New NUCLEAR plants bear too high a risk for equity investors

European Nuclear Generation

 Political agenda key driver — The push for new nuclear capacity is being driven
mainly by the public policy goals of tackling climate change and security of supply
rather than the probable economics of the investment opportunity.

 Nuclear is materially “riskier” than other technologies — The period from design to
commissioning remains more than double that for other technologies, as do
construction costs, while payback periods are also 1.5-2.5x longer. In a pool
system, nuclear plants will be price takers. As a result, we argue that the cost of
capital should be higher than CCGTs or coal plants, all else equal.

 Unattractive risk-reward for merchant new nuclear — Our base case scenario
analysis shows that equity investors in new nuclear plants that operate as
merchant capacity would need to see power prices higher than €78/MWh to earn a
competitive return to that offered by conventional thermal technologies.

 Support is required to improve the economics in merchant markets — In our view,
unless governments are willing to underpin either the financing, the pricing of
output and/or decommissioning costs then equity investors are unlikely to earn a
competitive return on new nuclear. The UK is the only country where new nuclear
is currently being proposed without the financial case being underpinned.

 Investors should not become complacent of other variables — We believe investors
should also consider (i) achieved load factors in an environment of demand
slowdown, (ii) purchase of sites for new build and (iii) investment needs in system
reinforcement, which could have a substantial impact on break-even economics.


Sofia Savvantidou1
+44-20-7986-3932
sofia.savvantidou@citi.com
Andrew M Simms1
andrew.simms@citi.com
Peter Atherton1
peter.atherton@citi.com
Meg Brown1
meg.brown@citi.com
Stephen B Hunt1
stephen.hunt@citi.com
Manuel Palomo1
manuel.palomo@citi.com
Alberto Ponti1
alberto.ponti@citi.com
See Appendix A-1 for Analyst Certification and important disclosures.


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