August 16, 2022

Ep 365: David Stearns - Nuclear Financing Partner

Nuclear Financing Partner
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Show notes

Michael Crabb [00:00:58] Well, welcome to another episode of Titans of Nuclear. Our guest today is David Stearns, a nuclear financing partner. David, great having you on the show.

David Stearns [00:01:09] Hi, I'm very pleased to be here today. Thanks for inviting me.

Michael Crabb [00:01:12] Of course. Okay, so before we talk about what a nuclear financing partner is and does, tell us a little bit about yourself. Where are you from?

David Stearns [00:01:20] So I'm a U.S. citizen, I actually recently acquired French citizenship as well, my wife being French. But I've traveled a lot around the world, usually following some crazy project or another. I started out in finance with Citigroup, Citibank, and so that was as good a place to have an international career as any. So this was in the early '90s.

Michael Crabb [00:01:46] And where is this in the world? New York, Egypt?

David Stearns [00:01:49] I started in New York, but then moved to France, had training in London, moved to Egypt, moved back to New York and then and that was 10 years, you know, in a nutshell and then I stayed in global banking for 20 years. Obviously doesn't show at all, does it?

Michael Crabb [00:02:15] I couldn't tell, I couldn't tell.

David Stearns [00:02:19] The scars are here.

Michael Crabb [00:02:21] Yeah. There's more scars on the back than the front if you're in banking, for sure. So you always wanted to do banking or did you want to do energy? Give us a sense of how you ended up sort of doing what you do.

David Stearns [00:02:34] Well, I was always interested in kind of this intersection between what the market can do and what public resources or what the government can do or should do. So I come from a very kind of government family. We traveled the world and that was really, really interesting. But it just seemed that whatever flag you have on your passport or whatever country you come from, nothing is more powerful than what a market can do or what a market is unable to do. And so I was just really interested in that, that there are limits to foreign policy and there are limits to, you know, hard strength, and you need to use soft or hard power. And I was interested in the soft power side, which I think business really is and finance in particular was because in the early '90s, it was the eve of, well, it was just at the beginning of financial deregulation. So, especially at a U.S. bank like Citi, they encouraged us to get in touch with clients, to get new clients, to think of new products, to accumulate more and more risk or at least identify those risks. And they gave us kind of carte blanche to do a lot of things. I was almost more interested in the real economy side of banking rather than, you know, pure derivatives or trading floors and CDOs and things like that. So I don't want to cast myself as a good guy necessarily, but I always saw banking and finance as being at the service of other things as opposed to being at the service of itself, which is what it turned out to be. But my first assignments, you know, it's the luck of the draw, isn't it, when you're 25 years old or something, were in the energy sector. They just threw me in as an associate into the portfolio of energy clients. In France, my first transaction was something very plain vanilla called an MOF, a multi-option facility, it's a syndicated loan, the Big Mac of banking, and it was Framatome which then was the French state owned OEM, nuclear vendor.

Michael Crabb [00:04:44] Wow. So you're sort of accidentally introduced to energy and then accidentally introduced to nuclear kind of right out of the gate.

David Stearns [00:04:51] Absolutely, absolutely. But what was interesting was, as long as I was in banking, 20 years, it was always a sideshow. Nobody was ever kind of saying, "Oh, we've got to do the next nuclear deal, let's go talk to this utility or this vendor who probably needs some financing." It was actually the opposite, which was we just stay away from that unless they ask us about it, in which case, you know, we'll just kind of say, "Well, let's talk about your renewables portfolio or let's talk about your gas infrastructure, or let's talk about things that we actually can finance." Because banks, you know, you make money on the transaction typically. You don't really do advisory work. You might advise to arrange is what we called it. So you're getting involved early enough in the project where you can steer the financial structure and the project structure, but you're steering it towards the things that you know you can do as a bank and you know the market can deliver for you. And nuclear never fit those parameters. So I was always doing every other type of energy. I was mostly IPPs. And so in the '90s, you know, especially in Egypt, they had the privatization law and we had the first InterGen IPPs. And it was just fascinating work. And I never really considered nuclear to be a career until I left banking or when I realized that it was better to leave banking if I wanted to make an impact in the nuclear sector.

