Explaining the International Bank for Nuclear Infrastructure

Prospective member countries are expected to sign a joint declaration establishing the International Bank for Nuclear Infrastructure (Ibni) at the UN Framework Convention on Climate Change later this year. The embryonic Ibni hopes to provide a full range of financing tools to scale up nuclear energy. Ibni boosters hope that after the US, Canada, France, the UK, Japan, South Korea and the United Arab Emirates establish the bank, Ibni will provide nuclear developers and vendors everything from commercial low-cost loans, lines of credit, equity, guarantees and hedging instruments — potentially even including insurance and risk management solutions. Ibni's Strategic Advisory Group Chairman Daniel Dean and board member Elina Teplinsky sat down with Energy Intelligence's Jessica Sondgeroth to discuss the details of the conceptual multilateral international financing institution. Below is the second half of a shortened and edited transcript of that interview, explaining Ibni's commercial and donor-supported funds. The first half of the interview, introducing Ibni, was published last week.

Q: Ibni is proposing two funds, the Ordinary Operations Fund and the Special Operations Fund. Regarding the Ordinary Operations Fund to support proven Generation 3 technology, how is this fund different from existing forms of financing, such as the loan guarantees the US Department of Energy’s Loan Program Office (LPO) provided for the AP1000 newbuilds at Vogtle, in the US state of Georgia?

Teplinsky: If we look at proven technologies — I worked on loan guarantees for nuclear during the first tranche of them about a decade ago — the utilities that ended up getting the loan guarantees were in regulated markets that could pass the construction cost to taxpayers. None of the merchant projects were awarded the guarantees. Those utilities in those merchant markets, as well as other players that don't have large balance sheets to handle these projects or aren’t in regulated markets to pass it on to the ratepayers, still would still be struggling to finance these projects without some sort of equity investment. This is especially the case for SMRs [small modular reactors], at least until they become these modules that you just purchase and install, versus construction projects, which take a long time to happen. I think the Ordinary Operations Fund could also support these projects and supplement the debt that's provided by LPO.

Q: The Special Operations Fund would target emerging nuclear technologies. What is the gap this fund is intended to fill?

Dean: The Ordinary Operations Fund is the commercial arm of the bank. The Special Operations Fund is the donor-funding component of the bank that would supplement programs like the LPO in the US and all around the world in Canada, UK, France — all of the great initiatives that individual governments are undertaking to promote their new-generation nuclear technologies.

The Special Operations Fund would provide additionality for what the government programs are not able to address until the point in time when the global capital markets are willing to provide capital to these companies and industries. We think that there's a significant gap, and we've talked to LPO, we've talked to all of these countries, and we think that there are many gaps.

LPO is providing debt for start-up companies that are looking to develop new nuclear technologies. And in addition to debt, there are a lot of other needs. There's a need for equity, there's a need for equity to be crowded in for these projects, for these industries. There is venture capital coming in. There's private equity coming in for some of these companies, but it's not enough to address the whole need. So what this bank would do is it would provide that additionality, what the governments are not able to fulfill, what the capital markets are not able to fulfill. It would provide equity where equity is needed.

It would provide additional debt where debt is needed. It would provide guarantees. It would provide risk mitigation mechanisms such as insurance. One of the issues in the US, as we've heard from many of the utilities that are not willing to enter into the first order for SMRs, is they are not situated to take first-of-a-kind technology risk. They've asked the US government, please provide cost overrun delay insurance 'because our shareholders, our ratepayers, cannot rightfully take this risk.'

In all of these situations, Ibni can provide that additional layer of support for what government, what markets, what utilities, what owner-operators, and what vendors cannot take on to facilitate the rapid progression of this technology. The keyword is additionality. The bank would provide that additionality that is not being provided by all of these entities. We think that the progression will be very slow, or it will really be stagnated if an entity like Ibni isn't able to intervene. There just are not the resources from government and markets to address this situation.

Q: Going back to the Ordinary Operations Fund, elsewhere you’ve mentioned the abortive VC Summer newbuilds and much-delayed Vogtle newbuilds, and talked about how you would not have done them or would've done them differently. Can you talk a little bit about those kinds of projects? The troubled recent newbuilds such as Flamanville-3 and Olkiluoto-3 — what would Ibni do differently, especially when it comes to cost overruns?

Dean: Ibni will be the global aggregator of standards and criteria. One can argue that those projects, all of those projects, were not conceived of under what we could consider best international practices for developing a nuclear project in terms of commercial structures and risk allocation. There are many, many considerations that in hindsight obviously could have been handled better. If you have a global institution that has the standards and criteria that would guide the project stakeholders from the owner-operator's perspective, the vendor's perspective, the energy market perspective, the regulatory perspective, all of these frameworks would be considered in the standards and criteria. This is a very important aspect of the bank. Ibni would guide nuclear project developers toward the right structure, the most bankable financeable structure.

If you look at all of these cases — like Olkiluoto-3, VC Summer, the structure and the risk allocation — the frameworks were an afterthought. We have to start with the right framework to guide projects toward bankability and financeability. Now, in saying that, we're not going to eliminate overruns and delays overnight. The bank would be this long-term patient investor; it would be there to withstand the near-term issues in terms of delays and overruns. But progressively and rapidly under the right standards and criteria framework, the bank would have the objective to rapidly diminish these risks. These are financial risks, and these are the risks that are impeding capital flowing into the nuclear sector.

