Energy Policy 129 (2019) 111–119

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Project financing in nuclear new build, why not? The legal and regulatory T
barriers
Tristano Sainati , Giorgio Locatelli, Nigel Smith
⁎

School of Civil Engineering, University of Leeds, United Kingdom

ARTICLE INFO ABSTRACT

Keywords: This paper investigates the legal barriers to apply project finance for building nuclear power plants. Countries
Nuclear law such as the UK, Turkey and emerging economies (i.e. Malaysia and Indonesia) are increasingly seeking to attract
Energy law private investors for nuclear projects using project finance. This is an innovative approach, and until now the
Project financing only cases registered are Hinckley Point C in the UK and Akkuyu in Turkey. This paper scrutinises the mis-
Special Purpose Vehicle (SPV)
matches between the requirements of project finance and nuclear law. Nuclear law introduces specific re-
Special Project Entity (SPE)
Sustainability
quirements affecting the security interest of private lenders, hindering the bankability of nuclear projects on a
non-recourse basis. The paper emphasises that the performance-based regulatory approach is more compatible
with project finance compared to the prescriptive based one. Furthermore, the paper examines the gaps between
nuclear and holistic energy law, looking at the financing of energy infrastructures. Improving nuclear law en-
ables to apply project finance to nuclear power plants, facilitating their deployment. Consequently, nuclear law
plays a central role in promoting sustainable energy mixes characterised by reduced carbon emissions.

1. Introduction law. Overcoming these barriers would narrow the gap between nuclear
law and the holistic energy law.
There is a growing interest in energy law. Energy law scholars ad- Section 1.1 defines energy law, introducing the underlying princi-
vocate the need for a holistic and cohesive energy law to improve the ples and historical stages of development. Section 1.2 defines nuclear
quality of decision-making of both judges and policymakers (Heffron law, describes its focus and compares its stages of development com-
et al., 2018; Talus, 2014). Traditionally, energy law was a hetero- pared to the holistic energy law. Section 2 introduces PF and highlights
geneous field composed of sub-domains such as petroleum law, nuclear the requirements conflicting with nuclear law, namely: the completion
law, and others. The conception of energy law as a holistic and au- risk and the security interest of lenders. Section 3 describes the aspects
tonomous legal domain is relatively recent (Bradbrook, 1996), whilst its of nuclear law conflicting with the requirements of PF. Section 4 con-
sub-domains have a long tradition. Energy law scholars identified cludes with the applicability of PF to nuclear law. The understanding of
common principles to enhance the consistency of the different sub- PF enables the gap between nuclear law and energy law to be assessed.
domains, as well as to guide the development of energy law toward a Energy and Policy Law
coherent evolution (Heffron and Talus, 2016b). Energy law focuses on the management of energy resources
Nuclear law concerns the management of nuclear power and can be (Heffron and Talus, 2016a). In particular, “the allocation of rights and
considered as a sub-domain of energy law. But if nuclear law is mainly duties concerning the exploitation of all energy resources between in-
concerned with nuclear safety and security, energy law has a broader dividuals, between individuals and the government, between governments
focus. This paper assesses the dichotomy between nuclear law and and between states” (Bradbrook, 1996).
energy law. In particular, it focuses on the application of a popular Energy law relates to energy policy, both law and policy address the
financing approach called Project Financing (PF). This financial method trade-off between economics, politics and the environment; these trade-
is widely applied to all types of power infrastructure with the exception offs are also known as the energy trilemma, or triangle (Heffron, 2015).
of the nuclear sector. This paper identifies the major inconsistencies The economic aspects include the development of the electrical energy
between the objectives of holistic energy law in comparison with nu- market, the trade in energy resources, and the financing of energy in-
clear law. The paper identifies the barriers of PF induced by nuclear frastructure. The political aspects focus on the country’s energy

⁎
Corresponding author.
E-mail addresses: t.sainati@leeds.ac.uk (T. Sainati), G.Locatelli@leeds.ac.uk (G. Locatelli), N.J.Smith@leeds.ac.uk (N. Smith).

https://doi.org/10.1016/j.enpol.2019.01.068
Received 4 May 2018; Received in revised form 25 January 2019; Accepted 30 January 2019
Available online 12 February 2019
0301-4215/ © 2019 Elsevier Ltd. All rights reserved.
T. Sainati et al. Energy Policy 129 (2019) 111–119

Table 1
The five stages of development, based on (Heffron and Talus, 2016a).
Stage Period and Background Main focus of energy law

