The current financial crisis and resulting credit squeeze raises many questions about how to finance big capital projects. The Carnegie Endowment hosted a discussion investigating how the financial crisis will affect nuclear reactor construction in the United States, with Stephen Maloney and Stephen Goldberg. Carnegie’s Sharon Squassoni moderated the discussion.
Stephen Maloney, a managing consultant in the Risk and Financial Services practice at Towers Perrin, summarized the state of the energy and credit markets, the effect of central bank policies on cost of capital and risk premiums, and emerging lending and commercial paper practices. The current market conditions give investors greater motivation to focus on short-term investments in contrast to the extended exposures financing nuclear construction.
Stephen Goldberg, special assistant to the director at Argonne National Laboratory, indicated that while financing nuclear reactors may be risky, there are four proactive steps that can be pursued to mitigate perceived financial risks:
- Federal support for early movers.
- Implement recommendations of oversight panels, especially concerning management of the back-end of the fuel cycle.
- Pursue alternative financing methods, especially joint financing for end-users.
- Implement science-based engineering tools to better identify and target underlying physical processes. For example, enhanced simulation could provide increased confidence to regulators, and in turn, reduce capital costs and risk premiums. More advanced materials could also improve the economics of new nuclear plants by increasing the lifetimes of more advanced reactor fuel and structures.
Goldberg suggested that evolving climate and energy security priorities necessitate expanding nuclear energy. In addition to the above steps aimed at decreasing risk, the current structure of loan guarantee program may limit the number of reactors that can be supported. Most important perhaps, the nuclear industry must attract and train more nuclear scientists, engineers, and skilled crafts people.
Question & Answer
Participants challenged Stephen Goldberg's assertion that nuclear energy is a critical component of climate and energy security. While Goldberg acknowledged the proliferation issues inherent in nuclear technology, he argued that the absence of nuclear energy would make it that much harder to meet our energy security requirements and reduce carbon dioxide emissions.
Carbon pricing has been cited as tilting the table towards nuclear generation. However, Maloney observed that the recent European experience trading carbon emission rights (CERs) revealed a thinly traded and volatile market. Maloney added that reliably forecasting the future market value of carbon will be difficult until such time a liquid market develops.
One participant suggested that the energy security arguments for pursuing nuclear power were exaggerated, since the United States itself imports 90 percent of its uranium for power reactors as well as being totally dependent on foreign sources for nuclear components and assembly. Goldberg concurred, noting also that the U.S. won’t be able to build reactors without a lot of foreign assistance, at least in the short term, but countered that such interdependence is true across all manufacturing industries.
Another participant questioned whether risk assessments adequately factored in infrastructure bottlenecks. With respect to the actual future cost and value of nuclear energy, Maloney observed most pro forms are "best estimate." Few analysts have actually assessed the uncertainties or priced the risks in their forecasts (e.g., commodity risks, regulatory risk, construction risk, sovereign risk, credit risk). Consequently, it’s difficult to estimate the uncertainties in the pro formas or to assess the appropriate confidence most published projections. Goldberg suggested that the manufacturing bottlenecks would resolve themselves with money and time, but the lack of skill and science and technology base would prove more difficult to improve.
One of the interesting points Maloney brought out in the discussion was that banks are starting to price debt at rates floating with the London interbank overnight rate (LIBOR) plus premiums reflecting the default prices for both the lender and borrower. These rates are not directly tied to ratings. In contrast, the government will still use credit ratings as one of its guides in providing loan guarantees
Finally, Goldberg and Maloney noted that the impact of the credit crunch will affect countries differently (e.g., China has substantial cash reserves and remains likely to build many nuclear power plants), but that an overall impact could be reduced GDP, which will also likely reduce electricity demand.