Funky Town Finance Meets The Nuclear Renaissance
Politics / Energy Resources Sep 29, 2010 - 12:18 PM GMTBy: Andrew_McKillop
Like a Marlene Dietrich show in a remake of 1945 Berlin, surrounded by Soviet troop hordes, the nuclear sales show has to go on. The vaunted “Nuclear Renaissance” which is being proclaimed by the industry could see more than 200 new reactors built during the 2010-2020 decade, rivalling the industry’s previous high-water mark of 1975-1985 when one new reactor came on line, on average, every 17 days. The image of cheap, clean, safe and low carbon energy which is also secure – despite the uranium being mostly imported – has seduced political deciders and the corporate elite, worldwide. But the reality behind this romantic green image of a nuclear panacea to future energy needs is something altogether different.
Welcome to Funky Town
Since 2004, a future globalized electrical village lit by the atom is the meat of the obsessional ad campaign run by the French Areva state-backed nuclear monopoly, under the banner of “semi-private” as portrayed in the business press. This longstanding and massive advertising campaign runs to the background music of the Lipps Inc 1970s disco dance track “Funky Town” (see and hear this advert at http://www.youtube.com/watch?v=E3B__ovj2jU).
Everyone is boogying to DJ Friendly Atom in these richly detailed TV and print media offerings. The comic strip presentations often show Areva-owned clean and environment-friendly uranium mines in Canada – rather than Islamic militant-menaced Niger where Areva has a massive mine. The ads sometime flash dark-suited, smiling Men of Finance proffering hard cash at the edge of the stage, to underline the new illusion: nuclear power is very market friendly.
Indeed, nuclear power is market friendly and uranium mining is always clean and environmentally friendly in Funky Town. Quite often the reactors on the skyline are joined by serried ranks of friendly windmills and gleaming solar panels also delivering low carbon electricity. When in Funky Town, the revellers dance to the Areva tune.
The Atomic Reality
At the time when “Funky Town” was regular disco fodder circa 1977, nuclear power generation was still almost totally and exclusively reserved for the Organisation for Economic Co-operation and Development (OECD) countries, the USSR and to a smaller extent, China and India. It was almost exclusively State-controlled, State-financed and State-operated. Its strategic deployment and costs were ultimately linked to the real business of the atom – nuclear weapons making and state security which, of course, was a State secret.
Why nuclear economics “did not matter” back then is certainly an interesting economic question and brings us to the root of the nuclear illusion. The State was not in the background, rather it was entirely present at the forefront of the nuclear scene, for the simple reason that nuclear powered electricity is expensive. Producing electricity for the civil power grid was still a side issue and interest for the State, in the early 1970s. The real objective of the State-backed and State-controlled nuclear industry was plutonium brewing to make atomic weapons.
This context had lasted from the early age of the atom until the 1960s in the “old nuclear” countries – although America’s “Atoms for Peace” programme began with Eisenhower’s speech to the UN Assembly on Dec 8, 1953 (later called the “Atoms for Peace speech”). This programme was more an exercise in PR and communication, and wishful thinking, than making nuclear power a real world source of “cheap, clean and safe” electric power for the coming mass consumer society.
The first coming of civil nuclear power in the 1955-1965 period did not scale up and become “international” by extending outside the USA and Europe, until the end of the 1960s and early 1970s where nuclear power became an “export” to Japan, South Korea and Taiwan. In all cases, in each country, the start-up of their civil nuclear programmes was organized and structured by the State, from start to finish. The so-called nominally private operating companies that were founded were usually private only in name. All building, construction, land use, environmental, worker safety, and financial, economic or legal regulations – especially liability insurance in case of an accident – were taken charge of by the State, from start to finish.
The State was present and paid for the upstream – the power transmission and distribution infrastructures, fuel supply and fabrication, spent fuel removal and reprocessing, storage of wastes, and other nuts and bolts on the hardware side. The State was present and paid for the downstream – assured and constant financing at below-market rates, the creation of closed capital State-private holding companies and the massive gift of accident liability insurance. Data on how much this cost is clouded in controversy, and in many cases all documentation has been destroyed, but the French Reseau Sortir du Nucleaire estimates that in France, the “civil-isation” of the atom perhaps needed US $ 75 billion of state aid and support (some $300 billion by today’s standards). A conservative estimate.
To be sure, no other energy supply industry, with the possible small-scale exception of Green Energy, could ever dream of receiving this royal flush of State largesse. This surely helps explain why in 2010, “Funky Town” go-go financiers have massively crowded into the nuclear sector. While the state aid pickings are good, this is the place to be.
From Put Options to Development Aid
The French EDF ex-monopoly electricity supplier with the biggest number of nuclear reactors of any traded power company in the world, also the most debt-laden traded company in France, and with a share price down about 25% through Jan-Aug 2010, is using financial engineering to keep a foothold in the US nuclear power market. Using debt instruments, EDF bought half of Constellation Energy Group’s nuclear business for US$ 4.5 billion in 2008, thwarting a takeover of Constellation by Warren Buffett’s MidAmerican Energy Holdings Co. At the time, Constellation set up an option for a later possible sale of non-nuclear plants to EDF. Since then, the financial crisis and unsure economic recovery have taken their toll on high-priced assets of highly indebted corporations, such as electric power plants.
EDF and Constellation are now in dispute over Constellation’s option to sell EDF non-nuclear plants for as much as US $2 billion. The so-called put option – implying the value of these plants would fall – is due to expire in December 2010. EDF is Constellation’s biggest shareholder, but if Constellation exercised its put option, EDF would incur more debt or lower-performing assets and view this as a hostile move likely to jeopardize their relationship. This would in turn compromise plans to build new nuclear projects in the near future.