Stage 1 During the 19th and 20th century, the main source of energy production was coal. The health and safety aspects of the coal Safety
extraction were the main issues that energy law had to tackle.
Stage 2 After WWII particular attention was given to the geopolitical security of energy sources, in order to avoid future war conflicts. Energy security
Stage 3 During the Cold War and after the oil crisis of 1970, the main focus was directed towards economic development. Neoclassic Economic development
economics theories pushed some states toward the liberalisation of energy production.
Stage 4 The early 2000s until recent times. Energy law focused prevalently on the promotion and support of energy infrastructure, Energy infrastructure development
attracting private investors.
Stage 5 From 2015 approximately, there was growing attention toward a more suitable and equitable energy impact into the society and Energy Justice
environment, including the emphasis on climate change

security. Meanwhile, the environmental aspects focus on climate industrial policy (Talus, 2013; Heffron, 2015). These overlaps with
change (e.g. greenhouse emissions), as well as, air, water and ground other domains make it harder to define the scope of energy law.
pollution. Both law and policy are applicable internationally, nationally To overcome the challenges coming from a dis-homogeneous energy
and at lower territorial level, e.g. regions, cities, etc. Governments law, scholars advocate for the creation of common energy law princi-
formulate their energy policy based on a strategy that is then reflected ples, which are not country or technology specific (Bradbrook, 1996;
in the energy law. Energy law incorporates standards, legal principles Heffron and Talus, 2016b). These main principles would constitute the
and mandatory provisions that regulate the production and supply of basis for further integration of sub-legal domains of energy law. Under
energy (Heffron et al., 2018). this perspective Heffron et al. propose seven main principles: (1) na-
In the last two decades, there has been a growing interest in energy tional resource sovereignty, (2) access to modern energy services, (3)
law as an autonomous and recognisable domain of law (Heffron et al., energy justice, (4) prudent, rational and sustainable use of natural re-
2018). The term energy law is relatively recent, and it was in traduced sources, (5) protection of the environment, human health & combatting
by Bradbrook’s seminal paper in 1996 (Bradbrook, 1996). Legal climate change, (6) energy security and reliability, and (7) resilience,
thinking requires normative structures around developed legal do- (Heffron et al., 2018). Overall, these principles should guide energy law
mains, like criminal law, tort law, criminal law, etc. Heffron advocates and policy (Heffron et al., 2018).
for a holistic corpus of energy law enhancing the consistency and in- To arrive at this holistic stage of development, energy law en-
tegration of legal norms, principles (Heffron and Talus, 2016b). Holistic compassed five main stages, as summarised in Table 1; these five stages
energy law facilitates coherent jurisprudence that improves the quality highlight the trend in energy law. Internationally, the current priority
and efficiency of court judgments. Holistic energy law favours the so- to move towards a low carbon energy system. This idea of evolution is
called “energy justice”, which concerns the equitable aspects of energy better described by the concept of JUST transition that is shared be-
management, including the affordability of energy for the society, as tween climate, environmental and energy justice. JUST is the acronym
well as the environmental sustainability (Heffron and McCauley, 2017). made up of Justice, Universal, Space and Time; these are the four di-
Holistic energy law also enables more effective decision-making for mensions describing the facets of current energy law transitions
policymakers (Heffron and Talus, 2016b). The creation of a holistic (Heffron and McCauley, 2018). Three main forms of justice characterise
legal domain is also justified by the unique nature of energy law, which JUST transition: distributional, procedural and restorative. JUST tran-
is intrinsically interdisciplinary and spans technological, socio-eco- sition is universal in the sense that it is intrinsically recognised and it is
nomic, political and environmental areas. Energy law requires con- internationally accepted. JUST transition takes place at multi-space
sistency across all these areas justifying the development of a holistic levels, i.e. international, national and local. Time is a critical aspect of
legal domain (Heffron et al., 2018; Talus, 2013, 2014). JUST transition as it brings the sense of urgency introducing chron-
The recognition of energy law as a holistic domain is a relatively ological targets.
new concept, as most of the existing legal domains have long-lasting The maturity of the energy law varies across countries. Similarly,
traditions. Similarly, the concepts of energy justice, environmental each sub-legal domain has its focus considering both the main princi-
sustainability and the emphasis on climate change are all relatively ples of energy law and their stages of development. This paper con-
recent ideas and concerns (Sovacool and Dworkin, 2014; Sovacool siders the nuclear law as part of energy law. In particular, it assesses
et al., 2016). Conversely, the sub-domains of energy law have a longer whether nuclear law is consistent with the general trend in energy law.
tradition and have evolved relatively independently. For example, the To do so, the research focuses on the use of PF since it enables to clearly
laws concerning fossil fuels and mineral extractions (e.g. lex Petrolia distinguish the stages of development of energy law compared to nu-
and lex mineralia) are relatively old and evolved separately from nu- clear law.
clear law, or the law regulating the electricity markets (Daintith, 2017;
Talus et al., 2012; Belyi and Talus, 2015). Fuel extraction and energy
production are characterised by a variety of technologies, each with its 1.1. Nuclear law as a component of holistic energy law
own techno-economic features, and environmental implications. Fur-
thermore, the management of energy resources is also country-specific, This research focuses on nuclear law for the civil use of nuclear
meaning that different countries have different policies that are re- energy. With this respect, nuclear law can be considered as a branch of
flected in their energy law. For example, some countries rich in mi- energy law (Handrlica, 2018). A formal definition of nuclear law is: “the
nerals and fossil fuels focus on the extraction of oil & gas resources in body of special legal norms created to regulate the conduct of legal or natural
order to foster their economic development. Conversely, other countries persons engaged in activities related to fissionable materials, ionizing ra-
focus on energy security, developing policies that mostly concern on the diation and exposure to natural sources of radiation” (IAEA, 2003a). Nu-
diversification of the energy mix and fuel suppliers. Meanwhile, other clear law is based on eleven principles: nuclear safety, nuclear security,
countries concentrate on reducing greenhouse emissions by promoting responsibility, permission, continuous control, compensation, sustain-
low-carbon technologies. Since energy policy is country specific, energy able development, compliance, independence, transparency, and in-
law varies. Furthermore, both energy law and energy policy are deeply ternational co-operation (IAEA, 2003a, 2010b). The main objective of
interrelated with other domains, such as environmental law, or the nuclear law concerns the safe and secure management of nuclear ma-
terial. In particular, the scope of nuclear law lies on nuclear safety,

