCHINDLMAYR, G., TRUECK, S., Quantifying risk in the electricity business:
A RAROC-based approach, Energy Econ. 29 5 (2007) 1033–1049.
[8] BIERMAN, H., SMIDT, S., The Capital Budgeting Decision: Economic Analysis of Investment Projects, 9th edn, Routledge,
New York, London (2007).
[9] ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2009 Sector Understanding on Export
Credits for Nuclear Power Plants (2009),
http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage=en&cote=tad/pg(2009)19
[10] ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, The Knaepen Package: Guiding Principles
for Setting Premia Fees Under the Arrangement on Guidelines for Officially Supported Export Credits (1997),
https://www.oecd.org/tad/xcred/1910218.pdf
[11] ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, The Export Credits Arrangement text (2017),
http://www.oecd.org/trade/xcred/theexportcreditsarrangementtext.htm
[12] ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, Recommendation of the Council on
Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (The “Common
Approaches”) (2016),
http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TAD/ECG%282016%293&doclanguage=en
[13] THE WORLD BANK, Operations Manual (2017), https://policies.worldbank.org/sites/PPF3/Pages/Manuals/Operational%20
Manual.aspx
[14] Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management, INFCIRC/546,
IAEA, Vienna (1997).
[15] Convention on Nuclear Safety, INFCIRC/449, IAEA, Vienna (1994) (as amended up to 2002).
[16] The Structure and Content of Agreements Between the Agency and States Required in Connection with the Treaty on the
Non-Proliferation of Nuclear Weapons, INFCIRC/153 (Corrected), IAEA, Vienna (1972).
[17] BANK FOR INTERNATIONAL SETTLEMENTS, Basel III: international regulatory framework for banks (2017),
http://www.bis.org/bcbs/basel3.htm

83
 GLOSSARY

average debt service cover ratio. The average of the period by period debt service cover ratios over the life of a
loan.

bankability. The willingness of banks to provide (long term) lending to an investment, and subsequently to hold
illiquid assets (e.g. loans) on their books over the long term.

bank debt. Money owed to one or more banks. Depending on the ownership and contractual structure and the
overall security package available, commercial banks may be prepared — under conditions defined in
advance — to provide long term debt financing to fund the construction and the operations of a nuclear new
build project. In the nuclear sector, banks tend to work in close cooperation with export credit agencies to that
effect.

bond market. A financial market in which participants can issue new debt (on the primary market), or buy and
sell debt securities (on the secondary market). Investors in such a market would typically be corporations or
individuals in search of an income stream based on long term (revolving) cashflows.

cost of capital. The rate of return required or demanded on funds deployed by shareholders or lenders to finance
an investment. Such a rate is typically calculated as an IRR for equity, over the life of the investment, or debt,
over the life of the debt.

cost of funds. The interest rate paid by financial institutions for the funds that they deploy in their business. For
(commercial) banks, the cost of funds is determined by the interest rate paid to depositors on financial
products; this is closely related to — and often used as a synonym for — the cost of capital.

debt. An amount of money owed by one party (the debtor, e.g. the borrower) to another one (the creditor, e.g. the
lender). Debt is subject to contractual terms regarding the interest, the tenor, the repayment profile, etc. From
an accounting point of view, debt is a liability. There are different types of debt (e.g. senior or junior), each
giving the lenders a different priority level in being repaid if the borrower goes into liquidation.

debt service cover ratio. The predicted (or actual) ability of a project to generate sufficient cashflow over a given
period to service the full debt requirements in that period (e.g. payment of interest plus repayment of the
principal) after operating expenses and taxes have been paid. It is calculated (annually) as the ratio for the
period of the forecasted (or actual) cashflow (after deduction of operating expenses and taxes, but before debt
service and dividend distributions) to debt service.

electricity off-take agreement. An agreement between the project developer or owner–operator and a counterparty
who agrees to take the electricity produced by the NPP on the terms and conditions set out in the agreement.

equity. In finance and accounting, the value of an ownership interest in a business (e.g. a company) that is spread
among shareholders. Equity is risk capital: in the case of bankruptcy, all creditors (ranked in order of priority)
are paid against the proceeds of the assets; shareholders are paid last, and receive whatever is left after all
liabilities have been extinguished (e.g. assets less liabilities).

export credit facility. An arrangement which makes a specific amount of funding available from a lender for the
purpose of paying a seller for goods or services that it is exporting to a buyer. The facility may be drawn down
in one of two ways. Either the lender may disburse the funds to the seller directly as it meets its commitments
to the buyer, or it may reimburse the buyer after it has made a payment to the seller itself.

equity internal rate of return. The internal rate of return that equity providers receive on their investment.