Michael Crabb [00:06:13] Interesting. Okay, so tell us a little bit more. I mean, in the '90s, you had probably two or three sort of major market cycles in power, right? You had sort of your own financial market deregulation, you had energy market deregulation, you had commodity price cycles and you had technology cycles. I mean, this is an unfair question, but can you give us like 3 minutes on the three decades of craziness that you got to participate in?

David Stearns [00:06:43] Yeah, yeah. I mean, the condensed version, I suppose, Michael. So the '90s was really about unbundling and restructuring utilities and getting commercial finance, external finance, whether controlling or non-controlling finance, equity and debt.

Michael Crabb [00:07:04] Can we double click, because I do think it's important just from a nuclear perspective that we can get to later, tell us a little bit more about unbundling. I think this shift on the commercialization of energy projects just hasn't quite made it to the nuclear industry, right? Like, as a utility is not necessarily your customer.

David Stearns [00:07:27] Yeah. Well nuclear today, right? But in the '90s, it was still possible. I mean to the extent that there were nuclear construction projects. The renaissance was really in the early part of the 2000's, I suppose, with TVO. So we'll talk about that. But the '90s didn't see any nuclear transactions other than... I mean there was no new build. It was post Chernobyl, post Three Mile Island, and to the extent that there were construction projects I'm trying to think what they would have been. I don't think I saw a single one. I mean these were all... What were we doing? Gas.

Michael Crabb [00:08:03] Yeah, combined cycle.

David Stearns [00:08:04] We were all doing gas. We started dabbling in onshore wind, with these 700 kilowatt turbines, kind of saying, "Oh my God, I mean, that's big." And then Vestas comes up with the one megawatt and then the three megawatt and then the gearbox issues and everything was very progressive, fairly linear. And we could see that the policy backdrop, and this was the great or the interesting about thing about the '90s was that it seemed like the policy backdrop was not important. You know, who cared who was president. The liberal order had won the day and so markets were going to decide pretty much everything for us. And that was good because it drove down prices, it created competition and it gave the country and the consumers everything that they wanted or that's what we thought. And so in the '90s, it worked until it didn't work. And where it didn't work, for example, you had policies about renewables. In order to support that there were tweaks, there were policy tweaks in different markets where the governments would say, "Well, let's provide a subsidy so that we can bring some onshore wind investment forward or, do more R&D in solar," for example. Or, "Let's do some policy tweaks, negative policy tweaks against the coal fired plants." And so we're going to do in the European Union, there was the LCPD, the Large Combustion Directive, which basically forced all coal fired power plants that didn't have SOx and NOx cleanup equipment in the FGDs, it forced them to shut down by, I can't remember it was so long ago, but I think by 2020. They had a certain number of operating hours. So what were we talking about with the utility customers who were pretty much the owners of these assets? You know, they were saying, "Well, should we shut this coal fired plant down? And maybe we can repower it with gas or we can put biomass in it like Drax, or maybe we can just... Let's separate our business entirely," which the U.S. did, which the Germans did, the French did, which was let's put this generation over here, let's put supply over here, transmission over there, and within the generation said, "Let's make it competitive." And they were being forced to in many of these markets. And what sticks? What are the technologies that work? And it was a treadmill on the banking side. There were just so many deals and so many projects. And it wasn't just the utility clients. It was all of sudden the independent developers who were showing up. You know, AES Corp., for example, was a class act. It still is. And InterGen, I mentioned as well, International Power. These were great firms doing a lot of really good work, bringing kilowatt hours to people all around the world who wouldn't have had them otherwise. And in most cases, it was cleaner than the alternative, which was coal or diesel. So we were doing good, right? The banks were doing good through the '90s, but markets change, don't they? So what's part two? Part two is: enter nuclear. This was where it got really interesting for me because my first kind of full contact with the nuclear sport was TVO in 2002. We got an invitation landed on. I was in the project finance team of a French bank called Credit Agricole Group, in 2002 in France. And it was an invitation from this nuclear co-operative in Finland that had two operating units and was saying, "We want additional capacity. We think that the market and our investor/consumer base will be needing this over the next five, ten years. There was a 40 page info memo for a €3 billion transaction, you know, $3 or $4 billion dollars, I suspect at that time. Debt transaction, because the investors that the co-operative investor consumers were putting in their, what, 25% of the deal, so this was a highly-liquid transaction.

Michael Crabb [00:12:21] How mature was this deal when it landed on your desk? Was it just sort of an idea or did they have some of the contracts and the interconnect and some of that?

