Following up on the news that the UK is to have a new nuclear power station built for a cool £16 billion (US$25.87bn) (see below), I’ve been taking views on the subject and have come to an interesting conclusion: I can’t find anybody willing to defend how it’s being financed, that is by the private sector (in particular by the companies that will own the power plant, with the debt on their books).
I should clarify. The UK government and its private sector partners led by France’s EDF Energy will naturally defend the financing, because that is what they have agreed to. When the government last week announced they had set a minimum guaranteed price per unit of energy from that plant, or ‘strike price’, they were doing so on the basis that EDF had explained the drivers of the cost of borrowing the money and building the plant that required a certain financial return, which in return required that price.
And as I blogged below, the risks EDF and its co-investors are taking on help determine the cost of that financing. The whole point of having a detailed investment agreement, which the two sides have worked out and intend to sign next year, is to ensure that the risks are shared in the way they say they will. If, for instance, the plant is shut down on health and safety grounds, the agreement says that EDF and co will not be compensated. That way, the contract is not a ‘heads we win, tails you lose’ deal in which the investors will take the profits and the taxpayer will pick up the losses.
So what’s the problem? The problem is that the risks associated with nuclear power plants are so great, in the (admittedly quite remote) event of catastrophic failure, that in that case the investors may try to pass all the risk back to government, irrespective of the agreement. As I noted below, they will already be on the hook for billions of pounds of debt – EDF, as biggest shareholder, will be taking on up to £8 billion – which has serious implications for their financial position (ability to raise money for other purposes, credit rating and so on). If the plant failed catastrophically, I suspect they would ask government to waive the contract on the grounds that they couldn’t bear any more costs beyond losing the money they’d already sunk in.
That’s why two people familiar with the infrastructure market told me last week they thought the government should take on the full risk of building and financing the plant – and logically, take the profits from running it too. It’s hardly revolutionary. In the United Arab Emirates, state-owned Emirates Nuclear Energy Corporation is financing and building two power plants, with two more proposed. It’s borrowing money internationally as well as committing its own funds.
Infrastructure projects are financed subject to detailed agreements which determine who should absorb each risk and which account for every worst-case scenario. If, in the final analysis, the private sector cannot absorb any worst-case scenario risks, then it’s hard to see a case for private finance. I’m not arguing that the public sector should be financing this power plant, but that’s the case that’s been put to me.