Nuclear Plant Financing – Advanced Payments during Construction

Today we continue our series on nuclear project financing. 

In this post we will discuss why it may be a desirable for customers to start making payments during the construction period rather than wait until a nuclear plant has been completed as is the more traditional approach to new plant financing.  This is often called construction work in progress (CWIP) payments, advanced payments during construction or concurrent payments during construction. 

Nuclear projects are capital intensive and have relatively long project schedules.  In traditional rate regulated utilities, when there is a new project being constructed, all costs associated with the project are summed and ONLY when the project is completed and producing electricity, can these costs enter the rate base and payments from the customer begin.  In general, this means that customers do not take on the obligation of new generation until a plant is actually generating electricity. 

This not only results in investor capital being at risk for a relatively long time, but it also increases the amount of financing required to cover both the actual construction costs and the continuously compounding interest. 

Now, what if the customer started to make payments against the project costs before the project is completed to incrementally increase electricity rates during the construction period?  This approach provides benefits to the project, and hence ultimately the customer as follows:

• reduces the amount of interest that would otherwise be accrued and compounded for future recovery,
• lowers the electricity rates at project completion needed to recoup construction costs,
• reduces the total amount of financing required for the project thus improving the financial capacity and credit ratings of the utility
• may reduce the cost of capital as a result of a stronger utility balance sheet

How does this work to reduce the total amount of financing required?  The customer is now effectively becoming a lender to the project by contributing funds before project completion.  The customer then benefits with lower electricity costs when electricity generation begins as they are in essence receiving a return equal to the project cost of capital on their prepayments. 

This has been seen under the CWIP cost recovery mechanism in the US (used at Plant Vogtle for example) and has been proposed for the Sizewell C project as a key component of the Regulated Asset Base (RAB) revenue model in the UK. 

While in theory the amount of costs covered during construction can be any amount, in most jurisdictions, it would be limited to covering financing costs (interest) and sometimes, pre-construction costs (a different issue for a future post).  In the RAB model in the UK, plans are also in place to offer returns to equity investors during construction, thereby lowering their risk which is expected to result in lower costs of capital. 

In summary, having customers offer a source of funding during construction in the form of advanced payments for electricity will help mitigate project financing risk and result in lower electricity rates once the plant is operating.