85
field of the possible. The set of risk allocation arrangements, contributions to the overall financing and returns on
those contributions that are acceptable to financing stakeholders.

financial close. In the case of lending, this means the date of availability for initial payment of the equity financing
required to fund an investment. It takes place after the shareholder agreement has been signed, and any
condition precedent to initial payment envisaged in such agreement has been duly satisfied. In the case
of borrowing, financial close means the date of availability for initial drawdown of the (long term) debt
financing required to fund an investment. It is taking place after the loan agreement has been signed, and any
condition precedent to initial drawing envisaged in such agreement has been duly satisfied.

financial risk. The combination of different risks associated with the financing of an asset, the occurrence of which
would increase the probability of a financial loss that would subsequently impair the ability of the investment
to provide an appropriate return to its key stakeholder(s).

forward contract. A non-standardized contract between two parties to buy or to sell an asset at a specified future
time at a price agreed upon today (in contrast to a spot contract, which is an agreement to buy or sell an asset
today).

futures contract. A standardized contract between two parties to buy or sell a specified asset of standardized
quantity and quality for a price agreed upon today (the futures price) with delivery and payment occurring at
a specified future date (the delivery date);

debt to equity (or gearing ratio). The relationship between a company’s debt and the equity it has from its
shareholders. Expressed as a percentage, the financial debt to equity ratio is obtained by dividing the debt by
the shareholders’ equity.

interest rate. The rate at which interest is paid by a borrower for the use of money that they borrow from a lender.
The (interest) base rate is the interest rate at which the central bank of a country lends money to commercial
banks. It is a key rate of reference, which influences all the other interest rates in the economy.

internal rate of return. The discount rate that makes the net present value of all (e.g. positive and negative)
cashflows from a particular investment or project equal to zero. The project internal rate of return is typically
used to evaluate the attractiveness of a project: if the IRR exceeds the investor’s required rate of return, the
project is desirable; if it falls below the required rate of return, the project should be rejected. Another type of
internal rate of return is debt internal rate of return. Crucially, debt internal rate of return reflects the cost of
borrowing on a more comprehensive basis than simply the headline rate of interest attached to a loan; it does
so by factoring in any additional costs associated with that loan, such as one off or upfront fees charged to
arrange the loan. The debt internal rate of return is expressed in terms of per cent per annum.

loan life cover ratio. The loan life cover ratio is calculated as the ratio of the present value of the forecasted
cashflow (after deduction of operating expenses, but before debt service and dividend distributions) over the
remaining life of a loan to the total outstanding debt.

margin. The return in excess of the risk free interest rate that an investment is expected to yield as a compensation
for investors who take the extra risk. (The risk free interest rate is the theoretical rate of return of an investment
with no risk of financial loss. It represents the interest that an investor would expect from an absolutely risk
free investment over a given period of time.)

option. A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset or
instrument at a specified strike price on or before a specified date. The seller has the corresponding obligation
to fulfil the transaction (e.g. to sell or buy), if the buyer exercises the option.

86
project life cover ratio. The project life cover ratio is calculated as the ratio of the present value of the forecasted
cashflow (after deduction of operating expenses, but before debt service and dividend distributions) over the
remaining life of a project to total outstanding debt.

return on equity. The amount of net income returned as a percentage of shareholders’ equity. It is expressed as a
percentage and calculated as the ratio of net income to shareholder’s equity. The return on equity measures a
corporation’s profitability by revealing how much profit a company generates with the money its shareholders
have invested.

risk-adjusted return on capital. A regulatory measure for a bank of the expected return on equity after deduction
of operating expenses and loss provisions for the cost of risk.

swap. A contractual agreement between two counterparties to exchange the cashflows of one party’s financial
instrument for those of the other party’s financial instrument.

tenor. The length of time until a loan becomes due for repayment; often used to describe the length of time until the
final instalment of the loan repayment schedule is due for repayment.

term sheet. A short, high level document — typically one or two pages — setting out the material terms and
conditions that the negotiating parties agree will be satisfied by the more detailed final agreement that is
under development.

weighted average cost of capital. The average rate of return required or demanded on funds deployed (e.g. equity
and debt) to finance an investment. Such rate is typically calculated as a weighted average IRR for: (i) equity,
over the life of the investment; and (ii) debt, over the life of the debt.

