Should infra investors take the nuclear option?

“The question is: why would we not look at it?” asks Mike Weston, chief executive of the UK’s Pensions Infrastructure Platform. Weston isn’t talking about the group’s recent investment in 24 UK wind farms, nor its 2016 debt investment in a rooftop solar portfolio. This time, he’s being asked about a potential interest in financing nuclear energy projects in the UK and he’s not the only one.

The UK currently has eight operating nuclear power plants, generating just under 9GW of capacity, equal to 20 percent of the UK’s electricity. Yet the ageing plants are due to be retired by 2030 and Japan’s Hitachi and France’s EDF are looking to develop new plants, alongside the latter’s long-awaited Hinkley Point C project.

While many of the traditional energy infrastructure investors have often seen nuclear energy projects as a different beast, the UK government is hoping to force a rethink on the sector.

“It remains the government’s objective in the longer term that new nuclear projects like other energy infrastructure should be financed by the private sector,” said business and energy secretary Greg Clark, in a statement to parliament at the beginning of June. “So, alongside our discussions with developers, we will be reviewing the viability of a regulated asset- model as a sustainable funding model based on private finance for future projects beyond [Hitachi’s] Wylfa.”

Essentially, the government is looking to replicate the Thames Tideway model – London’s “super sewer”, which brought the likes of Amber Infrastructure, Allianz, Dalmore Capital, DIF and Swiss Life to a £4.2 billion ($5.5 billion; €4.7 billion) construction project with a regulatory framework allowing it to start generating revenue when construction begins and then subsequently become a regulated asset. The Tideway model has since been hailed by many in the industry as a platform to use in the future for expensive and complex infrastructure projects, although a model through which taxpayers foot the bill in the event of cost overruns has not sat well with the public.

Despite this, it’s worth bearing in mind that not everyone has been as open to the possibility as Weston. Many industry insiders were contacted for this article with some unwilling to comment, some dismissing nuclear power as an asset class they would not get involved in and others reacting with a sense of bewilderment.

Yet, there remains an insistence that this can be the way forward for UK nuclear projects, which, supporters claim, display fundamental infrastructure-like characteristics.

“For [our next project] Sizewell, we intend to replicate the Hinkley design and capitalise on the work that’s already been done and approved by the UK,” Julia Pyke, nuclear development director at EDF, tells us. “About 20 percent of the costs of Hinkley is the cost of design and qualification. Just by building a copy, you take out about 20 percent of the costs.

“What do [pension funds] need in order to invest? They need two things: income during the construction phase and an income model in which they can suffer a downside return, but they can’t suffer actual loss of capital. We need a model like Thames Tideway which takes a base case and our idea is the investors would bid the cost of capital.”

The model would introduce another way for pension and infrastructure funds to deploy capital in place of what is a dwindling source of opportunities, while also helping with EDF’s own financial pressures.

“We’re comfortable with the fact that once construction’s over and it moves into a utility-type asset and utility regulation, there’s an opportunity at that point to come out of the project and for new people to come in,” explains Weston. “Pension scheme capital is an obvious source of capital for long-term projects like this.”

Cheaper by the dozen

The development of this model puts nuclear power in the UK “at a critical and exciting juncture”, according to the government’s job advert for someone to lead the work, which includes running a soft market-testing process as part of its engagement with potential investors. So what sort of levels of interest could they expect to come up against?

“We’ve had enthusiasm from everybody we’ve talked to, which is about a dozen actively interested investors,” says Pyke. “They’re interested to come to meetings, visit the site, get up to speed with nuclear as an asset class, start to understand what the risks are and what the risks are not.”

She adds that this group largely consists of infrastructure and pension funds and that EDF is looking to this dozen to help develop what it can bring to market as an investable product. Pyke identified Dalmore as one of the interested parties, which has been on record with its potential involvement. The firm was asked to comment for this article but had not responded at the time of publication. However, chief investment officer Alistair Ray told the UK’s Financial Times recently that “nuclear does not need to be completely risk-free to be of interest” and that the regulated-asset model is a key attraction.

“EPRs have a 60-year asset life, so we would be proposing the regulated-asset structure lasted for a period of about 45 to 50 years,” Pyke outlines. “We’ll be offering a very long-term, stable, inflation-linked product.”

Weston says if a project with these characteristics does come to fruition, then “it will be something we’ll be prepared to look at”. However, he says PIP is not one of those to have held talks with EDF so far.

“It’s still very early in the process. We keep a watching brief on how the whole thing is going to develop,” he explains. “There’s still an awful lot of uncertainty over what the outlook will be. There’s certainly a long way to go where there’s a proposition like that we can start analysing.”

While EDF has no official delivery date for Sizewell C, former chief executive Vincent de Rivaz last year indicated this should be around 2031, although it was also de Rivaz who now infamously proclaimed in 2007 that EDF will turn on the 3.2GW Hinkley facility before Christmas 2017 and “without it, the lights will go out”.

Risk management

It’s obviously clear de Rivaz’s prediction was slightly wide of the mark, both in terms of energy supply and construction of the plant itself. Yet, should those two factors be significant concerns? When de Rivaz spoke in 2007, the UK barely had 500MW of operational offshore wind. This figure now tops 8GW and is coming in at almost half the price, in addition to a meteoric rise in onshore wind and solar capacity. There is also a large pipeline of interconnectors with Europe either in construction or waiting for permits, while EDF now aims to have Hinkley in service by the end of 2025.

“The delays in Hinkley were down to the final investment decision and those were attributable to a number of parties at different stages,” Pyke maintains. “Also, it’s quite complicated and difficult to get a new nuclear project like this away for the first time. It won’t be so difficult the next time.”

She also emphasised the ESG benefits a nuclear power project brings in terms of job creation and local investment. “Compared to an interconnector as a way of bringing in a similar quantity of energy, one is giving rise to jobs making cables in China and one is giving rise to 25,000 construction jobs in the UK. There are different ways of looking at the same question,” she says.

But the ESG question has many shades of grey, though. Several infrastructure and pension funds will be restricted from even holding talks with the likes of EDF on this matter due to their ESG policies. Those that are permitted to still must consider potential reputational risks with the Fukushima disaster fresh in the memory. Weston acknowledges this and says each individual PIP member would have to make its own consideration should an investment opportunity materialise.

“Reputational risks have gone down over time for nuclear,” he believes. “Clearly, you’ve still got the dangers of radioactivity but, eventually, given what’s happened with the nuclear industry, safeguards in construction and operation are there.”

Dieter Helm, the Oxford University professor who led the government’s energy review last year, believes somewhat differently and remarked following Clark’s announcement that “no smart contracting and regulating framework can magic away the deep challenges that nuclear faces”.

Keen to drive further interest in this sub-sector, the UK government also recently announced plans to boost the number of women working in nuclear by 2030 to 40 percent from its current 22 percent. Clearly, it wants to see previously reluctant investors enter the sphere. Whether this government will be around to see its plans materialise is another question.