New Nuclear Plants Not Viable Without Government Support

Jan.10.09 | About: VanEck Vectors (NLR)

New nuclear power plants are unlikely to be built without financial incentives from governments, according to Oxford Analytica.

A so-called nuclear renaissance has been underway for some years now, OxAn says. It has taken three broad forms, namely:

  • the predominantly state-led and financed continuation of nuclear construction in countries with an existing industry, such as South Korea, China, India and Russia;
  • renewed support for nuclear power in countries that have existing industries but that have not seen any newbuild in decades, the most notable in this regard being the United Kingdom and United States; and
  • a host of potential newcomers to the nuclear market, the most substantial groups being emerging economies in Asia and the Middle East.

However, in practice, outside countries where nuclear is state-subsidised and driven by government-set targets, new nuclear is making little progress, despite increasingly supportive policy environments. Moreover, the financial crisis is having various impacts on the industry, the most critical of which is likely to be the increased cost of capital.

Increased borrowing costs are likely to more than outweigh the impact of the decline in basic commodity prices. Even if central bank rates have fallen, the cost of project finance has not.

For project financiers working in energy, wind, solar or natural gas-fired plants, remain much safer investments than nuclear. Smaller-scale projects also suit the current conservatism in project lending.

On the other hand, governments, faced with recession, are committing themselves to a huge range of public spending initiatives, and promotion of so-called ‘green jobs’, which are undermining previous commitments not to engage in forms of state aid. A lack of bank lending is also pushing borrowers towards state banks, export-import banks and multilaterals. Both these trends could benefit nuclear, as governments become more amenable to providing the cheap finance that new nuclear requires. As such, the financial crisis may increase the chances of state support for new nuclear.

Nevertheless, the main new nuclear building programmes are taking place in China, Russian and India — all countries where the government has mandated targets and is building new units through state-owned companies. In addition, South Korea and Japan, which are already heavily dependent on both nuclear power and imported fuels, have major construction programmes. In South Korea, all of the country’s nuclear reactors are owned by a subsidiary of the state-owned Korea Electric Power Corporation. By contrast, only two nuclear plants are under construction in Western Europe and none in the United States.

It would appear that the risks associated with new nuclear in liberalised, or liberalising, markets are too high to attract capital at a price that makes new nuclear viable.

Without additional state support, new nuclear will have to be built from existing utility revenue streams, which in some cases could damage credit ratings.

Meeting both carbon emissions and supply security goals will be difficult, if not impossible, if an established low-carbon base-load technology like nuclear is ignored, OxAn concludes. However, newbuild does not look viable in current market conditions. State support is needed and may be more forthcoming from governments faced with recession.