Credit downgrade could increase cost of nuclear - expert

Johannesburg – A downgrade to junk status could make the cost of nuclear power procurement “infinitely more expensive” than it is to date, said an industry expert.

During a panel discussion on financing nuclear power projects at the Africa Energy Indaba on Tuesday, Mike Peo, head of infrastructure, energy and telecommunications at Nedbank Capital explained that nuclear could be procured on an affordable basis. However, a country’s ability to do that is often based on the rest of the world’s view on the country’s stability.

“The cost of debt financing of a country inherently depends on rest of world’s political view of stability of country,” he said.

“Fundamentally nuclear can be financed. The single biggest problem is that you need a financing arrangement that replicates the life over which your nuclear reactor can produce power,” explained Peo.

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A solution is to split the energy mix between local and international content and then optimise the local content as much as possible, he said.

Peo highlighted different models used to fund nuclear power projects. These include financing by government, sovereign wealth funds and national banks, and funding by corporates.

Often with corporates, the challenge is to generate revenue during the construction period to prevent costs from becoming “exorbitant”, he said.

Another option is to have industrial investors form a consortium to fund the project.

Regardless of the funding option, perceptions of the long-term credit rating is what impacts cost, said Peo.

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Peo added that the cost should be considered, in light of the benefits of economic growth that will result through the procurement. This includes job creation as a result of industrialisation. “The benefits can be exceptionally substantial,” he said.

Rob Jeffrey, economic risk consultant who was also on the panel explained that electricity is a “necessary condition” for economic growth. Decisions about power systems are lifelong decisions that look 40 or 60 years into the future.

When it comes to financing projects, Jeffrey explained projects should attract investment, both local and domestic.

This should also be accompanied by reduced economic and political risk to ensure costs do not pick up.