David Stearns [00:12:34] For Finland, it was very mature. For a lot of other markets it wouldn't have been. But the Finnish template for me is really just a gem. You know, it's a jewel and a really interesting model for the rest of the world. Obviously you can't replicate things, but they had a decision in principle from the parliament, which is essentially the government approving the fact of a utility or a group of investors saying, "We'd like to build this plant on this site." I think they had their environmental impact assessment and they didn't have their nuclear licensing, obviously, but they did have their EPC that they were ready to sign with Framatome. And it was a fixed price, turnkey, I don't want to say date certain, but it looked a lot as a CCGT, you know, as a conventional thermal IPP banker, it had a lot of the things you would have wanted or you would have expected. And so we looked at it. But people said, "But this is nuclear." And so that was really a chance for me and for the team, the project finance team, to actually think, well, first of all, is this project finance? And second of all, to say and if it's not, it doesn't actually matter, can we do it? Because what they were asking for, it was a fascinating transaction and it continues to be the benchmark for me, sadly, 20 years literally down the road, where it is a highly levered... It's a nuclear project financed without shareholder guarantees, without government guarantees, highly levered, without a PPA or any kind of structured offtake agreement. And they raised what turned out to be enough money at the time, but obviously not enough based on the actual structure of the project, the deliverability of the project which was a huge learning curve Framatome, but also for TVO as an owner. But it was actually a transaction where I would say, I mean it's been a laughing stock for people outside the industry and maybe even inside the industry for 10, 15 years because that's the delay. There's been arbitration, counter arbitration. But, it got commissioned earlier this year and I'll bet you in 10 or 20 or 30 years, Finland and the world and the investors and the consumers in Finland will be really, really happy that they did it. I've got some ideas around that. I'd spent a lot of time thinking about why that one worked. What are the things you could take away from that, usefully? And I think there's quite a bit.

Michael Crabb [00:15:14] Oh, yeah. What are they? Share.

David Stearns [00:15:17] Well, the cooperative model for me is really interesting because I have this view that nuclear energy, it's not just my view, actually I think a lot of people probably share it, that nuclear energy doesn't get remunerated the way it should. That, sure, a kilowatt hour of energy on the grid is a kilowatt hour of energy, and there's a competitive market for that in most of the open, in the OECD economies, let's say. And so that's fine. And then on our bills, we can choose our generators or our suppliers. It says that the price to compare, never mind the system cost, but, here is the actual energy consumption cost for you, David Stearns, at your home, and you can change that. That's really interesting, but that's not really a proper accounting of costs and benefits for me. And it does exclude a lot of the benefits of nuclear. Whereas the costs we know. I mean, it's a fascinating industry for me because, for me, it's an industry that has actually fully accounted for its costs. And the investors do not get a free ride unless they've lost all of their money, obviously. And, you know, there are catastrophic events in which that happens. I mean, policy wise, but also technically and in terms of nuclear accidents. But there are very well trodden paths, sadly or not, but not that many. But there are paths and a pecking order that says "You, the investors, you take the first loss." That's how it is.

Michael Crabb [00:17:02] And that's a horrible thing. If you have a gas combined cycle, you have an outcome that is a catastrophic loss from an investor perspective. You have a wind turbine. I mean, those are all probabilistic outcomes that are part of an investor's return, right? Otherwise, their return would be zero. That is sort of a basic infrastructure thing, right? There's some anticipated loss across portfolio of investor assets.

