Financing Nuclear Projects in Developing Countries

Over the next decade, the world faces two significant interrelated challenges. First, developing countries must increase electric generation to provide their citizens with access to affordable, reliable energy. Access to energy is necessary for economic development and prosperity, fundamental for economic growth, and critical to enabling societies to achieve basic levels of health, education, and social development. Although only one of the United Nation's 17 Sustainable Development Goals (SDG 7) focuses specifically on energy access, it is widely recognised that without such access many of the other SDGs will not be met. The United Nations recently warned that "[w]ithout urgent action, the world will fall short of achievement of SDG 7 and consequently other SDGs".

Second, all nations face the urgent need to rapidly and dramatically reduce carbon emissions. The Intergovernmental Panel on Climate Change’s most recent report predicts catastrophic environmental and economic impacts unless the increase in global temperatures is limited to less than 1.5 degrees Celsius. SDG 13 attempts to address this crisis. While achieving this goal is possible, "doing so [will] require unprecedented changes".

The conflux of these demands presents developing nations with a dilemma, as increasing traditional (i.e. fossil) generation to meet energy needs further contributes to climate change. This dilemma is exacerbated by the fact that developing countries are often the most vulnerable to the effects of global warming. As a result, some developing nations are looking to nuclear power to meet growing demand. Nuclear power offers the benefits of traditional generation by providing reliable baseload power while producing virtually no carbon emissions.

Many countries in developing regions have shown interest in civil nuclear power programmes. However, construction of a traditional large nuclear power plant may not be a viable fit for many developing countries, due to reasons such as a lack of human capital, GDP, or geography (e.g. lack of sufficient cooling water). The long lead times for traditional nuclear plant construction may also be a hinderance to developing nations, as this can increase project risk and financing costs.

In addition, developing nations may lack a sufficient grid to support the amount of power a large traditional nuclear power plant would produce, as no single plant should exceed 10% of the grid’s capacity. A 2009 IAEA study found that, based on then-projected 2015 grid size, 19 of the 54 countries studied would only be able to fully utilise a plant of 300 MW or less. The 10% rule also assumes that all generation is connected to a single grid - an assumption which does not hold in some developing nations which have fragmented grids. However, small- and medium-sized or modular reactors (SMRs) could be a fit for those countries which are unable to support a large nuclear power plant. These reactor designs could be quickly deployed, require less human capital to build and operate (and some of which could be provided by the supplier), and could be sized to match local grid constraints.

Many SMRs are designed to operate for many years between refueling, be walkaway safe, and are highly proliferation resistant, factors which could help overcome public perception and opposition to nuclear power. Further, SMRs could be used in conjunction with other systems to address non-energy needs, such as providing thermal energy for desalination plants, industrial process heat, or for district heating systems. These non-electric functions are not available from most conventional renewable resources and could help developing nations meet other SDGs, such as SDG 6 (clean water and sanitation), SDG 9 (industry, innovation and infrastructure), or SDG 11 (sustainable cities and communities).

Finally, it is possible that SMRs could replace aging fossil plants, thereby eliminating sources of carbon. Recently the United Nations’ multi-stakeholder SDG 7 Technical Advisory Group, when discussing "ways forward to reach climate goals", noted that "[n]uclear is also an option in pathways that assume public acceptance and resolution of the proliferation challenges". For these reasons, SMRs should be fully considered in any plan to address SDG 7 and SDG 13.

One problem facing energy projects in developing countries is lack of financing. Among the reasons SDG 7 is at risk of not being met is the fact that "[f]inancial flows, including public and private investments in energy, are ... falling short of what is needed". Developing nations often turn to development finance institutions (DFIs), such as the World Bank, for financing. DFIs attempt to serve humanitarian ends by providing financing, advising, and technical support to development projects in poorer regions. The World Bank's mission is to "end extreme poverty [b]y reducing the share of the global population that lives in extreme poverty to 3% by 2030" and "promote shared prosperity [b]y increasing the incomes of the poorest 40% of people in every country".

DFIs are heavily involved in financing energy projects and have increasingly moved away from financing projects with high carbon footprints. They have recognised nuclear energy's "sustainable and operational benefits", and the United Nations has expressed a willingness to consider nuclear energy as a means to meet SDG 7. However, despite this recognition most major DFIs will not finance nuclear projects. Common reasons given are a lack of institutional expertise on the part of the DFI, that nuclear projects are not an area of comparative advantage for the DFI, and political and financial risk given the scale and nature of nuclear power projects. While some have criticised DFIs' stance on nuclear power, arguing that DFIs are placing politics and ideology ahead of their mission, nuclear financing does present risk to DFIs.

For example, a key risk facing potential lenders for nuclear projects is that the traditional long lead time for nuclear construction requires capital to be outlaid over many years, during which time construction delays or changing political attitudes can derail a project. Similarly, the long construction time means even small delays as compared to the overall project schedule are still significant from a financing standpoint and the long time frame also makes the economics of the project highly sensitive to interest rates. Nuclear generation facilities also have higher upfront capital costs than other energy projects, and so by the time the plant is completed a significant share of the costs are sunk. If a project is abandoned due to changing political views or construction overruns, it is too late for the investor to reverse the investment decision and avoid a significant loss.

However, SMRs obviate many of these risks, and it is therefore time that DFIs revisit their stance and consider financing for SMRs. As discussed earlier, the design of these reactors should allow them to more readily achieve public acceptance thereby addressing DFIs’ political concerns. SMRs also obviate the need for organisations like World Bank to develop significant nuclear safety, non-proliferation, and technical expertise because the reactor designs largely mitigate these concerns by being walkaway safe, proliferation resistant, and relying on standardised designs.

Moreover, SMRs resolve the concerns related to large, long-term capital outlays. SMRs' shorter construction time means capital does not have to be committed for as long, reducing the risk that overruns or changing political attitudes would cause a project to be abandoned. Because of the shorter overall project schedule, construction delays would typically be concomitantly shorter. For a multi-unit SMR installation, a delay would often only apply to the first unit thereby having less of an impact on the overall project, and less capital would typically be sunk in a non-complete reactor at any given time.

Finally, helping to bring this revolutionary technology to market fits well within the ambit of DFIs. The World Bank, for example has stated that "[t]he long-term shift to a sustainable energy future depends on deep technological innovation and rapid diffusion of new energy technologies" and has expressed a willingness to provide financing if a project "has a high cost and carries high risks but offers strategic potential for the future". Few technologies offer the future strategic potential of SMRs.

It is becoming increasingly clear that DFIs' traditional reasons for refusing to finance nuclear projects do not apply to SMRs. These reactor designs mitigate many of DFIs’ concerns about financing nuclear power, and in the context of developing economies can play a crucial role in allowing the attainment of SDG 7, SDG 13, and other developmental goals. However, public financing is critical for developing world energy projects. For this revolutionary technology to be brought online, DFIs must reconsider their anti-nuclear stance and provide financing for SMRs alongside other low carbon sources.