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nuclear security, nuclear safeguards and nuclear liability. development stages of the holistic energy law. Improving nuclear law
Compared to the five stages of development of energy law, nuclear would give effect to the concept of JUST transition characterising the
law seems to remain at the first stage of development: safety. The current trend in energy law (Heffron and McCauley, 2018). In parti-
emphasis on nuclear safety and security is justified by the nature of cular, improving the nuclear law would make deployment of NPPs
nuclear technology, and its potentially detrimental effect on people and more feasible in some countries, reducing the carbon emissions
the environment. Major accidents such as Chernobyl in 1986 and worldwide.
Fukushima in 2011 demonstrated the potential for catastrophic effects To investigate the barriers of PF derived from nuclear law, it is
from nuclear accidents, which in turn impacted heavily on the devel- crucial to consider the technicalities of both PF and nuclear law. PF
opment of nuclear law (Heffron, 2013; IAEA, 2002). Furthermore, some requires the confidence of private investors who are assured by fa-
intrinsic features of nuclear technology match some principles of en- vouring banking, security and bankruptcy law. These aspects are dis-
ergy law (e.g. energy security), which does not need to be codified in cussed in Section 2.
the nuclear law (Heffron, McCauley and Sovacool, 2015). For example,
the nuclear energy favours energy security, because nuclear fuel is re-
2. The Project Financing of energy infrastructure
latively cheap (per amount of energy produced) and energy intensive
(in volumetric terms) meaning that it is possible to supply and store
Several authors have propounded the idea of using PF (Finon and
vast amounts of fuel from multiple suppliers (Corner et al., 2011;
Roques, 2008; Barquin et al., 2010) in the nuclear industry. NPPs are
Watson and Scott, 2009). Another example concerns environmental
capital intensive projects that require the support of policy and decision
sustainability because nuclear energy can replace coal or gas as a
makers (IAEA, 2006a). Because of the higher investment risk, the cost
baseload technology reducing greenhouse emissions. Therefore, nuclear
of financing NPPs is higher than Coal plants or Combined Cycle Gas
law does not need to emphasise the sustainability of nuclear energy.
Turbine (CCGT) (Taylor, 2016).
Despite its potential, the generation of electricity by nuclear energy
For nuclear programmes, the financing is a major challenge, espe-
is controversial, and while some countries promote it, for example
cially when compared to other infrastructure sectors, for example
France and South Korea others exclude it due to public opposition re-
conventional power projects, waste, and transportation. PF can be
lating to radioactivity, potential accidents, location of plants, (Esposto,
utilised to overcome this challenge. In PF, the public provides limited
2008), including. Ireland, Italy and Austria. Meanwhile, before the
and indirect forms of financial support (e.g. public concessions, fi-
Chernobyl accident, many countries promoted the use of nuclear energy
nancial guarantees and other similar measures), enabling the private
(Adamantiades and Kessides, 2009). However, major nuclear accidents
sector to finance and develop infrastructure and deliver public services
such as those at Three Mile Island 1979 and Chernobyl 1986 had severe
(Esty, 2008). The liberalisation that took place during the ‘80s in
detrimental effects for the nuclear sector (Hayashi and Hughes, 2013).
Europe paved the way towards a novel financial and contractual tech-
Before these accidents, nuclear law was primarily focused on economic
niques attracting private investors (Yescombe, 2013). The most sig-
development, in line with the Stage 3 of energy law. However, after the
nificant technique is represented by PF (Vinter et al., 2013). PF is “the
occurrence of these accidents, the focus shifted swiftly towards the
financing of the development or exploitation of a right, natural resource or
nuclear safety and security aspects. After Chernobyl, many countries