Closely linked to this example of financial engineering, is the Congressional decision on what will be the last government aids for nuclear power plant building in the USA- a decision that would likely go to Constellation. If the corporation backs out of nuclear expansion, due to financial stress caused by EDF in retaliation for Constellation using its put option, the chance of it building another friendly atom plant may be low.
Moving up a long way in funky financing, state-to-state bilateral deals in the nuclear power sector are now in high gear. Amounts in play are usually well above US $ 10 billion per project, and very complex mix-and-mingle methods and processes are used for their financing. From development aid finance, to market plays wielding put-and-call options, and natural resource based offset and compensatory trading all have a role for Funky Town financing of the atom.
As Iran unveils its own version of Funky Town, as it begins loading its new Bushehr nuclear reactor.
Like deals between South Korea and Abu Dhabi, Russia and Iran or France and Pakistan, the US-India arrangement targets business opportunities of epic dimensions. On the basis of the 2008 bilateral agreement, U.S. companies—most importantly Toshiba-Westinghouse and GE-Hitachi—are planning to build nuclear power plants in India. A linked American-Indian trade group claims that this business may ultimately be worth US $130 billion by 2030. At the basis of the long-running 30-year standoff between the USA and India was the question of uranium enrichment. During the negotiation of the 2008 agreement, Washington initially resisted giving India long-term consent to reprocess spent fuel subject to the agreement, because a 1982 U.S. National Security Decision Memorandum had limited such consent to the European Union and Japan. Business and plain sense however won the day: any questions of nuclear proliferation are in fact relics of a very distant past: India tested its first atom bomb in 1974 !
Already marshalled into this private-public ‘Marshall Plan’ for selling US nuclear power and services to India are the US Ex-Im (export-import) Bank, leading Wall Street private banks, and major downstream infrastructure companies such as Bechtel, all primed and ready to go. Under special arrangements for nuclear financing, US state agencies, especially the Ex-Im Bank can in some cases finance up to 85% of the initial sale for projects with a 15-year lifetime after an initial open-ended time period during which construction and hand-over to Indian buyers took place. Unlike smaller and specialized aid agencies like US AID, the Ex-Im Bank is an ideal vehicle for closely working with the big creative players of private finance, who shy well away from the atom for many reasons.
The next round in financing the new Nuclear Renaissance promises to be a lot less easy. Lined up on today’s buy side are a lengthening list of low-income and mid-income new nuclear countries wanting the atom. They include: Nigeria, Ghana, Sudan, Algeria, Egypt, Jordan, Kazakhstan, Indonesia, the Philippines, Bangladesh and others. Even “entry level” nuclear projects tend to cost US $ 2 – 5 billion, take years to construct and will have to be operated for a minimum of 30 – 40 years to make a profit and pay back initial costs. To be sure, the now standardized “operating life extensions” of 10 years here or there, may help avoid the prohibitive costs of decommissioning.
In a likely return to the dawn of civil nuclear power, the UN’s nuclear agency the IAEA could be extended to cover nuclear financing. When the IAEA was announced by US president Eisenhower in a Dec 1953 speech to the UN general assembly, his original proposal included power plant financing, building and fuel supply. As we know, the IAEA in fact was only given the “watchdog” anti-proliferation role that it still has. The World Bank and its regional bank affiliates were also excluded from financing the atom – and although today’s World Bank talk about nuclear power is positive, the financing is not there.
Modelled on the Global Renewable Energy and Energy Efficiency Fund, a US $ 100 billion fund that was definitely not approved at the December 2009 Copenhagen climate summit, the IAEA is working towards a “sister fund” known as the Global Nuclear Energy Fund for sustainable energy. In particular, this fund would aim to marshal and mobilize at least as much financing capability as the green energy fund: US $ 100 billion, but present and current promises, only from Europe, are of US $ 100 million. The nuclear fund would focus “small and innovative” nuclear power projects in low income countries, according to the IAEA.
Sovereign Debt to Global Debt
The UN’s Nuclear Suppliers Group has an impressive 45-nation list of supposed nuclear equipment and service suppliers, but these include countries like Iceland, Malta, Croatia, Cyprus and Romania, everyone short of the Vatican. The “serious suppliers” especially include the 5 UN Security Council permanent members, China presently mostly importing nuclear equipment and of course fuel, but quite soon planning to be a major builder of overseas power plants and operator of overseas uranium mines, like in India.
Most major suppliers, like the USA, France, Japan and Germany are also “seriously indebted” to new epic proportions following the 2008-2009 blow-out and collapse of the not-so-funky financial sector and its collateral damage to banks, and the economy in general. The result of all this is that selling nuclear power almost any place on the planet is now an attractive option – reinforced by the inevitable collapse of international financing and funding hopes for the green energy bubble at the December 2009 Copenhagen climate summit.
All illusions aside, the economic reality of Nuclear power is that it is expensive and comes in big slices. Country risk in a long list of New Nuclear countries is high and in the extreme, over and beyond the weapons proliferation, waste handling and storage challenges in these countries, and elsewhere. Financing the Nuclear Renaissance in 2010-2020 will almost surely shift to international and multilateral debt financing methods. The IMF will surely be there, and all creative methods will have a look-in to using nuclear power plants as the underlying security in a vast new upsurge in global debt trading.
By Andrew McKillop
Project Director, GSO Consulting Associates
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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