David Stearns [00:17:32] The real problem with nuclear is that... I can go on and on about cost and benefits and say, "Llife isn't fair. What about security of supply? What about energy resilience?" And I think that is a real problem at the policy level. There is an intrinsic problem in the industry, which is the promises are not delivered. So when TVO, let's use that one. I hope people who are involved in TVO like me will forgive me for maybe my somewhat faulty memory. But basically, there were promises that this was a €3 billion project back in 2002, 2003. That it would be operational by 2009, I think, so a five year nuclear construction period to commissioning. And so 13 years ago we would have had first power. And that didn't happen. And I think there's an intrinsic problem, and I think you've had a lot of very, very interesting people on your program who have really good ideas about how to educate not just the regulators but the vendors and the owners about licensing and how to clarify that and how to shorten timelines. So there are a lot of really good ideas out there. I'm a financial guy, so I'll mostly nod my head when I hear them. But what I would say is, as a financier, as a financial guy, I would say that the problem on costs and schedule and quality and performance is what I would call an accounting problem and a communications problem. Because we know that megaprojects, they always overrun, they always do. Nuclear in particular; but it's not to forget, it's just to observe. And I think what is interesting is that maybe when the developer who is trying to build up his or her stakeholder base with politicians and consumers saying, "This is going to be really cheap, really fast, really safe," you do want to say that and we should find as many ways as possible to be able to say those things and to be challenged. But was there enough challenge on the financial side? I don't know, in all the cases. But you would expect that the management case would say, "Oh, this is going to be a five year construction period. It's going to be $2,000 per kilowatt." And then you would want to hand that over to the financial people, wouldn't you? They can say, "Well, let me just look at your..." And then there's a very... EDF is on record as proudly standing up in front of the British Parliament here saying, "The EPR and EPR construction project is a series of 55 million unique engineering tasks." And the individual who said that was quite proud saying, "You know, we can do that, and we can pull that off." And I was just thinking, oh my God, I wouldn't have said that necessarily. But in some ways it's like, yeah, boast and be proud because they're really, really complex. And I have only admiration for the industry in that respect to pull that off. But at the same time, are those decisions being made, and when you're announcing a budget, when you're announcing a schedule, would it help maybe to say, "We think it's a P50, you but our external financiers think it's more like a P5." In other words, it's very, very optimistic. You know, you do that in the energy industry. You know, what is the wind resource? What is the oil reserve? You know, we use probabilities. And they don't have to follow a normal curve. But in nuclear, they certainly don't follow the normal curve. They're very skewed. So I call it an accounting problem and I call it a communications problem, which is to say we think it can be done in this envelope, in this financial envelope, but because of real issues like the supply chain and the licensing uncertainty and maybe public opinion, maybe changes in law and change orders in the EPC contract and innovation, because we're going to maybe freeze at least part of the design as much as possible before we raise the money and before we start building. But then we might realize that we shouldn't have frozen all of that, and so we want to go back, and maybe that's a good thing. But then you have to convince a lot of people that that's a good thing. And then you need the financiers to agree as well. And then you need the consumers to agree. Are they going to pick up the costs for that? So all of that innovation is really, really good. But I think what's really important is you have to have an early, early, early conversation on what the financing and the commercial specs are so that you're not accumulating risks at all the different levels in the program. And these 55 million unique engineering tasks turn out to be maybe 110 million and not completed, from start to finish in 5 years, but maybe in 10 or 15 years. And you do need that diligence, but it's not at the end of the process. It's really, you need those voices at the table early on, I think.

Michael Crabb [00:22:34] Yeah. No, that all makes sense. I don't know, it strikes me that there's a level of complexity in nuclear that sometimes is sort of overly, I don't want to say overengineered... But I mean, a nuclear plant is basically the steam side of a combined cycle, right? I mean, it's a coal plant or a biomass plant with a hot rock in it. I mean, there's like some level of complexity here that I can't... I really struggle to connect the dots on, you know what I mean? And I'm not sure what drives all of that. Because I hear you. It's an accounting, it's a communications problem. But we're building $2 billion offshore wind farms. We are erecting 500 foot towers in the middle of the ocean, connected to the sea floor, running a cable back to land. Like we're doing some ridiculously complicated stuff in one side of the energy industry, and then we have this, you know, 70 year old technology that we can't figure out. And that's the part that I mean, there is something missing in my mind. I don't have a good question here, but there's like...

David Stearns [00:23:48] I'm agreeing with you, that's for sure. What I would add is I've thought about that a little bit. I don't know that it really is entirely, you know, the way you've described it.

Michael Crabb [00:24:04] I mean, it's admittedly unfair. As a finance guy to a finance guy, it's admittedly unfair for me to call it a hot rock and a steam cycle. I admit that entirely.

David Stearns [00:24:12] We'll have the technical advisors explain it to you...

Michael Crabb [00:24:13] Yeah, yeah. They don't want to hear me say that.