other asset where the bulk of the financing is to be provided by way of debt
(e.g. Italy and Spain) abandoned, or suspended, their nuclear pro-
and is to be repaid principally out of the assets being financed and their
gramme, along with major investments in research and development.
revenues.” (Dentons, 2016)
For some years the development of nuclear programmes stalled even
Early examples of PF can be traced back to the Renaissance. The
though a notable exception, South Korea continued. This was the case
development of the railway infrastructure in the UK in the 18th and
until the so-called “nuclear renaissance” of the early 2000s. However,
19th century further developed PF (Finnerty, 2011). However, it is only
the Fukushima accident had a major impact on public acceptability,
in the last 20–30 years that PF evolved due to the worldwide dereg-
and comparably to Chernobyl, it either stopped or slowed down the
ulation and liberalisation of public infrastructural services. Some of the
development of nuclear energy worldwide.
modern financial techniques can be traced back to securitisation which
Nuclear law is still mainly focused on nuclear safety and security.
was first introduced in the ‘70 s in the US by the “Government National
The major accidents stopped the evolution of nuclear law; indeed, it
Mortgage Association” (Ginnie-Mae) (Ketz, 2003). Since then, secur-
had regressed from stage three (economic development) to stage one
itisation inspired new ways of exploiting PF in risky projects like off-
(safety). The extensive focus on nuclear safety and security has major
shore platforms in the North Sea in the ‘90s, or power plants in the US
implications on the economics of Nuclear Power Plants (NPPs), which
in the ‘80 s.1 In the ‘90 s the Private Financing Initiative (PFI), in the
are extremely challenging projects exacerbated by the prescriptiveness
UK, and other options became a part of the overall assessment of Public-
of safety norms and standards (IAEA, 2010b, 2003a, 2002; Heffron,
Private-Partnerships, PPP (Bing et al., 2005). The PFI was adapted to a
2013).
broad range of infrastructures, including roads, prisons, schools, hos-
However, recent examples, particularly in the UK, showed a
pitals, power plants and others (National Audit Office, 2006).
growing interest in attracting private investors to consider investing in
PF is often compared to corporate finance. In PF, the debt is lent to
nuclear power using PF (IAEA, 2014). PF has been widely used in all
an incorporated entity representing the project called Special Purpose
other types of energy infrastructure, including coal, CCGT and wind
Vehicle (SPV), or Special Purpose Entity (SPE), i.e. “a fenced organisa-
(Wang and Tiong, 2000; Kann, 2009; Esty, 2008). The wide use of PF in
tion having limited predefined purposes and a legal personality” (Sainati
energy infrastructures is associable to stage 4 (Section 1.1 – Table 1),
et al., 2017). In corporate finance, lenders, lend money to the project
which deals with energy infrastructure development.
sponsors. This has at least two key implications.
In the nuclear sector, the early attempts of PF include Hinkley Point
Firstly, corporate finance is a form of “on-balance sheet financing”,
C in the UK and Akkuyu in Turkey (IAEA, 2014). These nuclear projects
and the project debt is considered in the sponsors’ accounting state-
are applying, for the first time in history, a nuclear development PF,
ments. Lenders provide funds to the sponsors and not to the project
which has about thirty years of experience in other energy infra-
directly. PF is instead an “off-balance sheet financing” as the debt to
structures. Remarkably, in the nuclear sector, PF is not directly ap-
finance the project is not revealed on the accounting statements of the
plicable to many jurisdictions because nuclear law is still outdated and
act as a major obstacle to PF.
This paper identifies the barriers to PF derived from the mandatory 1
One of the first laws devoted to project finance were: finance for in-
provisions of nuclear law. This first step concerns the necessity to im- dependent power projects (“IPPs“), and the Private Utility Regulatory Policies
prove nuclear law, making it more consistent with the future Act (PURPA) 1978.

