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Dec 31, 2015

Energy Security and Climate Change Stoke Growth of Nuclear Energy

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Introduction

2015 witnessed the long-awaited entry into force of the Convention on Supplementary Compensation for Nuclear Damage (CSC) and the first reactor restarts in Japan since the accident at the Fukushima Daiichi Nuclear Power Plant in March 2011. The growth of nuclear energy in Asia continues, with 46 of 70 reactors under construction. Around the world, five new reactors (one in Argentina, three in China and one in Russia) were connected to the grid in 2015 and construction commenced on three new plants: Belarusian-2 in Belarus, Barakah-3 in the United Arab Emirates and CAREM-25 in Argentina. While projections for global nuclear energy growth remain mixed, energy security and climate change continue to be strong drivers towards an expanding nuclear energy future.

CSC Enters into Force

The CSC entered into force on April 15, 2015, following Japan’s deposit of an instrument of acceptance. The CSC is intended to establish a global regime governing third-party liability for nuclear damage by allowing a country to join if it is a contracting party to either the Paris Convention or the Vienna Convention, or if it submits a declaration to the IAEA that its national law complies with the key principles of nuclear liability set out in the Annex to the CSC. Currently, the CSC has the following seven contracting parties: Argentina, Japan, Montenegro, Morocco, Romania, the United Arab Emirates and the United States of America. As between these contracting parties, the CSC provides for exclusive and strict channeling of third-party liability for nuclear damage to the licensed operator, availability of minimum levels of compensation consistent with contemporary standards, exclusive jurisdiction of the courts of one state, choice of law and, if compensation under the applicable national law is inadequate, contribution by contracting parties of additional international funds to supplement the amount of available compensation. 

Japanese Reactor Restarts and New Government Targets for Renewable Energy, Including Nuclear

In September 2015, Kyushu Electric Power Co.’s Sendai 1 unit became the first Japanese nuclear reactor to commence normal operations. Japan had shut down all its nuclear power plants in the wake of the accident at the Fukushima Daiichi plant in 2011. Sendai 2 was restarted in November. All other operable reactors in Japan remain shut pending confirmation they meet the Japanese Nuclear Regulatory Authority’s safety requirements and obtain permission from local authorities. In December 2015, Takahama Town announced that it had agreed to the restarting of the Takahama-3 and -4 Nuclear Power Plants (PWRs, 870 MWe each), owned and operated by the Kansai Electric Power Co. The Nuclear Regulation Authority had confirmed in October that the reactors had completed the steps required to conform with the new regulatory requirements for light-water reactors.

In November 2015, Japan’s Ministry of Economy, Trade and Industry (METI) established a target of 44% of the country’s power to be sourced from nuclear and renewable energies (including hydro) by April 2030. 

Paris Climate Talks and the Role of Nuclear in Combating Climate change

The 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) has given supporters of nuclear power a platform from which to extol its virtues. Leading climate scientists have done just that and called for a major expansion of nuclear power as an essential measure to avoid climate change over the next century. Supporting the role of nuclear in minimizing climate change, The Organisation for Economic Cooperation and Development (OECD) Nuclear Energy Agency’s report “Nuclear Energy: Combating Climate Change” suggests there are only two options ─ nuclear power and renewable energy sources ─ to decarbonize an ever-expanding electricity sector and, of those, only nuclear provides “firmly dispatchable” baseload electricity. 

In the context of the potential role of nuclear power in mitigating global climate change, the NEA questions, “[c]an nuclear power be expanded rapidly enough to make a full contribution to combating climate change?,” referencing obstacles that have and are currently challenging the development of new nuclear power plants. Such obstacles include cost (including cost of alternatives such as gas) and access to finance, as well as nuclear safety, security and non-proliferation concerns, together with long-term radioactive waste management solutions. The policies of governments around the world will largely drive nuclear energy’s role in combating climate change. 

Nuclear Finance

For a project requiring access to large amounts of funds, the possible funding sources are currently relatively limited. Nevertheless, new nuclear project sponsors, including technology providers, need to seek and secure sources of finance, including private sources, and are therefore keen to develop project development and financing structures and models that will be acceptable to export credit agencies (expected to be primary sources of nuclear finance), commercial banks and other lenders and investors.

Project sponsors and the nuclear industry need to develop clear and credible solutions to real and perceived challenges in nuclear new build projects and articulate them in a manner that facilitates effective communication with banks. A significant portion of banking language is centered on “risk.” In the nuclear sector, risks are prevalent ─ in perception and reality ─ and include both financial risk and reputational risk. 

George Borovas and Helen Cook considered how to overcome barriers between the nuclear industry and financial institutions in their article “Nuclear Finance: Understanding and Speaking the Language of Banks,” published in the Journal of International Banking and Financial Law. They argue that effective communication, in particular about risks, is essential for the creation of bankable nuclear projects. Effective communication includes talking early and often, demystifying “nuclear,” and translating nuclear industry terms into banking reality.

