Financing Costs in New Nuclear Power Plant Construction

Construction costs of a nuclear power plant represent the largest expense of nuclear energy. Cost estimates for new nuclear construction in the US developed over the past decade project the “all-in” costs (total cost, including financing) to be anywhere from $5 to $9 billion. I think these estimates are far too high and will challenge them and the assumptions in a future post. However, up to 50% of the $5 to $9 billion can be attributed to interest expense from financing the project.

Factors Contributing to High Financing Costs for New Nuclear Construction

• Interest rate that includes a risk premium
• Credit rating of utility
• Inability to pre-charge rate payers without backlash
• Duration of project
• Cash on hand

Risk Premiums Charged by Banks

Utilities are subjected to paying an interest rate that includes a risk premium for loans to build new nuclear power plants. Banks argue that the uncertainty associated with new nuclear construction warrants a higher interest rate than market rate. The uncertainty banks are referring to is whether or not the nuclear power plant will ever be completed, and if it is, whether or not the plant will receive an operating license from the NRC. These risk factors allow the banks to make a case that the interest rate on loans for new nuclear construction should be several percentage points higher than market rates because the utility company may never get the cash flow benefit from the project should it not obtain an operating license or the construction is not completed.

Credit Rating of Utility

Every business has a different credit rating just like a person. As with people, banks charge businesses with a lower credit rating a higher interest rate than businesses with higher credit ratings. Utilities do not have a special class of credit rating, nor do they differ materially in their ratings from other companies, but each company’s individual credit rating will effect the interest rate they obtain on the loan(s) from the bank(s).

Inability to Pre-charge Rate Payers without Backlash

If utilities were able to charge their customers a small fee ($0.01 to $0.02 per kWh) ahead of the new nuclear plant construction without fear of public retribution, the amount to be financed for the project would be cut considerably, resulting in a significantly reduced financing cost. The utility proposing the new project in Georgia that has been approved for a US Government loan guarantee is discussing pre-charging their ratepayers in order to help curb this enormous, non-value added expense.

Duration of Project

The longer the construction of a nuclear plant takes, the more interest accrues. This means that construction delays are a huge area of concern for several reasons. As the project gets delayed, it pushes the revenue streams from the nuclear power plant further into the future. This means the utility is not generating cash flow from a project that they are spending large sums of money to construct for a longer period of time. Also, as this time elapses, the loan(s) are accruing interest in the hundreds of millions and even into the billions of dollars. A project that was projected to cost about $5 billion and take three years to complete will cost closer to $8 billion if construction delays force the completion date back to five years.

Cash on Hand

Utilities have a certain amount of cash on hand that they can choose to utilize to finance new nuclear construction projects. It does not make sense for a utility company to utilize all cash to finance new nuclear construction for a variety of financial reasons, but finding the right balance of cash versus financing is important. Even using $100 million of cash on hand will help reduce the amount of the project that needs to be financed, which in turn reduces the interest expense.

The Optimum Financing for New Nuclear Construction

Every utility company will choose a different financing structure to fund new nuclear construction. By pre-charging ratepayers a small per kWh fee and by using cash on hand a utility company can drastically reduce the size of the loan(s) required to fund the project. Any reduction to the size of the loan(s) will lower the amount of interest expense associated with financing the project. Since financing costs are such a large proportion of the total construction cost of new nuclear power plants, it is wise to fund as much of the project as possible through pre-charges and cash on hand.

US Government Loan Guarantees

Loan guarantees from the US government amount to what is essentially an insurance policy for the banks. The US government is pledging to repay a bank for a loan granted to a utility that is unable to build and license a new nuclear power plant. Since this provides an offset to the risk of uncertainty associated with new nuclear construction, banks should be forced to re-evaluate the risk premium tacked onto loans for new nuclear construction projects. What need is there to charge an interest rate premium on a loan that is backed by the US Government? There isn’t, and banks should be forced to bring interest rates on loans for new nuclear construction back down to market rates if the project is backed by a loan guarantee. Reducing the interest rate by as little as 1-2% can save hundreds of millions of dollars in financing costs for new nuclear construction projects.

Why Should Ratepayers Care about New Nuclear Construction Costs?

Customers should want their utilities to save as much money as possible when constructing any new power plant. The lower the cost to build, the lower the overall cost of the electricity to the end user. Since financing costs are such as huge piece of construction costs in nuclear power plant construction, it makes sense for ratepayers to be pre-charged because this will ultimately lead to reduced future costs in energy prices.

Image Credit

Two Dollar Bill courtesy of Flickr user Doublep1 under the CC license