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sponsors.2 PF represents, therefore, a major opportunity for the spon- Thirdly, PF transactions are based on a coherent nexus of enforce-
sors who can expand their borrowing capacity, with limited repercus- able instruments producing the governance structure for the project.
sions on their credit metrics (Dailami and Leipziger, 1998; Esty, 2003). Lenders are the main financiers, and they have significant trading
Secondly, in corporate finance, the capital is subject to the financial power as they require pervasive controlling powers toward the activ-
risk of the sponsors overall, and not to each project independently. If ities and performances of the SPV (Vinter et al., 2013). Sometimes,
the sponsor bankrupts, lenders might lose their capital. Sponsors are lenders appoint shadow directors to the SPV’s board of directors having
usually large utilities that have differentiated investments and assets. special veto power on critical decisions regarding changes of the project
Their credit risk depends on their multiple activities, investments and plan or budget. Additionally, lenders often impose independent audi-
contractual obligations. For example, an utility might own different tors and technical assessor for the acceptance of project deliverables.
power plant technologies, such as coal, nuclear, CCGT, etc. In case of These governance measures provide further confidence to lenders, en-
liquidation of the sponsor, lenders can have recourse to its assets to abling the financing of the project.
recover part or all of their lent capital. Therefore, corporate finance is Finally, reputation is a key intangible asset supporting PF. The
often “collateralised” that is to say the debt is backed by collaterals sponsor's misconduct affects their reputation in limiting their ability to
provided by the borrower, or sponsor (Gatti, 2018). further obtain non-recourse financing (Vinter et al., 2013; Gatti, 2018).
In PF, the SPV is the borrower on behalf of its sponsors (Nevitt and Sometimes sponsors would rather be at a loss in a venture in order to
Fabozzi, 2000). The SPV has no assets when debt is lent and is a brand- maintain their reputation, which is critical for PF.
new incorporated vehicle for the specific project; legal known as a “Man In summary, these four aspects explain why in certain circumstances
of Straw”. Because of the “bankruptcy remoteness”, the SPV reflects the PF can be inexpensive for sponsors and relatively secure for lenders.
credit risk of the project and not of its sponsors (Wood, 1995). From the Moreover, the notion of enforceability is paramount in PF because part
lenders perspective, the SPV has no assets to be used as collateral (Gatti, of the collateral lies on future cash flows generated by the project and
2018); therefore, PF is a form of “non- recourse finance, or limited secured by contracts, concessions and similar enforceable instruments.
recourse finance” (Finnerty, 2011). In practice, to make PF bankable, The legal context plays a vital role, concerning PF the most relevant
lenders might require collaterals, leading to “semi-recourse” finance branches of law are: banking, insolvency and security, corporate, con-
(Vinter et al., 2013). Additionally, in PF, the debt is “artificially” se- tract, tort, and construction law.
cured using contracts and concessions safeguarding future cash flows
from operation making the project business critical for PF. 2.2. Requirements of PF
These two features would be particularly beneficial for the sponsors
of NPPs. However, these advantages for sponsors are somehow coun- This section focuses on the essential requirements for PF considering
terbalanced by a higher risk exposition of lenders. Therefore, a legit- two main aspects: (1) the completion risk, and (2) the security interest.
imate question might be: Why would lenders provide debt to the SPV, The features of nuclear projects clash with these fundamental require-
with no or limited collateral at a lower cost? The answer lies in the ments; this is why the article focuses extensively on them.
concept of bankability. Firstly, lenders have a negative attitude toward construction risk
concerning: site acquisition and access, permits, risks relating to the
EPC Contractor, construction cost overrun, revenue during construc-
2.1. Bankability of PF transactions
tion, delay in completion, inadequate performance on completion, and
third-party risks (Yescombe, 2013). From the lenders’ perspective, the
Bankability concerns the acceptability of risk balance between the
project is bankable if future cash flows (or other forms of guarantee) are
project investors (Finnerty, 2011). To be “bankable” PF transactions
secured. In the nuclear sector, the most critical stage is the construction
require a sustainable balance of risk between lenders, sponsors and
phase because the cost amounts to billions of dollars with no positive
other critical project stakeholders (Flyvbjerg, 2013); together with the
cash flows causing maximum lock-up in the project. Some types of in-
rigour of non-recourse revenue generation.
frastructure can generate partial earnings during the construction
In PF, lenders provide the most significant portion of the capital (i.e.
phase, e.g. a hospital can begin its procedures in specific wings, while
70–95%); therefore, they usually constitute the most significant and
other areas have not been completed yet. NPPs do not generate any
conservative investors (Gatti, 2018). For these reasons, the research
revenue until all the facility is fully built, commissioned and approved
focuses on the lender’s perspective of in bankability requirements for
by an independent safety authority called Regulatory Body (RB).
PF. In the literature, the bankability is addressed by (1) bank syndica-
Lenders privilege projects characterised by limited completion risk
tion, (2) accurate due diligence, (3) governance, and (4) reputation of
(Tiong Robert, 1995; Gatti, 2018), e.g. known technology, limited size
sponsors.
projects, established and experienced contractors, etc. Usually, all these
Firstly, PF lenders are often organised in syndicates of banks (Gatti,
characteristics do not apply to NPP projects (Barkatullah and Ahmad,
2018), i.e. consortia linking different financial institutions (Nevitt and
2017; Boyd, 2008). In general, lenders attempt to transfer the com-
Fabozzi, 2000). The syndication of banks has specific governance me-
pletion risk from the SPV to experienced contractors. Usually, Turnkey -
chanisms simplifying the negotiation and administration of syndicated
Engineering Procurement Construction (TK-EPC) contracts (Clough
loan. Bank syndication allows banks to share and diversify the financing
et al., 2015; Hughes et al., 2015; Kelleher et al., 2014; Uff, 2013) are
risks.
often used as a prime contract between the SPV (i.e. the client) and a
Secondly, due diligence allows better scrutiny of the projects (Vinter
qualified EPC company (i.e. the main contractor) (Vinter et al., 2013).
et al., 2013; Delmon and Delmon, 2010) enhancing the Front-End En-
As TK-EPC contracts favour the maximum transfer of completion risk
gineering Design (FEED) creating the preconditions for better projects
from the SPV to the main contractor (or prime contractor). Ad-
(Artto et al., 2016; Merrow, 2011). Lenders of large capital sums are
ditionally, construction performance is typically secured by insurance,
usually conservative investors (Nevitt and Fabozzi, 2000) influencing
performance bonds and similar instruments (Finnerty, 2011). However,
many project aspects including the selection of both technology and
it is impossible to completely exclude the competition risk, especially in
suppliers. Lenders favour proven technologies and stable contests in
large projects (Merrow, 2011). Construction contracts (including the
terms of economy, policy and law (Gatti, 2018).
TK-EPC) have provisions limiting the damages that can be claimed by
the contractor. For example, in the Olkiluoto 3 (OL3) NPP project, the
2
This statement is generally valid. However, SPVs might have special ac- maximum penalty clause, for delay, was reflected by the 10% of the
counting treatment in some jurisdictions. For example, it could be mentioned in project budget, so even though the project was several years overdue
the footnotes of the accounting statements. and severely over budget, the penalty clause will remain consistent