87
 LIST OF ABBREVIATIONS

BOOT build, own, operate and transfer

BOT build, own and transfer
CAPEX capital expenditure
CAPM capital asset pricing model
CCGT combined cycle gas turbine
CFADS cashflow available for debt service
CIRR commercial interest rate of reference
COD commercial operation date
DSCR debt service cover ratio
ECA export credit agencies
EPC engineering, procurement and construction
FRM financial risk management
IBRD International Bank for Reconstruction and Development
IDA International Development Association
IDC interest during construction
IFC International Finance Corporation
IRR internal rate of return
LC letter of credit
LLCR loan life cover ratio
MIGA Multilateral Investment Guarantee Agency
NPP nuclear power plant
NPV net present value
O&M operation and maintenance
PRR project risk register
RAROC risk-adjusted return on capital
RfP request for proposals
ROE return on equity
SPC starting point of credit
SPV special purpose vehicle
WACC weighted average cost of capital

89
 CONTRIBUTORS TO DRAFTING AND REVIEW

Benbow, J. Portland Advisers, United Kingdom

Curtis, K. Portland Advisers, United Kingdom

Ferrari, M. International Atomic Energy Agency

Harlow, M. Portland Advisers, United Kingdom

Knox, G. Portland Advisers, United Kingdom

Kovachev, M.D. International Atomic Energy Agency

Lepouzé, B. International Atomic Energy Agency

Philp, H. Portland Advisers, United Kingdom

Rollat, X. African Development Bank, Côte d’Ivoire

Stearns, D.F Horizon Nuclear Power, United Kingdom

91
 Structure of the IAEA Nuclear Energy Series

Nuclear Energy Basic Principles

NE-BP

Nuclear General Objectives Nuclear Power Objectives Nuclear Fuel Cycle Objectives Radioactive Waste Management
and Decommissioning Objectives
NG-O NP-O NF-O NW-O

1. Management Systems 1. Technology Development 1. Resources 1. Radioactive Waste Management

NG-G-1.# NP-G-1.# NF-G-1.# NW-G-1.#
NG-T-1.# NP-T-1.# NF-T-1.# NW-T-1.#

2. Human Resources 2. Design and Construction of Nuclear Power Plants 2. Fuel Engineering and Performance 2. Decommissioning of Nuclear Facilities
NG-G-2.# NP-G-2.# NF-G-2.# NW-G-2.#
NG-T-2.# NP-T-2.# NF-T-2.# NW-T-2.#

3. Nuclear Infrastructure and Planning 3. Operation of Nuclear Power Plants 3. Spent Fuel Management and Reprocessing 3. Site Remediation
NG-G-3.# NP-G-3.# NF-G-3.# NW-G-3.#
NG-T-3.# NP-T-3.# NF-T-3.# NW-T-3.#

4. Economics 4. Non-Electrical Applications 4. Fuel Cycles

NG-G-4.# NP-G-4.# NF-G-4.#
NG-T-4.# NP-T-4.# NF-T-4.#

5. Energy System Analysis 5. Research Reactors 5. Research Reactors — Nuclear Fuel Cycle
NG-G-5.# NP-G-5.# NF-G-5.#
NG-T-5.# NP-T-5.# NF-T-5.#

6. Knowledge Management
NG-G-6.#
NG-T-6.#

Key Examples
BP: Basic Principles NG-G-3.1: Nuclear General (NG), Guide, Nuclear Infrastructure and Planning (topic 3), #1
O: Objectives NP-T-5.4: Nuclear Power (NP), Report (T), Research Reactors (topic 5), #4
G: Guides NF-T-3.6: Nuclear Fuel (NF), Report (T), Spent Fuel Management and Reprocessing (topic 3), #6
T: Technical Reports NW-G-1.1: Radioactive Waste Management and Decommissioning (NW), Guide,
Nos 1-6: Topic designations Radioactive Waste (topic 1), #1
#: Guide or Report number (1, 2, 3, 4, etc.)

93
@ No. 25

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