| Just in case you are left scratching your head after you read this Guardian article: * yesterday (22-July-2019) the UK government published a consultative paper proposing a funding model for a new nuclear power plant [1] * the public has until 14-Oct-2019 to respond. The UK Government will then take into considerations all responses and will proceed with implementing or not the proposed funding model * the paper [1] is very well structured (in bullet point format) and worth a read. The financial engineering aspects are complex enough that I sincerely hope Matt Levine will deem this interesting enough one day to translate them for us in his column. Until he does that, I'll do a poor Matt Levine impersonation below and try to give you my understanding * the climate change aspect: the UK government has committed to zero net carbon emissions by 2050. In this paper they state that, although solar and wind will carry us most of the way there, nuclear is still needed * The Guardian says "nope" * we are in a he-says-she-says impasse, but: * the UK Government has formed a Committee on Climate Change that released a lengthy report [2] on how to achieve net zero emissions; the technical appendix [3] goes over why we actually need nuclear. You can read and decide for yourself, but the CCC does not appear to be biased in favor of nuclear. The appear to push for solar/wind, but acknowledge that the renewable penetration will be economical only up to a fraction that is below 100% (they mention 80% on page 17). My summary of the funding model: * there are people with money to invest (mainly pension funds) and people who need money (nuclear power plants) * investors like good returns, but hate risk * what they hate most is a bundle of lots of different risks, and how these risks can interplay with one another * a nuclear power plant is exactly such a beautiful bundle of risks: risk of construction cost overruns, risk that Greenpeace will manage to shut the project down before it's completed, risk that the electricity price will be one tenth the production cost of this particular plant by the time it goes live, risk that some guy steals and money and runs, and obviously the Chernobyl/Fukushima risk * private investors cannot bear that much risk * you can add value by disentangling all these risks and making one party bear risk A, another one risk B, and so on * you can also add value by making some of the risks disappear altogether (it's good to be the king, ah, I mean the government) So, let's take them one at a time * risk of construction cost overruns: let's say the current projected cost is $10 BN. They know there will be cost overruns. They look at all similar projects, add a buffer, and deem that it's highly unlikely that the total cost will balloon to more than $25 BN. They then say that in the very unlikely event that the total cost will exceed that limit, the government will step in via a "Government Support Package". What that consists in is not specified yet, but a government guarantee for funding beyond that level is quite likely (a-la the implicit government guarantee that the US Government provides to Fannie Mae, or to the FDIC for that matter) * risk from the variability of the future electricity prices: this is mitigated via a "Regulated asset base" (RAB) model. What is being regulated here? the price of electricity. Aren't we in a free market? Why can't the price of electricity be simply dictated by the supply/demand? Because you can't really shop around for the best price of the kWh. There is some shopping around going on, but this is behind the scenes. The role of the regulator is to make sure the consumer is not getting screwed, and there is as much competition going on as possible so that the consumer gets a very good price. Matt Levine has some nice blog posts about how the auction works, see [4] for example. Ultimately, the regulator has the power to tell the consumer to pay X for the kWh, even if X exceeds the current production cost. That means the regulator can substantially reduce the risk of future revenues for a power provider, such as the operator of the envisioned nuclear power plant * Greenpeace risk. Well, Greenpeace, along with everyone else is free to respond to this white paper, by 14-Oct-2019. If the government finds their argument unconvincing, this risk is substantially reduced * Bernie Maddoff / Enron risk: these risks exists, but they are not specific to the nuclear power generation industry. They are mitigated by various regulations anyway, so they are indeed negligible * Chernobyl/Fukushima (also known as "the elephant in the room"): this paper is about funding the construction of the power plant, not about the cleanup cost if there is a future blowup/meltdown. One can still ask the question, and the implicit answer is like this: any cleanup cost will be charged to 1. the plant operator and/or the plant constructor (depending who's found to be at fault) 2. their respective insurers, up to a point. If the cleanup costs are not met by 1 and 2, then the operator and/or constructor will declare bankruptcy, in which case, the investors that provided the funding up to the Funding Cap (mentioned above) will lose their money. The UK government will foot the bill in excess of these costs. [1] https://assets.publishing.service.gov.uk/government/uploads/... [2] https://www.theccc.org.uk/publication/net-zero-technical-rep... [3] https://www.theccc.org.uk/publication/net-zero-technical-rep... [4] https://dealbreaker.com/2013/07/electricity-market-rules-wer... |