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T. Sainati et al. Energy Policy 129 (2019) 111–119

(Ruuska et al., 2011, 2009). Moreover, in the UK the contracts and jurisdictions can be compared by a multiplicity of factors. Wood (Wood,
construction law exclude the use of penalties for the contractor (Uff, 2008, 2007) compared different jurisdictions adopting several legal
2013; Hughes et al., 2015). tests, some of the most relevant for PF include:
In practice, it is extremely difficult to transfer entirely the comple-
tion risk from the SPV (client) to contractors also because of the nature 1. The scope of security considers which class of assets can be covered
of construction procurement and the contracting network. In large in- by the security interest.
frastructural projects, there are hundreds of companies involved. The 2. Perfection focuses on whether the creditor must have “full public
prime contract between the client and the main contractor is further possession and delivery of the assets” in order to have security on it.
into subcontracting chains. The lower contracting levels are decoupled 3. Secured debt considers whether it is possible to secure future and
from the prime contractor consistently with the doctrine of privity in dynamic assets as opposed to real and static ones.
contracts (Furmston, 2017). Procurement processes favour the creation 4. Security trustee considers whether it is possible to employ the in-
of subcontracting chains, leading to a complex and remote3 contractual strument of Trust.
network. In such cases, each contractor transfers most of the risks “back 5. Transfer deems whether the transfer of assets can take place by
to back” from its client to its subcontractor(s) (Kelleher et al., 2014; novation or it requires ownership with consequences on the owner
Hughes et al., 2015). Accordingly, some critical provisions contained in balance sheet. Novation is the act of amending contracts, i.e. sub-
the sub-contracts mirror the prime contract, i.e. between the client and stitute the contract (or part of it) with a new one.
the prime contractor. This shifts the completion risk from the client to 6. Enforcement contemplates a variety of aspects and procedures as-
remote contractors who are not able to transfer the risks to any other sociated with the execution of the security interest. For instance,
actor. The completion risk is quickly dispersed in hundreds of small enforcement considers whether, during the liquidation, the en-
sub-contractors leading to complex risk patterns. For example, a small forcement of security requires a public auction, the involvement of
subcontractor might cause economic damage significantly more sub- the court, a public administrator, or other mechanisms.
stantial than its capitalisation, leading to its bankruptcy. In such a 7. Priority toward unsecured creditor focus on the extent to which it is
scenario, the project would be delayed, or even stopped, in order to possible to rank ahead of secured creditors against unsecured ones.
replace the sub-contractor. Additionally, litigation between contractors 8. Costs and taxes consider the general cost of creating security, by
creates further delays as well as cost overruns. The underperformance carefully viewing taxes, legal expenses and administrative fees.
of the project would hit back the SPV and the lenders, making the
contractual remedies ineffective. Furthermore, for the doctrine of A strong security interest is essential in PF (Wood, 1995). If the
priority in contracts (Furmston, 2017) there would be no contractual security interest is weak lenders are not able to secure their debt and
obligations between the underperforming subcontractor and the SPV. subsequently reluctant to lend the money to the SPV. Other banking
In light of this, it is clear that lenders are particularly averse in fi- and insolvency aspects relevant for PF are:
nancing projects characterised by relevant completion risk. This nega-
tive attitude to completion risk conflicts with nuclear projects as further • The ability to transfer contracts with limited prescriptions and
discussed in Section 3.2. publicity requirements;
Secondly, PF has links with insolvency law, particularly concerning • Favourable insolvency policies for secured creditors.
the so-called “security interest”. “A security interest gives a creditor prior
propriety rights over an asset – the collateral –which enables the creditor to Particularly important is the insolvency law regulating the bank-
realise the collateral to pay the secured debt ahead of most other unsecured ruptcy and liquidation processes, leading to alternative routes such as
creditors of the debtor. The security interest is a separatist on insolvency, i.e. private “work-outs”, judicial reorganisations or liquidations (Wood,
the collateral does not fall into the pool available for unsecured creditors. A 2007; Finch and Milman, 2017). Equally relevant are the insolvency
security interest is primarily a protection against the insolvency of the debtor policies distinguishing between various approaches, i.e. set-offs vs close
since normally if the debtor remains solvent the creditor has no need for the out and settlement nettings (Wood, 2007).
priority propriety right. […] the essence of security is that the creditor, if Deregulated contexts favour PF because lenders can introduce so-
unpaid, can force a sale or other realisation on the propriety and use the phisticated mechanisms to secure their capital with no (or limited)
proceeds to pay the secured debt ahead of other creditors” (Wood, 2007). physical collateral (Wood, 2007). When PF transactions are negotiated,
In PF, little or no collateral is available for securing the project debt. lenders have strong bargaining powers as they are lending a vast capital
The delivering infrastructure is a tangible asset, available only at the to a brand new company (i.e. the SPV) without having collateral or
end of the construction period. The effective guarantees for lenders lie capabilities (Fabozzi, 2012; Sainati et al., 2017). In a deregulated
on the enforcing instruments either by securing the revenues streams context, lenders can counterbalance their risk exposition with control-
(e.g. off-take contracts) or by providing a temporary monopoly to the ling powers and rights, making projects bankable. Equally important is
SPV (e.g. public concessions). Therefore, these intangible assets can be the ability to time and cost-effectively enforce contractual obligations
considered an indirect form of collateral for the debtor that falls under (Vinter et al., 2013).
the definition of security interest.
Insolvency law is country dependent. Wood classifies the insolvency 3. The impact of nuclear law on project financing
law regimes showing the strong correlation between the legal traditions
and the insolvency framework (Wood, 2008, 2007). Common law jur- The accidents of Three Miles Island and Chernobyl (IAEA, 1992)
isdictions (particularly the UK) provide a deregulated context favouring raised a global concern toward the safety of NPP and the cross-
security interest. Conversely, Napoleonic and Islamic jurisdictions don’t boundary effects of nuclear accidents. The enhanced safety require-
favour the security interest. Roman-Germanic are mixed jurisdictions as ments, imposed after the accidents, increased the NPPs’ construction
they partly support the security interest (Wood, 2008). period and costs (Moreira et al., 2013; Koomey and Hultman, 2007).
The security interest is a particularly complex topic, and different Nuclear law lies in international and domestic legal and regulatory
frameworks. Internationally, two main institutions spear the concerns
about safety and security by promoting the ratification of multilateral
3
The term “remote” is a legal term widely used in many branches of law, conventions, as well as bilateral treaties, i.e. the International Atomic
including contract, tort, criminal, etc. In this context, the term refers to the Energy Agency (IAEA) and the Nuclear Energy Agency (NEA) a branch
contractual distance between the client and the subcontractors that effectively of the Organisation for Economic Co-operation and Development
undertake the construction works. (OECD). Furthermore, other regional institutions such as the European