Key Market Developments

In October 2015, EDF and China General Nuclear Power Corporation (CGN) announced a partnership for developing nuclear power plants in the United Kingdom, including signing a Strategic Investment Agreement for constructing and operating the proposed Hinkley Point C nuclear power plant, under which CGN will take a 33.5% equity stake in the project. In addition, the agreements between EDF and the UK government were announced to be in “final agreed form.” Such agreements include the “Contract for Difference” (CfD) which sets a price for Hinkley Point C’s electricity of £92.50 per MWh for 35 years or £89.50 per MWh if a final investment decision is taken on the second plant at Sizewell C. The Energy Secretary will reportedly make her final decision on the Contract for Difference when EDF and CGN have signed the full investment documentation. In addition, the UK Treasury, through Infrastructure UK, agreed to provide a financial guarantee of £2 billion under the UK Guarantee Scheme, with further amounts potentially available in the longer term. This scheme allows HM Treasury to provide support in the form of “an unconditional and irrevocable financial guarantee of scheduled principal and interest in favour of a lender to/investor in a UK infrastructure project” (each guarantee provided under the Scheme is tailored specifically to the project but effectively substitutes the UK government, and its credit rating, for the relevant borrower/issuer of debt).

The UK government’s support of Hinkley Point C faces further challenge despite the European Commission’s investigation concluding that the UK government’s measures did not constitute illegal State Aid. For further information on the decision, see the Shearman & Sterling Client Briefing, “European Commission Approves Hinkley Point C State Aid.” This decision is being challenged before the European Court of Justice by the Austrian Government in Case T-356/15: Action brought on 6 July 2015 - Austria v Commission and also by Greenpeace Energy eG and others in Case T-382/15: Action brought on 15 July 2015 - Greenpeace Energy and Others v Commission. 

In addition to Hinkley Point C, the nuclear power projects being developed by NuGeneration and Horizon both made rapid progress in 2015 and are likely to gather momentum in 2016.

In other developments, Egypt and Russian state nuclear provider Rosatom signed an agreement on November 19, 2015 to collaborate in the construction and operation of a nuclear power plant equipped with four NPP units with capacity of 1,200 MW each at El-Dabaa. Poland announced that it will proceed with its nuclear program, and the Czech Republic developed a new national energy policy, which includes the future development of new units at both the Dukovany and Temelin sites. Fennovoima, together with Rosatom, submitted key license and permit applications for its nuclear power Hanhikivi 1 plant in Finland. China signed an agreement with Argentina to finance and build two nuclear power plants in Argentina. The Korea Atomic Energy Research Institute (KAERI) ─ designer of the SMART (System-integrated Modular Advanced Reactor) ─ and Saudi Arabia’s King Abdullah City for Atomic and Renewable Energy (KA-CARE) signed agreements throughout 2015 to cooperate in the commercialization and deployment of the SMART reactor in Saudi Arabia and in third countries.

In November 2015, the Obama Administration in the United States announced actions intended to ensure that nuclear energy remains a component of the US’ Clean Energy Strategy. The President’s FY 2016 Budget includes more than $900 million for the Department of Energy (DOE) to support the US civilian nuclear energy sector by leading federal research, development and demonstration efforts in nuclear energy technologies. DOE will be supplementing its $12.5 billion loan guarantee solicitation, available to support innovative nuclear energy projects, in order to drive innovation and growth across the nuclear power sector. Other actions to sustain and advance nuclear energy include establishing the Gateway for Accelerated Innovation in Nuclear to provide the nuclear energy community with access to the technical, regulatory and financial support necessary to move new or advanced nuclear reactor designs toward commercialization. 

2016 – Looking Ahead

In addition to the Hinkley Point C project in the UK, for which a final investment decision is expected shortly, both the Horizon and NuGen projects continue to move ahead. For the Horizon project, owned by Hitachi Limited, the Office for Nuclear Regulation (ONR) moves to Step 4 of the Generic Design Assessment (GDA) of Hitachi’s UK Advanced Boiling Water Reactor. NuGen, sponsored by Toshiba and Engie (formerly GDF Suez), will be preparing its nuclear site license, as NuGen has informed ONR that it intends to apply for a nuclear site license for Moorside in 2017 with a view to the license being granted in 2018. The GDA process for NuGen’s Advanced Passive 1000 reactors will continue in 2016. Both Horizon and NuGen are in the public consultation phase of the development consent process with further consultations to be run in 2016. As they progress through the various approval processes, both projects may seek UK government support and require State aid clearances.

2016 promises to be a big year for the Barakah 1 nuclear power plant in the UAE, which is heading for a May 2017 completion date for Unit 1. Unit 1 is more than 81% complete and Unit 2 is almost 60% complete. The Emirates Nuclear Energy Corporation (ENEC) will continue working to obtain the approval of the Operating License from the Federal Authority for Nuclear Regulation (FANR) for Units 1 and 2. The first four units are scheduled to be completed by 2020, when Unit 4 is connected to the grid. ENEC has stated that it may soon be ready to commence the procurement process for more units, possibly also at the Barakah site. 

Tenders for new units which may be launched in 2016 include from Poland’s state-owned Polish Energy Group (PGE). PGE announced in November that it is in discussions with Westinghouse, GE Hitachi, SNC-Lavalin Nuclear, Areva, EDF, and KEPCO, and will launch a tender in 2016 for reactor technology. 

Long discussed and awaited, 2016 may be the year for the launch of South Africa’s procurement. The country has already signed intergovernmental agreements (IGAs) with several vendor countries that have expressed interest in its nuclear new build program. The program is expected to include multiple PWR units and require strong government support, as well as commitments on localization and technology transfer.

Mexico, the Czech Republic and Bulgaria are also on the list of possible 2016 procurements. 

In addition to new procurements and construction, the nuclear energy sector will also be focused on plant upgrades and license extensions, radioactive waste management and decommissioning. Of the currently 438 operational nuclear power reactors, 225 have been in service for 30 years or more.

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