The bank would be the global leader in establishing what is a bankable, financeable project in the nuclear sector and it would rapidly progress toward repeatable bankable, financeable projects that are done across borders in multiple countries where this is going to catalyze investor confidence. Investors will see that here's a successful project that was delivered on time and within budget. We have a program [the Bruce and Darlington refurbishments] right now in Canada that is being delivered on time and within budget. The nuclear industry is capable of delivering successful projects. We just need to scale up this effort and have a globalized set of standards so investors have this confidence that if it's a project delivered under Ibni standards and criteria, it instills confidence that it will be a successful and bankable project.

Q: On the risk part of the Special Operations Fund, how far into the risk spectrum are we talking?

Dean: Number one, the Special Operations Fund would assist those countries that do not have investment-grade sovereign backstop credit. Like all multilaterals, this bank would assist developing-status countries that do not have a sufficient sovereign credit rating. It would provide political risk guarantees, similar to the World Bank IDA [International Development Association] partial risk guarantee program to assist those countries that don't have sovereign credit. That’s with respect to emerging countries, emerging economies.

With respect to technology, there are only two entities in the world that can really facilitate technology risks. Those are sovereign governments and multilaterals. Sovereign governments are already taking on technology risk for emerging nuclear technologies. Ibni, as a multilateral, would be an extension of that. It is appropriate for a multilateral to do this. It wouldn't impact the credit rating of the commercial arm of the bank because that is a separate and distinct fund. So we think that the bank can take appropriate levels of both sovereign risk from newcomer countries and developing countries. It can take appropriate levels of technology risk to support emerging technologies and this will not impact the highest credit ratings that we think are feasible for the bank.

Q: With regard to Special Operations Fund, what do you consider technically and commercially proven technology? How do we categorize that?

Dean: There will be a progression. Once we have one reactor that's in commercial operations, it doesn't mean that technology is commercialized. It's subjective.

It's got to be at the point in time where the financial markets are comfortable with the risk of that technology. The objective of the bank is to bridge that gap until the global debt and equity markets are comfortable taking on the risks of that technology where it's sufficiently proven. We can't say definitively whether that's the fifth or the 15th or the 100th deployment of that technology. I think this is an entirely different paradigm with the concept of commoditized factory-produced SMRs. We don't really know the point when — X-energy, NuScale, Rolls-Royce — all of these vendors are going to end up with their technologies sufficiently commercialized. It's really going to be up to the markets to determine where that point is.

I think what we can say from the Ibni perspective is we want to accelerate that process as quickly as possible. We want to establish the standards where the bridge to commercialization and market acceptance is as fast as possible. I don't think we can sit here right now and say when each of these technologies is going to be sufficiently scaled and commercialized.

Q: How will Ibni assess which projects it wants to invest in? Will you have your own team of engineers review the designs to make sure that they're sufficiently complete and ready for development?

Dean: First of all, the allocation of funding and support will need to be depoliticized. It will need to be autonomous from the shareholders.

We get this question a lot: How do we ensure that we have a fair and equitable level-playing field amongst the industries within all of these member countries? We think we can achieve that by establishing the standards and criteria basically on a consensus basis. Those standards and criteria as to how the funding would be allocated would be on an autonomous and depoliticized basis. That's number one. And yes, the bank would have all of the technical resources to assess to what degree a particular applicant adheres to the bank's standards and criteria. There would be technical elements, commercial elements, financial elements, legal and regulatory elements that would be considered, and policy elements that would be considered in all of these evaluations.

It would need to be completely depoliticized. If it were politically influenced, the concept would be dead from the start because we could have a situation where we would have one large majority shareholder that could potentially skew the funding toward the benefit of their country's interests. We couldn't have that. It would need to be completely autonomous, objective. There would be independent review screening components within the evaluation of which applicants are the highest priority, and which are potentially lowest priority. That would have to include, as you said, Jessica, technical evaluation as well as financial, commercial... the entire spectrum.

Q: To follow up on that, one of the things you mentioned before is the maintaining of a Triple-A credit rating? How do you plan to do this?

Dean: The triple-A credit rating is based on the sovereign support of the member shareholders. We were in New York last week, we talked to the three major credit rating agencies. We think that given the structure that we're proposing this is achievable to have the highest possible credit ratings; this is really based on the capitalization of the bank for one thing, the liquidity that we would structure in the bank. It would be based on the demonstrated and proven models that multilaterals have utilized. All of the major global multilaterals have achieved AAA credit ratings.

We think we can apply those same structures and utilize the established rating agency criteria to structure this bank to achieve the highest possible credit rating. So it's really a function of the sovereign countries that are backing this organization. We do think that it should be a treaty organization. A treaty amongst these countries is a very strong contractual mechanism that provides a lot of comfort to the rating agencies and the global bond investors that this is a very strong commitment amongst the countries to maintain the capital and the liquidity necessary in this bank to fulfill its mission.

Q: That covers my questions. Is there anything you’d like to add?

Teplinsky: We have a huge challenge ahead of us. We need to at least double, if not triple the capacity we have today of nuclear in the next 15 to 20 years to meet climate change mitigation objectives. That type of investment would be unprecedented if coming from traditional sources, which have been government finance and the balance sheets of large utilities. To achieve this goal, you really need something transformative. This concept is something that we've been working on for two-plus years, getting feedback worldwide, both from governments and all the different stakeholders. We've really developed it to be a transformative and implementable solution that can address this challenge. For that reason, we are fairly optimistic that it will have success.