David Stearns [00:24:15] But what I mean financially, maybe, is that I think there's more value in what the nuclear offering actually is because it's not just, this is a design, we froze it, and now it's spitting out kilowatt hours, or, you know, process heat and steam, or whatever, and that's exactly what it was supposed to do and that's what it's doing. And then 25 or 30 years later, it's not going to do that anymore, we're going to decommission it. Nuclear, is is it 40, is it 60, is it 80, is it 100 years? I don't know. Yeah, I've heard some good arguments that say it could be a hundred years, but in practice, for now it's mostly 40 years. But that's a long time. But there's an embedded kind of variability, which is what I would call safety, which is if the safety bar ever has to move up, then you've got to stop what you're doing as the owner, as the licensee, and you've got to have a conversation with the regulator to say, "Okay, what am I going to do about my sea walls? What am I going to do about my emergency diesel generators? What am I going to do about my redundancy, my defensive depth or, you know, all these things?" And I've got to improve that because, you've heard it as many times as I have: an accident somewhere is an accident everywhere in nuclear. And so, in March 2011, every reactor around the world, as far as I know, was shut down for an inspection or for just a review of the target safety case versus the actual plant status. And then 9/11 was another one. And so sure enough, the regulator legitimately said, "We actually think we need to build up safety." And so, I would say that's good. I like safety. I think we should definitely agree to that. But there needs to be a funding mechanism because there's a benefit to the world, to the consumers, but to the world, if the plant is even safer than we thought or than we'd been planning. And somebody's got to pay for that. Why is it the investors? What shouldn't it be the consumers? The internalization of those benefits says to me that if we're in an open economy, a competitive market... I mean, if we're in a kind of a government to government framework, then everything you and I are going to talk about, none of that matters. If we're talking about a vertically integrated, state owned utility or talking to a third world country, they will do it a different way. So I think you and I are talking mostly about competitive markets and so on.

Michael Crabb [00:26:37] Yeah.

David Stearns [00:26:38] The consumer should be paying for safety.

Michael Crabb [00:26:39] Yeah, the marketplace for safety is a really important conversation because it feels like it only exists in nuclear. It's almost nonsensical, I mean, we kill 5 to 10 million people with air pollution around the world every year. It's not even just an accident in nuclear somewhere is an accident, it's any sort of accident. Like after 9/11, we didn't say we need buildings to be able to withstand a plane crash. I almost feel like the nuclear culture has sort of gone down two really bad paths or like really challenging paths. There's an assumption now, there's like this burden of failed projects in the past. You said people haven't lived up to their promises, so there's just an assumption that that happens, so why try something? Why go through another regulatory process? It's just going to fail like the last one, right? There's a defeatism in half the industry. And then there is this view that making something too expensive to ever build in the name of safety with no context... There's no context. Maybe that's a solution, and maybe what you're saying is like, "Okay, make it a government allocation question." Like, elevators could be safer. Let's protect people from lightning, or let's build sea bubbles around every city on the coast because of a hurricane. There needs just to be a constant, like social contract, social calculation around that, I think. I don't know how that happens; I'm sort of... again, not a real question there. But have you thought about what a mechanism, what a market mechanism would look like for that from a government perspective? Have you talked to policy holders about that?

David Stearns [00:28:47] You've got market design teams in a lot of the different governments that are, I think, really actively working on that. How do you integrate nuclear or newbuild nuclear into the existing market that is doing very well, thank you very much. Nobody wants that elephant to do a cannonball in the middle of the swimming pool, right? Oh, my God, let's make room for, you know, two or four or six gigawatts of nuclear. Nobody wants that. So, there's not a natural constituency to kind of say, "Oh, let's make room on the bus for some nuclear units."

Michael Crabb [00:29:20] I mean, you've been in projects. I don't know if that's necessarily true, right? There's a number of countries that are least, outward facing, very supportive of new nuclear.

