Abu Dhabi may use debt to finance nuclear plant

Emirate has variety of options to fund construction of first nuclear reactor.

Abu Dhabi is expected to raise debt to finance more than half the cost of its initial US$20 billion (Dh73.46bn) nuclear project, defying a warning by the International Atomic Energy Agency (IAEA) that lenders could shy away from nuclear development. Last week, the Emirates National Energy Corporation (ENEC) appointed Credit Suisse as the financial adviser to the project that will produce the GCC's first atomic power complex.

No firm plan for the financing exists yet but Abu Dhabi has already accessed debt markets to pay for energy infrastructure such as power plants and pipelines. "The Government of Abu Dhabi likes to finance projects with leverage because it likes to benefit from the rigour of banks' analysis," said a senior government source. This week, however, Yukiya Amano, the IAEA director general, said international lenders were "reluctant to support nuclear power projects", amid a surge of interest in nuclear development by new countries.

But the Abu Dhabi financing could be raised by a combination of export credit, syndicated loans and government bonds, depending on the appetite of global investors after the global recession. The Government-owned ENEC would probably be the sole owner of the nuclear facilities once they were built but would operate them jointly with a South Korean consortium led by Korea Electric Power Corporation (KEPCO). The group was chosen last December as the master contractor for the project.

Credit Suisse will help develop a financing structure advantageous to Abu Dhabi. That might involve a bank syndicate and equity partners, as with the Dolphin Energy network - a successful project Abu Dhabi championed to supply gas from Qatar for distribution to industrial customers in the UAE and Oman. The exact financial model for the nuclear project, however, has not been determined. The proposed development is not only the UAE's biggest current infrastructure project but is also regarded as a national priority. It faces no significant domestic or regional opposition and has already attracted interest from numerous banks.

Credit Suisse is experienced in arranging financing for critical industrial and infrastructure projects in emerging economies. That suggests a banking syndicate could be assembled quickly. Export credit agencies from countries supplying the materials and parts are also expected to shoulder part of the financing, as is common in major infrastructure projects across the developing world. This eases the pressure on Abu Dhabi's government financing, which is already being funnelled into civic and industrial diversification projects, with a budget deficit forecast this year. Government guarantees on the loans, by contrast, can be a crucial ingredient to a successful financing, said one nuclear think tank.

"Loan guarantees are important to nuclear energy project financing because the cost of a new nuclear plant is high compared to the size and financing capability of the typical electric company," the Nuclear Energy Institute, based in Washington, said in a recent briefing paper. The global financial services group ING said the major risks to lenders would include construction cost overruns and delays in equipment delivery.

After construction, the risk profile of a nuclear project substantially declines. Abu Dhabi might, therefore, consider a bridging loan to cover the construction period, which it could later refinance with 30-year debt based on low-risk revenue expectations from a long-term power-purchase agreement. Refinancing is common for nuclear projects to accommodate changing risk. In Finland, financing for the $3bn Olkiluoto 3 nuclear plant was initially 75 per cent bank debt, 5 per cent loans from the shareholders of the plant operator TVO and 20 per cent equity. The loans were arranged in five to seven-year tranches with the expectation that they would be replaced with long-term bonds and buyers' credit.

Other risk factors for nuclear plants that could require loan guarantees, ING said, included overruns in plant decommissioning and waste-management costs, which could lead to those not being fully covered by electricity tariffs. It named market uncertainties and major liabilities as additional risks. Before the end of this year, ENEC is expected to apply for regulatory approval for the first nuclear complex from the newly established UAE Federal Authority of Nuclear Regulation (FANR) and the nation's environmental authorities.

ENEC has licences from FANR only for assembling nuclear safety equipment and for site preparation at Braka, a remote location on the Gulf coast in western Abu Dhabi. The latter involves building structures such as roads and jetties. While ENEC must wait for environmental approval to proceed with the site preparation work, contracts already signed could prompt the start of equipment fabrication, reducing the risk of delayed deliveries.

In July, KEPCO awarded a $4bn sub-contract to South Korea's Doosan Engineering and Construction to build reactor parts. Doosan is keen to complete the huge work package on time so it can compete for additional contracts. "By successfully conducting Korea's first project to export the Korean standard nuclear reactor, we will make important contributions to the nation's effort to export nuclear power plants going forward," Doosan said.

ENEC, meanwhile, is applying for more comprehensive approvals from FANR for plant construction, which could be issued next spring. It has also made a three-volume submission to the Environmental Agency-Abu Dhabi. [e-mail]