New nuclear needs positive taxonomies, says Rothschild & Co executive

On the role of government in nuclear new build, Vaughan described EDF's Sizewell C project in Suffolk, England. The proposed twin EPR development will be a replica of the French company's Hinkley Point C, under construction in Somerset. This is primarily financed by EDF on its own balance sheet, but for Sizewell C the expectation is that EDF will not play a major role on the financing side. Instead the company will take a small minority stake.

"The ambition for Sizewell C is to raise private financing and that means a big quantum of capital, in excess of GBP20 billon (USD28 billion). And of course that capital needs to be raised at low cost. We need the power output from Sizewell C to be competitive and we're targeting a power price of GBP40-60/MWh," Vaughan said, adding this requires "the deepest pools of capital to be available".

Such a project cannot afford to face any impediments, which means the taxonomy and the environmental, social and corporate (ESG) reference points need to be positive.

"We want the biggest institutions to come and play and commit, and the formal requirements need to be fulfilled. But there is an additional, more subtle, requirement that is not just about taxonomy. There needs to be a broader context of political support that investors are going to believe is durable. There needs to be a clear declaration, and made with political consensus, that nuclear is essential to the country's net-zero goal and climate ambition. And that really cannot be equivocal. So it's about ESG classification, but it's also about the reputational issues that the investors will consider," Vaughan said.

Reputational risk

Investors look at a project, not only in terms of meeting regulatory requirements, but from a much broader set of stakeholder perspectives.

"They are worried about what their ultimate investors think, what their pensioners think (if it's a pension fund) or their savers. They're worried about what their employees and their customers think. It's against that backdrop that they need to see a clear consensus. These are going to be big, high-profile investments that investors do not want to be controversial.

"Those investments will in some cases be deployed for decades, sometimes in quite illiquid conditions, and so investors will extrapolate and ask themselves, 'Well, is this going be something I'm having to defend and to justify?' It must meet the relevant commercial criteria, but they need to know that it's going to be reputationally supportive. And that clearly requires the taxonomy to be in place and to be supportive, but it also needs a wider consensus, and a wider political declaration, that the nuclear project is a fundamental part of society's objectives to hit the climate targets."

This is already becoming evident in engagement with investors for Sizewell C, he said, adding, "We need all channels to be on for this sort of investment to be capable of being raised."

RAB model

The conference was moderated by Sama Bilbao y Léon, director general of World Nuclear Association, who asked whether the regulated asset based (RAB) model, which is being considered for the Sizewell C project, could also be used in developing countries. If not, then what are the alternatives, she asked.

"The issue around attracting capital is to create the right structure that presents for private investors a proposition which doesn’t impose too much risk," Vaughan said.

"At Sizewell C, the key issue has been sharing the risk appropriately between consumers and investors. That's the essence of the RAB model, but it's made slightly easier in the UK because Sizewell C will be a replica of HPC and so the design is going to be substantially proven as we go from Hinkley to Sizewell, and the same teams that build Hinkley will be building Sizewell."

The key starting point, he said, is there is "a perception and logic" that first-of-a-kind projects have created "a difficult backdrop" for new nuclear programmes. "We need to create an interesting investor profile if we're going to get the big quantum money and at the right cost of capital, so it's really important to present a really clean proposition to investors."

In developing markets, the key issue is the credit rating, he said.

"If you want to raise the Sizewell quanta of capital that are needed for a nuclear project, and you're going to attract at a cost of a competitive electricity price, then you're going to need a strong investment grade credit rating. The essence of the RAB model is that the platform for the credit rating is the consumer covenant - Is the power tariff of sufficient credit quality to support the borrowing of the project at an attractive strong investment grade credit rating? That would be the key question." He added: "Politically, it's important that there is a perception that you are posing to customers an acceptable level of risk and are not just dumping on customers every risk."

Need for momentum

On the outlook for the development of nuclear, Vaughan asked, "Are we going to be stumbling along, building first-of-a-kind in new jurisdictions? Are we going to have a very limited build-back programme or are we going to repeat the experiences of the 1970s and 1980s, when there was a rollout of new nuclear that was sufficiently frequent, and the momentum was sufficiently large, for the constructors to be able to get on top of the construction issues, and nuclear was capable of being delivered with relatively low risk and at a good cost.

"And we're really only at the beginning of that process with the resurgence of nuclear at the moment. Let's face it, if you're going to deploy nuclear in a way that meaningfully contributes to climate change goals, it means those assets have got to be functioning by the 2040s and 2050s. A project like Sizewell has a 10-year gestation. It's going to only be producing in the early 2030s, so there's a big question mark out there: Is nuclear going to go through a big acceleration, where it's going to be really meaningfully deployed during the late 2030s and early 2040s? If it is, then the risk perception changes, and then you can be much more imaginative about financing models."

Government funding

Until there is such a momentum in support for new nuclear build, Vaughan said the 'alternatives' to the RAB model are going to be much more focused on direct government funding, or government sponsored funding, perhaps through state controlled and state-owned facilities.

"The models that we have seen have very much centred on vendor supported models. EDF is building Hinkley Point C on its balance sheet, and we've seen others, such as Kepco, offering to put significant amounts of capital into projects," he said.

"But more evidently, the non-OECD actors - namely, China and Russia - have well-developed programmes with momentum, and they are able, probably, to assess the deployment risks of new nuclear construction more readily," he added. Russia's Rosatom has been able to offer "much more interesting financing packages and more risk-bearing construction projects", he said, "and I think things are going to have to change if we're going to have OECD models to match that."

RAB is "an interesting step" that can work in other jurisdictions, but "a fair wind" behind a widespread deployment of new reactor units is needed to reduce construction cost through practice.

It is really important, he said, that taxonomies have a common supportive stance.

"Sizewell C is only one project, but we're going to be tapping UK, European and US investors and, one way or another, they're going to get judged by their own taxonomies. If nuclear has a red light or an amber light in any of these jurisdictions, then that is going to have an adverse impact."

Reputational risk is a major concern to private investors, and so a taxonomy is "by no means nominal", he said. "It's really important".

A supportive taxonomy will support public declarations of pathways that corporate entities must follow, he said. These will set "examples, standards and benchmarks", with those who fail to follow them being "called out".

"This momentum of financial and strategic declarations by corporates is far more powerful than we sometimes realise," he said. "And they draw attention to the corporates who lag behind."