Energy Nuclear 18 March, 2024 8:00 am   
Editorial staff

Piotrowski: A Copernican Revolution in Approaching the Financing of Nuclear Power Plants (INTERVIEW)

Zrzut-ekranu-2023-12-21-1 Nuclear power plant. Source: Freepik

We have the economic potential of the market, and we will save a lot by simplifying the financing model. In exchange for a simple commitment to consumers, we can raise funds enabling the financing of a multiple nuclear power plant constructions. For both sides, this is very profitable – proposes Andrzej Piotrowski, former Deputy Minister of Energy (2016-2018) and former Vice President at Ultra Safe Nuclear Corporation (2022-2023), opening a discussion following the first part.

BiznesAlert: At the end of the Law and Justice party government in Poland, a real boom of big and small nuclear power plant projects appeared. Has financing been found for them, amounting to a trillion zlotys? 

Andrzej Piotrowski: Such a figure was presented by the authors of the Backer-McKenzie report a year ago. But that was the value of projects that were not started but only announced in the media. In my opinion, except for the Korean APR 1400 project, most of them are based on wishful thinking. Also, the AP1000 project in Choczewo seems to be still “temporarily” financed from state funds and is moving at a snail’s pace. Under the guise of auditing, the new government is looking for, among other things, the method of financing. There are talks about a contract for difference, which, as the British experience in Hinkley Point C has shown, is very poorly suited for nuclear investments. Meanwhile, it’s the last call to find an effective method for financing nuclear investments. Therefore, referring to the declaration that nuclear energy is an issue far beyond political divisions that even President Andrzej Duda and Prime Minister Donald Tusk speak with one voice, I would like to propose my concept as an opening of a discussion among experts on a completely new approach. Not negating the need to introduce mechanisms suitable for the entire sector, I suggest building this mechanism step by step, focusing on implementing those projects that are necessary and realistic, such as AP1000 NPP in Choczewo. A smoothly executed project in similar APR1400 technology in Barakah has real costs of 5 billion USD per 1 GW. Thus, three nuclear blocks of similar technology built in Choczewo should cost about 73.5 billion zlotys. The aforementioned Backer-McKenzie report assumed that the costs would amount to 90 billion zlotys, noticeably more. However, I would be cautious in stating that the project on the Polish Baltic Coast is being smoothly implemented. Therefore, among the various method of financing I want to propose a significantly different one, that in addition to providing investment funds, may also play a crucial role in disciplining the project’s implementation. 

But necessary are funds of a value often described as beyond national range of reach?

Flaunting huge sums does not facilitate the development of rational solutions. The amount of 90 billion zlotys for a power plant may seem large, but in Polish energy market, it’s a not uncommon value. In 2023, Poland produced 178.8 TWh of energy, which, at an average price of 529 zlotys/MWh on the commodity exchange, translates to 94 billion zlotys. This means that the annual value of the electricity market in Poland exceeds the costs of building a nuclear power plant that would provide nearly one-fifth of the peak demand. The scale of investment seems not only proportional but also, importantly, matched to the current purchasing power of our market. 

There’s another observation. To achieve 10.2 GW of prosumers photovoltaic capacity by September 2023, a total of approximately 45 billion zlotys was invested. Thus, over a few years, prosumers have spent an amount comparable to half the cost of building the Nuclear Power Plant in Choczewo. If these expenditures were directed towards a nuclear power plant, we could receive 1.9 GW of capacity, available on average 90% of the time throughout the year, translating to 14.8 TWh of electricity – every year, for 60 years. Less energy would be obtained from 10.2 GW of photovoltaics, as statistically, it generates power for about 13% of the time in a year, resulting in 11.6 TWh – every year for 25 years. I don’t want to compare the efficiency of these two types of investments here, as these are just rough estimates, but to emphasize that about 1.3 million out of 14 million households have decided to spend their savings on an investment in the future “profit” realized in the form of electricity, and the amount invested so far equals one and a half nuclear blocks. 

So, are you proposing that we all come together and collect funds for building a nuclear power plant?

The construction of energy infrastructure and the delivery of energy will always, I emphasize always, be paid for by energy consumers. And if its construction or operation requires state assistance, then taxpayers will pay additionally. Meaning also energy consumers, because all of them are also taxpayers. In total, they will pay more, because this additional flow of money will generate associated extra costs. I have just shown that consumers have at their disposal funds that not only can, but also very importantly – their holders want to, allocate them to protect against rising energy prices. Investing in photovoltaics boils down to pre-purchasing energy, motivated by the desire to protect against rising energy prices. So, we are talking about the possibility of leaving significant amounts of money in consumers’ pockets, because the financial costs of building a nuclear power plant statistically constitute one-third of the total costs. So, it’s not a contribution to a common goal, but an investment offer, and as I’ve shown, there are grounds to persuade many people to it. There are also grounds to assess that it is also a very socially beneficial investment, reducing the outflow of profits abroad. 

Your original settlement scheme for prosumers, which attracted such great interest, guaranteed that the investment would soon start paying for itself. Here, we’ll have to wait several years for the investment to pay off. Won’t that limit demand? 

There are already many financial instruments with a long-term perspective. Often, they can also be traded on the exchange until the obligation’s maturity date. In this case, the price of the proposed instrument will continuously refer to the energy prices on the commodity exchange. Therefore, I wouldn’t tie the scale of interest in such a solution to the maturity term. More important will be whether buyers are guaranteed that a nominally specified amount of energy purchased now, as a bond, will be compensated by exactly that amount of energy at the agreed time. And without any “fine print”. In the case of a prosumer, it was crystal clear that 80% of the energy fed into the grid would be returned, regardless of market prices. 

