IAEA Technical Meeting on topical issues in infrastructure development,

IAEA Technical Meeting on topical issues in

infrastructure development,

Vienna, 3-6 February 2015

Nuclear Energy Department, Ministry of Economy

•The market of electricity generation is liberalized, in which trade remain highly-centralized due to the existence of vertically integrated capital groups.

• According to preliminary data for 2014,electricity production amounted to 156,6 GWh (-3,7% less comparing to 2013),

•The share of coal (hard and lignite) in electricity production decreased to 84,7% (87% in 2013)

•The three biggest generation companies are the capital groups: PGE Polska Grupa Energetyczna SA (37,8%), TAURON Polska Energia SA (13,2%) and EDF (9,5%). They keep more than a half of the installed capacity and are responsible for almost two-thirds of electricity production in the country.

•The prevailing part of power exchange trading in 2013 was conducted on the Polish Power Exchange (POLPX) and Warsaw Stock Exchange Platform for Trading Electricity (POEE GPW SA) •The volume of all transactions on power exchange amounted to 176,6 TWh in total (+33,7% comp. to 2012).The long-term power purchasing contracts were dissolved in 2005 as

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Equity financing:

• Polish investors (min. 51%): PGE + other energy companies (TAURON, ENEA) + large energy consumer (KGHM)

• participation of foreign strategic investor (eg. NPP operator, technology provider) • other possibilities under consideration: Finnish model (cooperative),

Debt financing:

• Export Credit Agencies

• international financial institutions, including banks • project bonds

• other sources

Possibilities of state support / engagement:

• guarantees of the State Treasury (however state aid for NPP is prohibited under EU competition rules, but the Euratom Treaty creates some possibilities) ,

• long-term contracts and similar market instruments (eg. Contracts for Difference, PPA, solutions from the Exeltium model) ,

• market capacity,

NPP

’

s possible financing models –

Nuclear Power Programme: Current Status and Prospects

NPP

’

s possible financing models, (1)

•

Project Financing

:

–

Financing through major debt of the Special Purpose

Vehicle (SPV)

–

Majority of equity in the SPV may be taken over by PGE

SA and other investors,

–

The other equity investors may be : international energy

corporations experienced in nuclear, technology

vendors, Polish energy companies, major Polish energy

consumers in the Polish market

–

commercial financing is assumed in the form of

credit/bonds to banks, while the ECAs involvment takes

the form of direct loan to the SPV,

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NPP

’

s possible financing models – under

consideration (2)

•

Corporate financing:

– SPV is financed entirely by investors through increased

capital and a loan by investors in order to use a tax shield and gain quick return on the funds involved

– Debt financing is provided by project investors on their own

balance sheet (corporate financing)

– Investors in the project also provide energy off-take

„Corporate” and „projects” financing model involves certain risks on liberalized markets (political and regulatory, schedules delays, costs overruns, price unpredictability) for investors and financial institutions and it is difficult to implement

Potential market support mechanisms in consideration:

Contracts-for Difference

(1)

• CfDs provide investors with a degree of confidence over the price they can expect to receive for their output, and that they will be able to make a reasonable return on their investment. They do this by providing an agreed “Strike Price” (long-term predictability).

• The CfD is a two-way instrument for investors and government. If the Strike Price is above the market reference price, the generator will receive difference payments paid for by electricity suppliers and ultimately by customers. If the Strike Price is below the market reference price, the generator will pay back the difference to

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Contracts-for Difference

–

advantages (2)

• There is a need for such intervention, as current electricity markets do not provide sufficient predictability of prices to justify nuclear investment

• The proposed instrument (CFD) could be appropriate tool, as it addresses the market failures, will have an incentive effect for investors and ensures no over-compensation

• The proposed instrument does not distort the market, as the plant will still have to compete in the market

Contracts-for Difference

–

controversial points

(3)

• The high price of electricity for long term period: in the the UK government guaranteed the price for of up to 92,50 pound per megawatt-hour of electricity for 35 years, more than twice the current wholesale market price, which is not acceptable in Polish terms

• The small flexibility of CfD instrument in the long term versus possible changes in electricity market

• Difficulties in evaluating the appropiate level of „strike price” in a long run

• Question of comparability of support for different technologies (in case of different system of support for individual energy sources

• Possible approach of the EC in case of implementing CfD only for a given technology (ex. nuclear).

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Capacity market mechanisms (CM)

considarations

CM- Payment mechanism for maintaining production capacity

Pros:

- CM will provide generators with steady income for their capacity

- The Government will determine the volume of capacity to be contracted, - CP will provide an insurance policy against the possibility of future

blackouts by providing financial incentives to ensure enough electricity capacity to meet demand

- In July 2014 the EC concluded that the proposed UK CM is in line with state aid rules

Cons:

- CM may incentivize investments in fossil fuel generation, therby working against instruments designed to bring about the decarbonisation objectives

- Unknown interaction with other mechanisms such as demande side response, low carbon support mechanism and short term balancing

- the pertinence of issue on how to avoid over-compensation/double compensation (CfD + CM)

State credit guarantees considerations

:

- With current wholesale electricity prices (and prevailing

construction cost) it is extremely unlikely that a new NPP could be financed without governmental support

- The guarantee is aimed at financing market failures, in particularly the availability of debt finance

- The guarantee reduces the financial risk and thereby decrease the the cost of capital

Cons:

- Does not address the problem of finding equity investors, - Does not provide investors with any degree of certainty about future wholesale prices or protection against future changes of law or policy,

- The guarantee is given on commercial terms (question of public aide)

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PPAs Risk allocation

• PPA (CfD) reduce the risk for investors (both equity and bond-holders, and thus the opportunity cost of capital,

• Spectrum of risks covered by PPA (plant construction, completion and performance, credit worthy, offtaker of power, timely payment for power)

• Allocate risk to a party best able to manage the risk. Optimum risk allocation:

- makes project risks manageable

- makes the PPA bankable [ability to raise long term non recourse debt, to be repaid from tariff charged by the project company]

- lowers project costs

• In Polish terms limited number of potential PPA partners (a few bigger customers/distributors) reduces scope for such

arrangements

the liberalized markets

• Financing involves unique risks, huge capital and long term arrangements

• The Polish Governement will consider possible forms of support for the NPP

• The special inter-governement team have been set up for the coordination of nuclear project.

Pl. Trzech Krzyży 3/5 00-507 Warsaw tel +48 22 693 50 00 fax +48 22 693 40 46 email [email protected] web www.mg.gov.pl Ministry of Economy

Thank you for your attention