The French nuclear conundrum

Financing is one of the most complex issues any new nuclear power plant project has to face. The main difficulty is not actually finding funds as many institutional investors, especially pension funds and insurers, have a strong preference for long-term infrastructure projects. At its core the question is to find a balanced risk structure that all stakeholders can agree upon. 

Financing a nuclear power plant is a risky endeavour

Construction risk

The total construction cost of a nuclear reactor results from initial expenses such as land acquisition, preliminary engineering work, planning and land preparation, from construction expenses such as EPC (engineering, procurement and construction) costs and from financing costs. Each of these items is subject to significant upfront uncertainty and can substantially increase during the construction phase of the power plant. It is especially important to bear in mind that during this initial period, all costs are paid out-of-pocket by the equity investors and the banks that lent to the project. By definition, the project will not be able to generate any cashflows before the Commercial Operation Date (COD). Hence risk is accruing during the construction phase and peaks at the moment operations begin.

Nuclear power plants take multiple years to build, even in countries such as China that benefit from steep learning curves and economies of scale. Any delays during the construction phase will result in a cascade effect where subsequent tasks are themselves delayed and must be replanned, triggering new costs. This will also result in a delay in first revenues, thus reducing the overall profitability of the project. Critically, it also means that interest payments on the outstanding debt will still have to be paid, potentially requiring to raise new equity and/or debt to face them, as no source of cash is available. This snowball effect explains the rapid increase of total costs when a project meets unexpected difficulties. Lenders are especially wary of these as the ability of the borrower to pay the interests during the construction phase is at risk.

Market risk

Once operations have started, lenders and equity providers are quite unwilling to face commercial risk for the revenues of the plant. Given the amount of money that has been spent, they favour a steady stream of predictable cash-flows over a long period of time. This security over the revenues profile is a pre-requisite to them agreeing to provide equity or debt in the first place. Hence, it is nearly impossible to build nuclear power plants whose production would be sold at wholesale prices on a competitive market.  This situation introduces too much risk over the demand for the power of the plant, especially given the prolonged construction phase that makes it unrealistic to rely on market price forecasts when the initial investment decision is taken. A variety of financial tools have therefore been used to secure the revenues of nuclear plants, including Power Purchase Agreements (PPAs) and Contracts for Difference (CfD). Here again, it comes down to finding the right balance in risk allocation, with a burden-sharing between the sponsors of the project and end-consumers. 

Compounded by specific difficulties in France

France has announced that it intends to build six new nuclear plants via EDF, the State-owned private company who owns and operates the current nuclear fleet. Even though EDF managed to deliver two functioning reactors at Taishan in China, lenders are quite wary. Indeed, the Flamanville 3 and Hinkley Point C projects on which the company is currently working respectively have 12 and 5 years of delay, which skews expectations regarding the ability of EDF to deliver the planned new reactors on time and on budget. While each project has its specificities and much feedback has been learned from the two plants, stakeholders remain cautious. 

With more than €54bn of debt at the end of 2023 and a BBB credit rating, EDF is already highly leveraged. Its stock has been fully purchased by the French State in 2023, which is now its sole shareholder. The State itself has strong budgetary constraints and is engaged in emergency spending cuts and is therefore unlikely to provide additional resources to EDF. The company is thus faced with a conundrum. It needs to find billions of euros to finance the required investments but cannot provide them based on its current balance sheet.

Historically, new power plants in France have been financed on EDF’s balance sheet as the company was then a public administration. Flamanville 3, its most recent plant, has followed the same scheme. However, plants such as Taishan 1 & 2 have been financed through project finance structures with external shareholders providing some of the equity and the debt being raised by the project company. 

Difficult trade-offs are on the table

The current situation is thus characterised by a series of impossible choices. One option would be to create autonomous project companies for each new power plants with external shareholders diluting EDF’s control. This option would limit EDF’s equity commitment and avoid a consolidation of the project company’s debt in EDF’s group accounts. It would however have serious implications in terms of sovereignty in a strategically critical industry and investors would need to be vetted first. It would also deprive the project from the financial backing of EDF and, implicitly of the French State, hence increasing the risk profile and financial cost. Discussions are taking place around long-term contracts that would provide some form of security over the revenues but finding a counterparty willing to shoulder such a risk is difficult in a competitive electricity market. Other solutions such as Contracts for Differences raise the question of whether French taxpayers are potentially ready to accept to pay for the plants and whether European competition authorities will accept the specific mechanism put in place.

Another option would be for EDF to sequentially build the plants and finance them on its balance sheet using a mix of cash-at-hand and newly issued debt. Once a plant has been built, the company would then sell it partially or totally and use the proceeds to finance the next one. This option however lengthens the overall construction duration and is constrained by EDF’s current financial situation. It would also end EDF’s role as sole owner (and potentially operator) of nuclear plants in France.

At this stage, no firm decision has been communicated by EDF or the State on how the new plants are going to be financed. The recent upward trend in electricity prices have freed-up some financial breathing space for EDF but barring a significant increase in the price at which EDF sells its currently produced nuclear electricity, the company will probably not have the means to finance the plants on its own.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.