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Is Europe Ready for a Nuclear Renaissance?

27 November 2024, By Claire Mauduit-Le Clercq and Emmanuel Dubois-Pelerin, S&P Global

Highlights

From the current limited nuclear power construction activity, with about 3 GW in progress, Europe seems ready to accelerate again, but only in countries already operating nuclear reactors. This comes amid increased geopolitical tensions, energy security concerns, aging existing nuclear fleet and increased need for firm and low-carbon power to deliver on electrification and decarbonization ambitions.

We estimate that the total cost for new build could be up to €15 million/MW, well above most other clean energy sources. This estimation notably considers overnight costs, cost of capital, and time — all of which can result in significant variations and add to unpredictability.

We believe the economics of the projects and the credit quality of the involved utilities will therefore rely on the efficiency and credibility of the frameworks that will govern these assets. Economic viability depends on dedicated remuneration schemes, risk-sharing mechanisms and government support. The need for robust frameworks is exacerbated by the substantial upfront investment funding needs of each project and a negative track record of significant time and cost overruns we observed on recent projects.

In any case, any nuclear new build will take years to become operational and connect to the grid, creating ongoing tensions on projected economics and future power market dynamics. Managing these will be key to attract investors while protecting consumers.

………………………………………………………………………………………………………… The European Parliament also approved the classification of nuclear as “green” under the EU Taxonomy for sustainable activities, making nuclear power an eligible option to bridge Europe’s decarbonization trajectory. This is key, as this contributes to alleviating pressure on funding (see the discussion Nuclear as a bridge to 2050 in the European Union in this report for more details).

……………………………………………………………………………………………………….  The level and unpredictability of costs of new nuclear builds are a major obstacle to the renaissance.

…………….. In this report, we do not focus on lifetime extensions, which are indisputably cheaper than a new build, whose levelized cost of electricity (LCOE), even with mild assumptions, is probably at least three to four times French energy regulator CRE’s estimate of €30-€40 per MWh for EDF’s 12-year, approximately €68 billion “Grand Carénage” investment program. Reciprocally, one could embed in a new EPR LCOE the optional value of a future extension beyond the assumed lifetime — but most projects already target 60 years from the start (versus typically 40 years in the past), so that optional value beyond 60 years is very uncertain and at any rate stands so many years away (around 2090 for new construction starting now) that its net present value is relatively modest. We see lifetime extensions as supporting the related utilities’ credit quality only for existing reactors.

……………………………………….The construction costs of all recent new nuclear reactors, in Europe and the US, remain massive: we see the starting point of overnight costs (that is, ignoring the cost of capital during construction as if the project was completed “overnight”) at about or above an order of magnitude of €10 million/MW for Europe-built EPRs (it is unclear whether SMRs would be cheaper per MW; the real credit mitigant would be the three to four times lesser single-asset exposure if a utility is building just one).

…………The costliest of all by far is the very latest build, the UK’s HPC. As per the latest (January 2024) public communication on current costing, we see about €₂₀₂₄15 million/MW.

For clarity, we include in “overnight costs,” beyond those capitalized by the developer, certain items which, given the magnitudes involved, can be very relevant:

Supplier losses, like Toshiba’s $3.68 billion loss on Vogtle or Areva’s several-billion-euros loss on OLK-3. They are typically hard to assess (and typically excluded from the LCOE). The appropriate baseline for assessment is an arguable point: the downside from the reasonable return the supplier expected versus from a break-even point. Nevertheless, net losses should be factored into the analysis.

Pre-COD operating costs, which some developers expense, rather than capitalize, and nonetheless represent monies sunk before cash flows in. For example, for FLA-3 construction, operating expenditures (opex) of €1.14 billion (€0.7 million/MW) were expensed over 2022–2023 alone.

Certain post-COD costs (e.g., the FLA-3’s vessel-head repair under first big planned outage) were an ASN (France’s Nuclear Safety Authority) precondition for commissioning in the first place. Both repair costs and the opportunity cost of not producing power during repair are not yet known.

……………………………………………………………………………………...The lack of cost competitiveness for nuclear technology construction in Europe is obvious versus other technologies and other regions

LCOEs are the highest for nuclear, highlighting its lack of cost competitiveness in construction in Europe.

……………………………………………….All current funding mechanisms envisaged for NNBs include strong taxpayer or consumer support

In our view, no funding on NNBs during the construction phase can be structured absent taxpayer or consumer support. This support can take the following forms:

• A subsidized state loan during construction and a CfD support during operations, as envisaged by the Czech Republic for Dukovany 5.
• State ownership, even when the state was previously absent from nuclear (e.g., SZC, where the UK government is and would remain the largest shareholder), combined with Regulated Asset Base (RAB) support starting from Day 1 of the construction phase. The objective is to reduce WACC and to share cost overrun risks.
• State-owned bank funding and intergovernmental loans, such as for Paks II in Hungary.

………………………………………………………………………………………….. Conclusion

Massive new build projects have gained momentum in some European countries, but financing them remains fraught with challenges. To sustain the development of these key decarbonization projects, countries are looking at innovative funding mechanisms to mitigate the heavy cost burden on operators. Construction risks will remain key concerns for the ratings trajectory of the involved utilities, and we will monitor the implementation of credit-supportive funding solutions that often require strong state involvement.  https://www.spglobal.com/en/research-insights/special-reports/is-europe-ready-for-a-nuclear-renaissance

December 1, 2024 - Posted by Christina Macpherson | Uncategorized