David Stearns [00:29:34] Oh, sure. Yeah. So France and Finland are really good examples. The Czech Republic, Slovakia, you know, these are countries that have real projects as well. It's not to say that they're saying one thing and doing another, it's actually the momentum in the market is, "Yeah, yeah, yeah. Let keep nuclear at the table and let's help out EDF, or let's help out Fortum or EABW or any of the German utilities." But that's a different story. But if nuclear is moving more slowly and with greater uncertainty than onshore wind, offshore wind, battery storage, solar PV and so on, then you know, the squeaky wheel doesn't get the the grease, in this case. Policymakers will say, "Well, you know, nuclear, what more do you want? I've taken care of your liability issue, remember that one? I've given you the accelerated or specific sites and permitting, not shortcuts, but pathways. I'm helping pay for R&D at the national laboratories. I'm doing as much as I can. And, you know, public opinion says I shouldn't really be doing more." And so I think that's the problem. Nuclear has to wash its own face, has to stand up and say, "You know, we've been really bad at communicating, communicating our numbers. Not communicating, but safety, but our economic value added, our costs and benefits. And we, the industry, respectfully request a realignment of costs and benefits so that consumers are actually internalizing all the benefits and paying for those benefits, and we the investors are paying for the costs, obviously, or we're taking the risks. And we'd like to have a conversation, please, about how economic and how efficient that actually is for us investors to be taking all the risks." I've actually got the UK's CFD model in mind, which is Hinkley Point, Hinkley Point C, whereby the investor takes 100% of the construction risk and the consumer gets a guaranteed strike price or tariff, if you like, that shall not exceed, £92.50 in 2012 money. So, that's a really radical kind of Yalta moment for me, which was to say investors take all the risks and they have to embed their returns in that strike price. And if they miss it, in other words, if they undershoot or the costs overrun basically, too bad. But if you are within budget and if you are within schedule and you've got kind of super returns above what the strike price was supposed to give you, then we're going to claw some of that back. Which is what the European Commission asked for for Hinkley Point C in 2016 or '17 under the state aid kind of proceedings. So the investors are taking all the risks, the consumers are set, and actually £92.50, as we can see for EDF, it's not enough. But it's the deal that everybody hates, right? Because, the past six months in the UK have been very, very difficult, obviously, from a wholesale market price perspective and so on. But the longer term trend is not... the value of that strike price of that CFD for Hinckley Point is somewhere about $120 per megawatt hour right now. And that's just a lot for a 35 year contract it seems, in today's money. And then it inflates, which is also kind of funny because your costs don't actually inflate. I mean, the whole cost structure doesn't inflate for 35 years. A few things go up, but you've got your maintenance plan, you've got... So it's a crazy deal. It doesn't make any sense at all. The consumers hate it. EDF must hate it. I can't speak for them, obviously, but there's no sign that they're happy with how things are going at Hinkley Point. They're being recapitalized or they've just been recapitalized and they might have to go through that exercise one more time. And they've run out of, you know, they're tapped out financially, which is why the UK government is looking at this regulated asset base approach because EDF has run out of balance sheet. So there's got to be a better way, and I think a lot of the discussion underway in the UK, but I think there's an osmosis effect because the nuclear community is small enough around the world is, there's got to be a better way to look at risks. You know, target costs are great, target schedule is great, and the servicing industry can do it, but there are a lot of reasons why they don't. And let's just look at that a little bit and try to see if consumers aren't getting a free ride on some things with the existing nuclear power plants, and see if we can't, whether it's safety, whether it's security of supply, whether it's resilience of the generation set and the energy portfolio. You know, I don't know whether it's giving nuclear plants or generators additional sales opportunities with respect to producing hydrogen or process steam or district heating or desalination, and things like that... Let's give them those opportunities and let's broaden that accounting framework so that consumers are really internalizing the full system costs of the portfolio that they are benefiting from today, nuclear and non-nuclear.

Michael Crabb [00:35:34] Yeah, that's a lot to dig in there. So maybe I'm in the minority here, but I like the contract for differences. I actually think this is one of those situations where nuclear sort of pioneered the contract for differences approach. And it has been used to commercialize every other technology but nuclear. And I kind of feel like this is an opportunity. It's one of those moments where I think there were some... failures is unfair, but there were some things missed on both the developer side and sort of the regulatory side. And both parties, instead of internalizing where they could improve their processes... How do you think about a different product? How do you think about being more efficient? It's just a lot easier to blame the contract. So nuclear turns around and blames the contract, and it's easy because this is not like a scalable contract. We're doing one big mega project with 10,000 people over ten years. As that project breaks down, people don't like that. But look at wind. Started at £140, £150, right? The contract for differences mechanism, I mean that's sort of how risk should be shared. Investors should have a return... Now, put aside the gain sharing. Like you shouldn't have to give back. If you're giving a strike price as an investor and you perform better than you expect, then you get that return, right? That's how it should be. And then the flip side is also true. And then if the project never gets done for whatever reason, development fizzles out or whatever, the ratepayer doesn't pay for any of that. That's how project development in energy is done. But then there has to be this sort of policy reality check on like, yes, there is huge value to have this power in your community. And I hear you on saying, "Well, let's talk about the accounting," but I don't think people actually care about the accounting. I think there's 10 or 20% of the people that will hate nuclear no matter what. They say things like, "I don't understand it, but I saw some horror movie and it turned us all green and I don't trust it." There's 20% of the people that know the science and they love it and they can't figure out why we're not building more. But most people don't really know anything about it or care or even pay that much attention. I think the industry sort of needs to come... it needs to shake off the fear a little bit. Because instead we just don't try. We say, "Oh, we'll never get there, we'll never meet our promise. We can't get the commercial deal. We're just going to do research." Look, you've been there, you've been in the room. The regulated asset based model for me is just a way to create more work without necessarily... I mean, you still have to come to an agreement on what the rate of return is. You still have to figure out what project costs are reimbursable and what aren't. it just creates more administrative burden and longer timetables. And that's what people don't like. So I don't know, to me, it's like we're not fixing the problem. We're just sort of adding more stuff to hide the problem.