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Union promote the development of international law. The international legal requirement of PF; in particular: (1) ownership requirements, (2)
nuclear law is relatively consistent in its principles and approaches, due indivisibility between operator and licensee, (3) capabilities required
to the vast corpus of international nuclear law that covers aspects such for the operator/licensee, and (4) financial requirements. These re-
as (Nuclear Energy Agency OECD, 2017): nuclear safety and radi- quirements can be limiting for PF when codified explicitly, consistently
ological protection, emergency response and management, radioactive with the prescriptive-based regulatory approach (Bredimas and Nuttall,
waste management and decommissioning, environmental protection, 2008; Sainati et al., 2015; IAEA, 2010c).
nuclear security and physical protection, non-proliferation, safeguards, Firstly, ownership requirements5 are justified for safety and security
liability and compensation for nuclear damage, and export control and reasons. Ownership requirements focus on nuclear-related assets in-
international trade. Domestically, each country establishes nuclear cluding the NPP, the nuclear site, the intellectual propriety, and the
laws, including the creation of institutions such as RBs (IAEA, 2003b). nuclear fuel. Typically, the “real assets” can be owned exclusively by
Domestic nuclear law includes detailed administrative rules and reg- the operator/licensee; meanwhile, the intellectual propriety has a se-
ulatory provisions (IAEA, 2002). parate regime; the ownership is often shared between the reactor
Therefore, nuclear law is made up of hard and soft laws focusing on vendor and the operator. Ownership requirements affect directly, and
nuclear-related matters (IAEA, 2010b). Nuclear law includes (IAEA, indirectly, the security interests of lenders. Directly, lenders cannot use
2002, 2010b): any nuclear asset as collateral for their loan. Lenders cannot own nu-
clear assets or sell them because only the operator/licensee is entitled to
1. International law composed of conventions and bilateral treaties; own them. This is a crucial difference with other energy infrastructure.
2. Domestic law dedicated explicitly to the nuclear-related matters; Usually, any type of investor can own a power plant with no or very
3. Technical regulations issued by tailored administrative bodies; limited restrictions. Conversely, in prescriptive based jurisdictions, the
4. Non-binding guidelines. ownership of NPPs requires the compliance of prescriptive norms that
are assessed by the RB for safety and security reasons. Typically, the
Domestic law and the regulatory framework are often classified by owner of the NPP is the operator/licensee of the facility. Indirectly,
two archetypical approaches, namely: prescriptive based, and perfor- ownership requirements might constrain the ownership of the op-
mance-based. The prescriptive based approach is founded on detailed erator/licensee to national companies, as some countries (e.g. the USA)
mandatory requirements using explicit tests limiting the uncertainty of forbid foreign investors to cover positions of control of the utility/ SPV
licensing processes. Examples are the French and the Finnish licensing or even the operating of NPPs. In PF, the deputy operator/licensee is the
processes (Bredimas and Nuttall, 2008; IAEA, 2012; Locatelli et al., SPV. The ownership and control of SPV is a matter of paramount im-
2011). The performance-based approach (also called goal setting) is portance for the security interest of lenders. Ownership requirements
based on general principles and objectives. The performance-based affect the ability of lenders to redeem the project in insolvency situa-
approach provides greater flexibility to demonstrate the achievement of tions. As a result, ownership requirements alone are a critical barrier to
the safety objective. Performance-based licensing processes are often PF from the lenders perspective.
complemented by extensive non-mandatory guidelines to reduce the Secondly, indivisibility between the operator and the licensee can
uncertainty and ambiguity related to the regulatory decision-making. be another obstacle for PF. Internationally, nuclear laws are based on
One of the best examples of performance-based approach is provided by the principle that the nuclear operator is the nuclear licensee (IAEA,
the British licensing process (Bredimas and Nuttall, 2008; IAEA, 2012). 2006b, 2002). In most PF schemes, the operator and the licensee (or
Nuclear law is a crucial determinant of every nuclear programme concessionaire) are separate entities. From the perspective of lenders,
(IAEA, 2001, 2010a). The RB is a critical stakeholder (IAEA, 2007) the SPV shall not be affected by any significant risk, including the op-
having four main responsibilities: (1) Regulating the nuclear activities, erational ones. The relationship between the operator and the SPV is
(2) licensing NPPs, (3) Inspecting (4) enforcing4 uncompliant beha- formalised by the Operation and & Maintenance contract. This argu-
viours. Once the RB is ready to fulfil its functions, the first NPPs can ment is critical because the operation of NPP involves greater risks (e.g.
initiate the licensing, a pre-requisite for construction and operation. technical and political risks) compared to other types of power plants
Licencing is the administrative process where the RB (and other in- (Miller and Lessard, 2001). The inability to separate the role of the
stitutions) assesses the safety of a NPP design. If successful, the appli- licensee to the operator affects the security interest of lenders (Section
cant becomes licensee by obtaining a nuclear license defined as a “legal 3.1).
document issued by the regulatory body granting authorization to perform Thirdly, capabilities required for the operator/licensee (IAEA,
specified activities relating to a facility or activity.” (IAEA, 2016) 2010c) could inhibit the adoption of PF in nuclear. In PF, the SPV is the
Licensing plays a central role in the regulatory control of NPPs, and deputy to be the operator/licensee. However, the SPV has no assets,
it is a critical barrier for PF. The licensing process impacts mostly on the capabilities or expertise at the time it is incorporated. The explicit and
construction phase of the NPP, which also coincides with the most prescriptive requirements focusing on the capabilities for the licensee
critical phase for PF as it affects the completion risk directly. exclude the possibility to use the SPV as operator/licensee, which
Overall, nuclear law plays a fundamental role in the feasibility of PF constitutes a significant impediment for PF.
in the nuclear sector. The previous sections described some of the most Finally, financial requirements focus on the finical solidity of the
critical requirements for PF: (1) low completion risk, and (2) strong operator/licensee (IAEA, 2002). Financial requirements can include:
security interest for lenders. These requirements conflict with specific
features of NPP projects, derived from the legal and regulatory frame- • The operator/licensee shall not bankrupt because of the critical
work: (1) prescriptive regulatory requirements, (2) extensive comple- safety responsibilities. In case of bankruptcy of the operator/li-
tion risk, and (3) limiting nuclear liability regime. Each of these three censee, the state undertakes the responsibility of the NPP. However,
features is further discussed in the following subsections. this would be a last resort solution, and the financial requirements
aim to make this scenario remote;
3.1. Prescriptive regulatory requirements

