Can a regulated asset model help deliver new investment?
Can a regulated asset model help deliver new investments?
World Nuclear News published a viewpoint created by Edward Kee, Ruediger Koenig, Paul Murphy and Xavier Rollat called, “Can a regulated asset model help deliver new investments?” in which they explore the challenges faced by investments for a new nuclear power plant emit a left-wing yet still capitalistic energy market. Nuclear energy produces vital outputs that are not incentivized in the energy market. Although sustainability and diversification of energy is of the utmost importance, investors don’t obtain any measurable returns from it. Any power plant investment will come across the natural challenges that derive from the long lengths and huge construction costs. Once the power plant has obtained it’s needed investments, it will still take at least five years until it is operational and producing returns resulting in completion risks
The project can cost more and take longer than planned resulting in delays and discounts on expected profits. Due to the fact the completion timeframe is so long and the cost is so high, the deviation from projections can be quite dramatic. The only institutions that can completely eliminate these completion risks are governments and government-owned companies. Additionally, nuclear power plants have a long operating time which exposes the future cash flows to larger amounts of risk. There can be new innovations or even changes in policy that could put the cash flow at risk. In turn, investors will need a higher rate of return on beginning cash flows to compensate for the completion risk and the long operating time.
A regulated asset model would be a best fit as it “can help provide a long-term, stable NPP (nuclear power plants) project structure that reflects the value of intangible nuclear power outputs and that can survive changes in political views of nuclear power and in electricity system regulatory systems.” The regulated asset has a relatively safe rate of return, however for nuclear power plants, the completion risks would need to be addressed before the investment. One of the risks being completely abandoning the project, as some nuclear power plants are closed before they finish construction.
The biggest issue will be finding the middle ground on how much of these risks are borne by investors and how much by the ratepayers. Because of the huge upfront costs and long times to completion, nuclear power plants become a risky investment. However, with the current momentum of regulatory and public opinion, nuclear energy could see a decrease in risk and an increase in government incentives. Regulatory bodies expanding financial incentives for sustainable energy will affect the return. Hopefully, soon investors will be able to capitalize on these power plants while the world capitalizes on carbon-less energy.