3. FINANCIAL MODELLING AND RISK ANALYSIS IN PARTICIPATING
3.1. BULGARIA
Bulgaria has a diverse energy mix that includes nuclear, thermal power plants and plants using renewables sources (hydro, wind, solar power plants and biomass). The total installed capacity of all electricity generation types is around 12.7 GW with annual gross generation of 45 TWh and gross domestic electricity consumption 37 of TWh15. Coal and nuclear energy produce four fifths of electricity generation (46% and 34%, respectively), while renewable sources have a share of 14%. Although Bulgaria remains a net exporter of electricity, its exports reduced significantly after the closure of four aging Kozloduy NPP (VVER–440) units in 2002 and 2006. In 2006 — the last year of operation of the two 405 MW Kozloduy reactors (units 3 and 4) — Bulgaria produced 45.8 TWh gross and exported 7.8 TWh of these (net) to Greece, Turkey, Serbia and the Former Yugoslav Republic of Macedonia.
Currently, Bulgaria has two nuclear units in operation at the Kozloduy site (units 5 and 6) for a combined capacity of 2 GW. Kozloduy NPP is the country’s lowest cost electricity producer.
In accordance with the national target for the long-term operation of the existing Kozloduy NPPs, a comprehensive programme for the modernization of Units 5 and 6 was carried out. A licence for operation of Unit 5 for a 10-year period was issued on 3 November 2017 and in 2019 the service life of Unit 6 has been extended by another 10 years. Government commitment to the future of nuclear energy is strong, though finance is lacking.
There are several main considerations driving the discussion of building new nuclear capacity in Bulgaria, both in terms of realistic timeframes and remaining consistent with the energy needs in the electricity generation mix. The first driver is given by the climate objectives and national commitments to the COP. The second is compliance with European energy policy targets — energy security and efficiency in the European Union, the National Energy Strategy goals, the possible removal of thermal power plants after 2030 and their eventual substitution with variable renewables. The third is the modernization of Kozloduy NPP units 5 and 6 or their decommissioning and the maintenance of a balanced energy mix.
Recent development on the power markets in the South East of Europe — limited demand growth, large construction of renewables sources, and new nuclear capacity to be built in Turkey — a need for new nuclear capacity seems unlikely before 2030. After this date, however, there may be a need for new nuclear base load capacity in the Bulgarian electricity sector, as a consequence of phasing out thermal power plants in the next two decades due to climate targets and the possible shut-down of the units 5 and 6 of Kozloduy NPP. Forecasts indicates that 2.4 GW of nuclear capacity would need to be installed and operating between 2037 and 2045.
15 Source: IEA Energy statistics.
The main objectives for CRP participation are to:
• Identify the most common NPP ownership structures and define the most appropriate for nuclear new build in Bulgaria;
• Identify what are the types of NPP contractual approaches as well as analysing their applicability to the context in Bulgaria;
• Investigate the conventional and alternative approaches for financing nuclear power generation project, especially in Europe;
• Build a model for financial estimation of the NPP investment;
• Investigate the nature of the uncertainties arising in the context of NPP investments;
• Develop a specific methodological approach to analyse and determine the uncertainties of the project.
3.1.2. Modelling assumptions
The information used in the research financial model for assessment of NPP investments in the Bulgarian electricity sector is based on participants’ own research and assumptions and does not reflect an official position of the Bulgarian government. Many cost data used in this analysis are based on the Open Energy Information database.16 The most important assumptions used in this research are summarised in Table 3.
Basic uncertainties in the research model are:
• Government policy in the energy sector development, in particular regarding thermal power capacities in Bulgaria and their phasing out;
• Operation life extension for units 5 & 6 after 2030 year (bearing in mind that units 3 and 4 of Kozloduy NPP were closed although they had fully implemented the modernization programme and had valid licences issued by the National Regulatory Agency);
• Expert risk estimation method.
The structuring and financing of NPP new build should comply with EU policies concerning competition and trends related to the development of a common energy union, as well as with the objectives of the Bulgarian Government. In particular, the Government of Bulgaria requires that “Construction of new nuclear capacity should result in proven positive economic effect and should occur without request State aid”.17
The realization of the project new nuclear power capacity at Kozloduy NPP site is possible through attracting a strategic investor or investors. The specific amount of the percentage distribution of the share capital is a matter of negotiation. The assumption is that Kozloduy NPP keeps a 49% capital share. At present, interest in the project is being shown by Chinese companies — China General Nuclear Power Corporation (CGN) and State Nuclear Power Technology Company (SNPTC).