David Stearns [00:39:03] So I like the CFD. I mean, I'm familiar with it as you are in any other type of technology. And it has worked, but I'm just saying, the Hinkley Point CFD is hated equally on all sides. And I'm just saying. So, this is a David Stearn's personal prediction, I'm going to kind of caveat that, but there will never be a nuclear CFD, a large reactor nuclear CFD, not in the UK, and maybe not anywhere if the CFD structure follows the same as they did in the UK. Because the strike price is too low for the investors, and it's far too high for the consumers. And I think the reason why is because there's an insurance policy inside that CFD which says the investors are saying, "I will deliver this energy to you hell or high water." I mean, no, that's not right. There are carve outs, obviously. But basically, the normal types of downsides, let's say in mega-projects, EDF is taking, the investors are taking. And that's just... mortal investors can't do that. And even if your balance sheet was bigger than EDF's 30 billion, the market cap today, which is not that much, is it? Because I think the Hinkley Point, the new budget is €30 billion.

Michael Crabb [00:40:44] So that's a bad product. Look, if we could build giga scale reactors for $10 billion or $15 billion, like maybe there is some government to government structure to build them... Like any way to get new nuclear, I'm all for it. But let's walk before we run a little bit. I mean, capital markets are really efficient, right? I mean, we could argue how efficient, but they are at least reasonably efficient. If we can't figure out in a period of record dry powder and record low interest rates and like still have this sort of level of challenge, it may not be a good product.

David Stearns [00:41:29] It is maddening. It drives me crazy because I stand up sometimes, I do some work for the IAEA on the member states to kind of talk about nuclear economics and financing, and, rule number one is the cost of capital has got to be really, really, really, really low. And people are saying, "But they're negative. I mean, what more do you want?" And I'm like, "Oh, right, I need to update my slides." But obviously the presentation goes much beyond that; that's a starting point and it's a very helpful starting point. The UK government has learned this lesson the hard way and the investors have learned even harder, well, just equally hard, you know, through failed projects and failed processes. So the Japanese, you know, there are three or four different developments over the past 10 years here, none of which other than EDF's has been taken forward. So the next iteration is under this RAB framework, which is definitely the right way to go, because what they're saying is... Instead of asking EDF to write, the investor to write an insurance policy that says, "I will make good. I will deliver this project, and if I don't, under normal downside circumstances, obviously it's on me." We can see that that doesn't work for most utilities and it doesn't work for EDF anymore. And so there is a level of risk sharing in the sense that EDF is saying, "If I had to price my strike price, if we do a Hinkley Point again, I would not make it 92 and a half, I would make it under £120, £150. Is that okay for you?" And obviously everybody would freak out. So the opposite is to say, "Because my cost of capital is so high then my risks are so high," so you do the RAB. But we're halfway to where I think the world should be in my idealized mindset, which is the co-operative model. We're halfway there because we're saying consumers do need to share some of the risks that avoids the investors having to make promises that they can't realistically keep. Will there be change orders? You betcha. Will there be changes in law? Of course. Will there be nuclear safety issues that you could never have foreseen when you put the shovels in the ground? Of course, there will be nuclear safety issues. You know, the standards rise relentlessly. And that's a good thing for the industry and it's a good thing for the world. But let the consumers pay for it in that case. And I like RAB for that. But it creates a layer of complexity that I don't like at all, and it creates this agency, an economic regulator, that has to sit there and kind of say, "I'm working extensively on behalf of the consumers here, but the policymakers are saying they want nuclear." And so I think that's an impossible mandate. I mean, at the highest level, there are ways to make it work, obviously, but I wouldn't have started there, you know, saying RAB. There are other ways to do it, but you know, politics is also the art of the possible. And so maybe that was the closest stepping stone from the CFD. And it was, because there are regulated asset based infrastructure assets here in the UK. Not that all the investors in those assets are all that happy with it on non-nuclear projects.

