1 - Introduction to Nuclear Financing

Bret Kugelmass: How did you first start working in the nuclear sector?

Anurag Gupta: Canada, especially Toronto, has a vast expertise in civil nuclear. Canada has harnessed nuclear power to provide citizens with a source of clean energy. Anurag Gupta was born and grew up in India, starting his career as a mechanical engineer with Indian Railways for four years. He was the works manager for a workshop built in 1862. They got a grant to modernize the workshop which exposed Gupta to net present value (NPV) and internal rate of return (IRR) analysis, leading him to pursue an MBA at Tulane University in New Orleans. This led Gupta to work for TXU Energy in project finance. TXU had a nuclear plant, Comanche Peak, which was Gupta’s first exposure to nuclear dealing with fuel purchasing and fuel supply. The complexity of nuclear blew him away. The technology and financing of nuclear is physically complex. Every nuclear project is unique and the risk profile for nuclear is not well understood. The amount of capital investment required for a single nuclear plant dwarfs any other energy infrastructure. Once the plant is up and running, nuclear plants are a source of clean power for decades and the variable cost is low. The key risk in nuclear power is safety; the industry cannot afford to have a safety incident. The biggest financial risk is in the construction phase. If a plant can be built on time and on budget, the levelized cost of electricity from a nuclear plant is very competitive. Anurag Gupta has not worked as an engineer in the energy industry, but has always had a finance and project development focus and used his engineering background to translate between the technical requirements and the financial requirements of a project. Anurga Gupta also worked for Ontario Power Generation.

2 - Risk Profile of Nuclear Reactors

Bret Kugelmass: What are some of the types of financing projects that would come across your desk?

Anurag Gupta: Anurag Gupta saw a mix of projects in the nuclear industry, including fuel supply arrangements for TXU’s nuclear plant and structuring the financing around those contracts. The more challenging and interesting work Gupta saw was when he moved into the consulting arena at KPMG. He was lead negotiator and led the KPMG team to advise the U.K. government on its negotiations with Hinkley Point C. Nuclear plants are extremely expensive and take a long time to build, but once they are up and running, the risk profile is decreased compared to the construction phase. Since there is so much money spent up front, the developer must be absolutely certain that the amount of electricity produced over the next fifty to sixty years will be sold at a price that gives an adequate return on the massive up front investment. In the new world order where the electricity markets are liberalized and wholesale prices are set by gas plants, electricity prices have become very volatile. This brings a big amount of revenue risk to the developer. Markets are constructs and reflect a certain policy objective. The way liberalized energy markets are constructed send market signals which don’t support the investment case for nuclear due to large up front capital requirement with recovery over a very long period of time. Markets have not been set up to send accurate price signals for a long period of time.

3 - Role of Government in Nuclear Development

Bret Kugelmass: Will it take government money in order to make nuclear projects come to fruition?

Anurag Gupta: In every single nuclear project around the world, the hand of government shows up in one way or the other. For nuclear programs to take hold and be successful in a country, the host government must have a very active role. Sometimes countries view nuclear as being energy policy, but it is as much industrial policy because it is creating a very complex project which lasts a long time and creates a massive number of long lasting, highly skilled jobs. If a country wants to embark on a nuclear project, it should look at how to harness the meta benefits the country gets in terms of human resources. Ontario Power Generation operates a number of nuclear plants and has a large pool of highly educated, highly trained workers along the supply chain and all of Ontario and Canada benefits from it. Governments can provide a lot of support in making sure supply chains exist and they are taking the right steps to upskill and reskill the workforce. Anurag Gupta used to work for KPMG Canada and moved to the U.K. in 2011 to lead the team on the Electricity Market Reform project. Canada has a long and successful civil nuclear program. Canada’s energy system is one of the cleanest in the world, using a lot of hydro and nuclear. The nuclear industry has a history of cost overruns and schedule delays, which have added to the financial cost and tarnished the reputation of nuclear with the public. Large reactors are assembled on-site in the form of a massive construction project. The question is whether nuclear can move to a model in which a reactor is assembled in a manufacturing setting where costs and quality can be controlled.

4 - Economics of Small Modular Reactors

Bret Kugelmass: If manufacturing efficiencies were brought to the nuclear sector, could costs of a nuclear plant be decreased by tenfold?

Anurag Gupta: A widely accepted definition of a small modular reactor (SMR) is that it is sized below 300 MW capacity. Smaller reactors require less upfront capital to build and, if they are small enough, can be manufactured in a factory environment, transported, and assembled on-site. This allows export markets to open up and remote communities, which don’t need 1,000 MW reactor, open up as markets. SMR’s can also produce process steam and heat. Some of the SMR concepts on the table now have been around for a long time, but their implementation has to do with the economies of scale. Whether you have a 100 MW reactor or a 1,000 MW reactor, the regulatory and safety costs imposed are roughly the same because it’s the same regulatory regime. The more megawatts you can produce to offset the set cost of safety and regulations, the more economic the project becomes. Until very recently, the model has been large industrial scale plants, large transmission lines, and large load centers. That model is under threat and is changing. The SMR community has to look at export markets to spread fixed costs over a large base. At the moment, most SMR’s are in the concept stage or in very primitive design stage; there is no commercially available SMR. In some ways, the risk of SMR’s may be higher because the first unit may not work as planned and there was a large amount of money invested in building a factory. A model in which government takes projects through construction but then benefits from the upsides post-construction has been successful. The Canada InfoBank is a federal institution being mandated to try and bring revenue-bringing infrastructure projects to fruition. Government can support nuclear by writing a check, but also by providing loan guarantees and infrastructure bank programs.

5 - Incentives for Financiers in the Nuclear Industry

Bret Kugelmass: What do you think would be some of the high value actions a government could take right now to kickstart the growth in a small modular reactor industry?

Anurag Gupta: Small modular reactors (SMR) are in a conceptual design phase in most cases. In order to make an SMR program successful, governments will have to make a choice between one or two technologies. Governments can also provide a buyer, such as a power purchase agreement or a utility. There is a tremendous amount of development dollars required to commercialize SMR designs and it will have to be a consortium approach. The concept of project financing is limited recourse, meaning the revenue itself supports the repayment of debt. For that to happen, financiers have to be comfortable with the risk profile of construction and development of nuclear plants. An attraction of the SMR program is, if you can get the first of a kind risk off the table and demonstrate they can be built on a budget in a factory setting, it becomes imminently financeable. In the large reactor market, people talk about first-of-a-kind risk. Because every site is so different, The world absolutely needs renewable energy, such as solar and wind, to combat climate change. Certain jurisdictions are making a mistake by turning its back on nuclear, as it will be a massive source of clean, green, low-carbon renewable power. Nuclear can provide on-demand power if it is required. Nuclear has a big role to play in mitigating climate change by having shown a history of projects that were delivered on-time and on-budget. SMR’s are a reality, not just a concept.