16 The Open Energy Information database can be accessed at the address http://en.openei.org/apps/TCDB/
17 Chapter XI of the Energy program of the Republic of Bulgaria for the period 2014–2018
TABLE 3. MAIN ASSUMPTIONS FOR BULGARIA KOZLODUY NPP Project Financing
Debt / Equity ratio 85% / 15%
Cost of debt 5.5%
Cost of equity 10%
WACC (owner) 5.7%
Tax Rate (owner) 10%
Loan origination fees 1.0%
Loan commitment fee 0.5%
Plant Development data
Number of units 2
Cost of land 0
EPC Cost US $2800/kW
EPC Escalation 2%
Discount date 01/01/2020
Project start date 01/01/2020
COD Unit 1 01/01/2030
COD Unit 2 01/11/2020
Plant Operations
Starting electricity price US $71/MWh
Escalation rate for electricity price 2%
Capacity 1000 MW/unit
Capacity factor 90%
Operating life 60 years
Fixed O&M US $180 million/year
Variable O&M US $2.1/MWh
Fixed and variable O&M escalation rate 2%
CapEx US $24 million/year
CapEx escalation 2%
Annual fuel costs US $71 million/year/unit
Fuel Cost escalation 2%
Provision for spent fuel US $1 million/year
Decommissioning cost US $100 million
The possible structure of the project is illustrated in the Fig. 9, and briefly described below. A special purpose vehicle (SPV) company, Kozloduy NPP New Builds (KNPP-NB), is created, with a registered capital of 35 million EUR. The SPV is fully owned by the company Kozloduy NPP (KNPP). KNPP would sign a shareholder agreement with the National Electric Company which would acquire 95% of the capital of the newly established company Kozloduy NPP – New Builds JVC. The resulting joint venture company would have a capital of 630 million EUR. At a later stage, a strategic investor with extensive experience in nuclear power projects would invest in "Kozloduy NPP – New Builds" JVC taking 51% in the company capital. The financing of the project would be realized in a debt to equity ratio 85% to 15%.
The type of contract would be split package — two different contracts will be signed: one for manufacturing and supply of the equipment and another with a constructing company. In the contract pricing a hybrid approach was used. The project company would sign contracts for fuel/raw material supplies, waste management and maintenance.
For ensuring electricity prices stability in the fully liberalized energy market — CFD are used (similar to UK model).
FIG. 9 Assumptions for potential Bulgaria Kozloduy NPP project structure.
3.1.3. Financial modelling
The main work performed during the CRP consisted in:
• Cost Analysis;
• Establishing a financial model for evaluating feasibility and competitiveness of the project Kozloduy Newbuild using a own model;
• Expert survey (risks assessment).
A split package type of contract is proposed — one for manufacturing and supply of the equipment and other with a construction company. In the contract pricing a hybrid approach is used.
3.1.4. Key outcomes
The main financial indicators for the proposed Kozloduy NPP project are shown in Fig. 10 below. Under the assumptions taken for this study (a strategic investor has been found, the project is financed 85/15 debt to equity), the results of the financial analysis show that a nuclear power newbuild project in the Bulgaria is financially viable. The NPV of the project is positive, the IRR of the project is above the WACC and the total return over the investment is above 10%.
FIG. 10 Main modelled financial metrics and other outcomes for proposed Kozloduy NPP.
3.1.5. Risk Analysis
In the risk evaluation of the Project, an expert estimation method and ‘brainstorming’ are used and the results are as follows. The main risks are:
• Financial and economic — market risks, budget overruns, lack of financing;
• Regulatory, political, legal and environmental — lack of government support;
• Construction — delays in the construction schedule;
• Nuclear fuel cycle — the absence of long-term vision/strategy for managing high radioactive waste.
Government commitment to nuclear power as a part of a national energy strategy carried out in Bulgaria can help to minimize risk, even though the strategy has not been updated since 2011. Early and firm action to put into place the legal and institutional arrangements can effectively demonstrate the strong government support for nuclear power.
Risks were ranked but not quantified, and a risk matrix has been developed.
3.2. CHINA