Our coal fired power stations are reaching the end of their economic life. The decommissioning of the existing nuclear power stations is under way. Security of supply concerns, accentuated at times over this last winter when spot gas prices peaked at well over $38/mmbtu (making it the most expensive gas in the world) are now coupled with the other key driver: the need for the UK to cut greenhouse gas emissions. It is in this context that the Energy Review is again considering the role which nuclear could play in meeting the UK's energy needs.

It is generally accepted that there is unlikely to be any form of Government guarantee in respect of any new build nuclear projects. The industry needs to shake off the image of dependency on Government subsidy to be viable. On the basis of forward electricity prices, new build would be economic. However, to facilitate private sector involvement, the Government will need to set a clear agenda and framework in which the industry can develop and build new nuclear plants. The nuclear industry and financial community are confident that a new build programme can be developed in the UK although key legal and financial issues must be addressed. These issues include:
n delays and uncertainty caused by the unpredictability of the Government approval process;

- unpredictability of electricity prices over the medium and long term; 
- the storage and disposal of intermediate and high level waste; and
- the perceived decommissioning cost risk.

The financing community is clearly interested in any new build opportunities. Lenders are, of course, sensitive to cost overruns including those associated with planning and construction delay. The uncertainty of the planning approval process  led the US Government to overhaul the permitting process in the US to address these issues. The delays and uncertainty under current UK planning law for nuclear new build are such that this factor alone presents a very significant barrier to cost effective new build. Any delay postpones the plant's producing income. These issues, when coupled with the inability to hedge electricity prices over the long term, are seen by financiers as serious roadblocks.

However, there are some solutions available. The key issues, and some possible solutions are discussed below.

Permitting/approval: An issue that will concern those considering developing or financing a nuclear power station is the risk associated with the Governmental approval process and permitting generally. In particular, there is little predictability as to the outcome or timing. One option would be for the Government to look at the US model of pre-approval of standardised designs. Under this model regulatory approval is given to a standardised design. Although the first approval would take a considerable amount of time, it is likely that any subsequent new build based on the approved design would be streamlined. The new planning and permitting process in the US compares very favourably to that which presently operates in the UK where in the course of a public inquiry every single aspect of the project is re-opened and the public inquiry process alone can take up to two years. It has been suggested that the use of standardised designs, rather than a fleet of one-off projects, may reduce the capital cost by as much as 30%.

The key is for the Government to establish a clear policy statement about the role of nuclear in the UK's generation mix together with a receptive and predictable regulatory environment. Without such an environment many are not convinced that the nuclear industry and financial community will be willing to proceed.

Electricity price uncertainty: Under the current electricity trading arrangements it is not practicable to hedge electricity power prices over the long (or even medium) term. Accordingly, putting aside the other issues, it would be extremely difficult, if not impossible, to project finance the development of nuclear power stations on a non-recourse basis without a long term offtake arrangement in place and even then, the pricing in that offtake will be difficult to pin down to anything that is not just market based. Experience has shown that where long term power purchase agreements are entered into at prices that are significantly out of the money, the counterparty invariably seeks to renegotiate. So although not merchant, a key challenge will be to structure the offtake arrangements that give pricing certainty and stability. One possibility, driven by the security of supply argument, would be the development of a mechanism akin to that used for renewables: the creation of a 'nuclear obligation' as part of the base load which has pricing certainty that flows through to end users. This would not be a Government subsidy, but rather a pricing certainty mechanism met by end-users as part of the overall generation mix.
Without changes being made to the electricity trading arrangements, one possible solution would be to revert back to a classic independent power project model of the early 1990s whereby each participant in the project would be responsible for a percentage of the offtake of the plant in correlation to its equity holding in the plant. Shareholders may include some of the large electricity suppliers together with other interested parties such as the construction contractor. Given electricity suppliers will require base load supply over the long term to meet the profile of their customers, this may be an interesting proposition to some suppliers.

Such an arrangement, although not novel, would assist the financial community in gaining comfort as to the predictability of the income stream of the plant.

Waste: The UK does not currently have a long term solution to intermediate and high level waste storage and disposal. This is of concern to the private sector participants and to lenders. Clearly this is a sensitive issue but one that has to be addressed as part of putting in place a regime to encourage development. Again, it is important that a clear regime is established so that industry participants can predict the environment under which they will be working over the long term. It is interesting that the US seems now to be stepping away from very long term waste disposal back towards storage solutions that would make waste accessible in the future.

Decommissioning costs: The risks associated with decommissioning are arguably reducing as the process becomes more 'routine'. Further, in many ways, the risk is one of perception arising out of a failure to separate the decommissioning costs of the nuclear power generation cycle from those associated with defence (which has been the source of the largest environmental problems and the most difficult decommissioning problems). There is also a need on the part of the industry to communicate clearly the distinction between the decommissioning costs associated with historic (pre-1990) liabilities and those that would be associated with modern nuclear power stations.

Although there are some difficult issues ahead in respect of the development of a nuclear new build programme, the issues are not, from a legal point of view, insurmountable. In fact, if the Government was to set a clear agenda and framework, given the potential shortfall in electricity generation in the medium to long term, the private sector may accept the challenge and develop a number of nuclear power plants in the UK.

Juliet Reingold

Martin Stewart-Smith

Cam Brockie