China a good fit as UK nuclear partner

Britain benefits through investment and technological diversity, while Chinese firms gain experience

The benefits of China's incipient involvement in British nuclear power go far beyond the pounds and pence of simple financial transactions.

In the case of Chinese nuclear companies, they can reduce the risks of their investments in power plants and maximize the benefits by getting involved in a project's whole lifecycle rather than just being passive financial investors, says Tony Ward, UK head of power and utilities at Ernst & Young Global Ltd, the London-headquartered audit and business services company.

Ward says nuclear projects require large up-front capital investment and take a long time to actually begin earning revenue from generating electricity, so a pure financial investor in a nuclear project may feel more uncertainty about future returns earned only through operational profit.

If an investor participates in a nuclear power plant's development, construction, operation, fuel cycle and decommissioning phases, too, then there is a chance to earn returns from provision of a range of services as the project progresses.

"Investors' perception of risk, value and return depends on whether those investors can participate in the broader lifecycle of nuclear projects. And participation in this broader life cycle is an area I think Chinese investors have an appetite and capability to do in the future.

"Chinese companies have great experience in their home market. I do see Chinese companies as being able to access more and more of the value chain of nuclear projects in the UK and elsewhere," he says.

To do this, Chinese companies may need to take the initiative as a technology investor, both introducing their own indigenous nuclear technology as well as localizing part of its supply chain capability.

While localizing part of their supply chain would replace some products from Chinese plants, the margin a company gains at each stage of the project's lifecycle would still generate returns throughout the project, Ward says.

Chinese firms may need to do this in stages as they become more familiar with the UK nuclear and commercial markets. "This is about a process of building the experience and confidence to be informed and successful - it may not be prudent to seek to step in and participate in all the parts immediately, as that may be both too risky and impractical," he says.

However, even as a pure financial investor, Chinese firms may have the ability to derive additional value by sharing their nuclear project management and operational experience. "Their intellectual knowledge and practical experience should benefit new projects, and enhance the return throughout the construction and operational phases."

Ward says nuclear investment decisions are often difficult because of their complex technical, regulatory and commercial structure, especially in liberalized, private sector-led markets.

Ward says the characteristics of nuclear power are some of the fundamental reasons the UK government negotiates a buy or strike price to help investors feel more confident of their investment returns, in turn setting the price that consumers will pay for nuclear energy in the future.

He says nuclear projects typically have high up-front capital costs with long development and construction timelines, especially when compared with other, higher-carbon forms of power generation. Gas power stations, for example, may require just 10 to 15 percent of the capital expenditure per megawatt built, and investment payback could be realized in far shorter timeframes, despite operational costs being proportionately higher. (The gas burned is the major cost over a station's life).

"All else being equal then, the rational investor would invest in gas as it produces the same output in terms of electricity, but at lower capital cost, more quickly, and at what is seen to be a lower risk. However, it is not what we need globally, and it may not be what each country wants either. Therefore it is important for governments to intervene and create appropriate incentives for some technologies and disincentives for others," Ward says.

Centrica's withdrawal from the Hinkley Point C project is an example that shows why nuclear projects may not be the most natural option for investors. Centrica, the British utility firm that originally planned to invest 20 percent in the project, withdrew in 2013 due to the project's delays and escalating cost estimates.

Ward says a key consideration in Centrica's withdrawal was likely to have been that the firm probably had more profitable, and more immediate, energy investment projects elsewhere in its portfolio that were a more natural fit for its business.

However, for other energy firms, for whom nuclear is a key part of their strategic purpose, such as EDF, Areva and the Chinese nuclear firms, new nuclear projects are core business.

He says escalating cost estimates and timeline extensions are common for nuclear projects because of their complexity, and even a small part of a project can have a knock-on effect for many other parts of the ecosystem.

One aspect is that the UK's new regulatory framework for nuclear energy, which was introduced as one aspect of the recent Electricity Market Reform, is especially stringent in that it requires all components of the nuclear project's lifecycle to be planned before a project can receive final approval, including the end-of-life waste and decommissioning plans and funding.

This is a whole new experience for nuclear investors because nuclear regulations elsewhere in the world do not demand such detailed upfront plans. Historically in the UK, the situation has also been different because nuclear projects were developed under government ownership, he says.

Ward says another advantage of Chinese nuclear firms' entry into the UK is their ability to provide diversity to the market, which is one of the key objectives the UK government hopes to achieve.

"There's a view that having different technologies compete with each other helps to drive down costs and improve efficiency. Second, it helps to avoid a type of dependency and concentration risk," he says.