Michael Crabb [00:44:52] The nuclear ones, they're not happy with it, for sure.

David Stearns [00:44:56] So this is a really, really challenging kind of obstacle course. I think that there are two kind of possible outcomes. One is that the large reactor business becomes the technology of prevarication, which is, "Oh, but next year we'll do better, on the next project we'll do better." And the status quo is maintained, the status quo is maintained, the status quo is maintained. And you actually never really see any large reactor projects and you don't achieve the economies of scale or the fleet economics that France is looking for, that the UK should be looking for, and that most countries should be trying to achieve. Not OECD countries, obviously. That's outcome number one, which is the large reactor industry basically is in permanent decline. And outcome number two, it could be that the SMR side, who probably can work with the CFD side... If they're front loaded promise, which is, you know, I can design and deliver nuclear safety from my factory floor. You know, I'm simplifying. But if they can do that, I like that. If they can do that, then, yeah, give them a CFD. And I think they'd be happy with one. And that CFD might be really low, but it just depends on what their order book is going to look like. But where we are today is not satisfactory to anybody. And the future for nuclear doesn't look at all the way it looks like today. And so it just seems like a really interesting time to be in the industry. But I'm running out of time, you know, like I've been at it for 20 or 30 years now. It's going to be my kids who are going to be solving these problems, or maybe it'll be too late by 2050.

Michael Crabb [00:46:45] Yeah, hopefully not. You still have some time left here. In the last few minutes, tell us what you're most excited about over the next five or ten years.

David Stearns [00:46:54] Oh, yeah. I love this duality between... I love what the SMR industry has done to rejuvenate the nuclear conversation, to challenge the large reactor business. And I love, somebody said it... I wish I had said it, but somebody said it first. The large reactor business is a technology without a business model, and the small modular reactor, the SMRs are a business model without a technology. And I love that. You know, that's neat, right? For us financial types, I can understand that. And I love this convergence where the large reactor business does need to think much, much harder about what I call the accounting and the communications and the risk sharing. You know, fundamental root to branch restructuring of how they deliver projects, including putting financial and commercial people in the room from the first day, not after the engineers have written the info memo, what a beautiful project this is going to be, and can you just go find the money for me now. So, there's a huge reeducation on the large reactor side that they've got to do. The small reactor side has learned that. It's a younger group of people, but they've got all of the lessons that the large reactor side has already learned, which is licensing is not as quick or as easy as you might think it is. Getting public opinion approval or support is... you don't want to overpromise is what the large reactor people have learned. And I wonder, and it's probably the one kind of word of, not warning, that's far too harsh, because everything is quite looking really, really good, I think, for the industry. But the one kind of word of caution, I suspect, for SMRs would be to say just the large reactor boys and girls, they learned things the hard way. They have totally overperformed in some areas and underperformed in other areas. Don't underestimate or don't write off that whole experience pack there. There's a lot to be learning and to be transposing, but they can't be the same teams. That's what I love. If you just take a big vertically integrated nuclear utility and say, "Okay, now we want you to do the same thing, but reverse it all. The diseconomies of scale and everything that you learned for the past 20 or 30 years, you're going to unlearn that and you're going to do it smaller, faster and so on." You know, it doesn't work with the culture in that side of the industry. And so there's a culture clash emerging, and that osmosis hopefully will work well. Sometimes it does, sometimes it doesn't, but I'm looking forward to a new nuclear culture where economics and finance and risk are part of the conversation with consumers and with the people who are providing the funding from the first day. Not after the engineers are all done saying, "Here's the leftovers, just go sort out the money problem now because we've done our jobs."

Michael Crabb [00:50:03] Yeah, yeah. What a great way to close it out. I couldn't agree more. And yeah, I'm going to capture that paragraph or two and put it on the site because that was excellent.

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