Why wouldn’t individuals choose PV panels or treasury bonds instead? 

The investment instrument I propose here has several distinct advantages from an individual’s perspective. It doesn’t require physical space for PV installations and simultaneously guarantees the price of electricity. Unlike a prosumer, it doesn’t necessitate a commitment of the entire investment amount upfront. Additionally, it can be cashed out earlier if needed. This investment can serve as a form of retirement security or a deposit, especially in a situation where speculations in the exchange market have practically eliminated traditional safe havens like gold or ‘hard’ currencies. Treasury bonds, despite being considered safe investments, do not effectively preserve funds from losing value due to inflation. In fact, they face a double challenge: not only do they fail to compensate for inflation, but they are also taxed on the nominal profit. This taxation further erodes their ability to keep pace with rising prices. A bond denominated in the amount of energy will be related to a specific obligation to produce energy – it’s an irrevocable promise of delivery, a sort of deposit receipt. And there’s no profit to be taxed if the bond is redeemed at the end of the period in exchange for the delivery of the purchased energy at the outset. 

Such a nuclear bond is also fundamentally different from bonds issued by corporations or even states. It’s hard to imagine a situation where electricity would become unnecessary. There’s also no rational scenario in which it would be cheaper over a longer period. The visions outlined by renewable energy supporter’s concern temporary phenomena. Ultimately, after considering the costs of energy storage and the costs of correcting supply disturbances, when we average the price, it turns out that the consumed energy becomes more expensive. 

Does this model require legal amendments? 

Introducing nuclear bonds requires creating an appropriate legal and institutional environment. Let’s start by designing institutions and processes, as it will set the basis for legislative needs. I believe that a specialized bank, not a NPP investment SPV company, should be the issuer of nuclear bonds. A nuclear energy bank would secure such bonds with an energy purchase contract from the power plant owner. By paying “upfront” in the purchase contract, it could also impose ensuring very strict oversight of the investment process in terms of technical, organizational, and economic aspects. This is more than the covenants used in the debt market. A sector-specific bank with industry specialists would ensure not only ongoing monitoring of investment implementation in relation to the planned budget and schedule but also have an appropriate arsenal of influence over the investment company. Moreover, the special status of a state nuclear bank would also provide a tool for achieving national security objectives. The state’s main goal in security oversight is to ensure scheduled energy deliveries at the planned price. This proposal also makes the nuclear project independent of the destructive influence of politics and those practicing it. 

What would the nuclear bank do in case of construction delays? After all, this bond is supposed to have an “ironclad” coverage in energy, and the bank issuing the bonds is responsible for that… 

Financing the construction of a Nuclear Power Plant does not require converting all the energy produced by the reactor over 60 years into bonds. In addition to strong substantive oversight instruments to prevent deviations from the schedule and budget, the issuing bank could, in such a situation, buy energy at market prices to fulfill its obligations. The incurred costs would be compensated by appropriate amounts of energy not contracted but covered by contractual guarantees for delivery. 

How large is such a “buffer”? 

Please note that the investor who completed the construction has a certain asset in the form of energy, which will be available successively over 60 years. Let’s estimate its value according to the weighted average for a 24-hour band and an annual contract (BASE_Y-24) on TGE in 2024. Its price was 491.72 zlotys/MWh. Nuclear blocks with a total capacity of 3,750 MW at 90% availability throughout the year will produce 29,565 GWh, representing a value of 14.5 billion zlotys annually and 872.3 billion over 60 years at current, 2024 prices. This intangible asset serves to repay obligations and cover operational and nuclear fuel costs. If there are delays or increased costs, more of this asset will be allocated to repay obligations. Financing 90 billion for the investment requires selling energy from 6.2 years of operation at today’s prices. Adding operational costs, fuel costs, and not insignificant costs of promoting and placing bonds on the market, the power plant must allocate energy from 10 to 15 years to repay obligations. There’s thus a large buffer. 

So, where’s the catch? 

There’s no catch. Just as Copernicus changed the point of reference in the description of the Solar System, turning incredibly complex calculations into simplicity, I’ve allowed myself to shift the central point of reference from the nuclear power plant to the energy consumer. In doing so, their need becomes a form of currency. This new perspective eliminates several unnecessary links in the value chain that previously incurred risks and costs. Not only do these values accumulate, but they also grow rapidly during the multi-year construction period. For this proposal to resonate with anyone, the bond should eventually allow them to pay their energy bills or sell it on the energy market. While there are other formal and organizational issues, we haven’t addressed here due to the limitations of our conversation, they don’t alter the essence of the concept.

The most important conclusion here is that, in exchange for a simple-to-understand commitment from consumers, we can raise funds to enable the construction of a nuclear power plant. This arrangement is highly profitable for both parties. A nuclear energy bank, equipped with specialized knowledge, staff, and instruments, could similarly finance other power plants—whether state-owned, private, or distributed energy systems like SMRs and microreactors. Adapting this instrument will be necessary not only for individuals but also for legal entities, particularly those interested in a certified carbon footprint. The core idea, however, remains unchanged.

This is the last call to find an effective method for financing nuclear investments, and it’s worth discussing ideas from various sides. Ultimately, energy consumers always pay for the construction of energy infrastructure and the delivery of energy. Let’s create a nuclear energy bank that will issue to consumers bonds protecting against price increases, convertible directly into energy, and ensure competent supervision over projects.

Interview by Wojciech Jakóbik