5
The licensing process can impose provisions conflicting with the Typically, the ownership requirements are introduced by domestic laws and
regulations. For example, in the USA, ownership requirements are stated by the
Section 104d of the Atomic Energy Act of 1954, and by the implementing
4
Civil administrative proceedings and fines as opposed to criminal ones that regulations: Section 50.38 of Title 10 of the Code of Federal Regulations (10
exclusive to the judiciary. CFR).

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• The financial requirements include specific plans for the decom- Regardless of the international differences, the three regimes have
missioning. Usually, the legal and regulatory framework imposes a in common at least seven main principles: (1) strict liability, (2)
long-term plan aiming to create a decommissioning fund during channelling the liability to the operator, (3) limitation of liability in
operations. Financial requirements conflict with the finical solidity time, (4) limitation of liability in amount, (5) mandatory insurance, or
of the SPV, which is the deputy operator/licensee in PF. Regardless other financial security, (6) jurisdiction and (7) applicable law (Heffron
of the amount to be paid to for the decommissioning fund, the op- et al., 2016).
erator/licensee must demonstrate its financial solidity. However, In all nuclear liability regimes, the nuclear operator/licensee is
SPVs are characterised by a vast debt and limited collateral for the strictly and exclusively responsible for nuclear accidents. The nuclear
investors, i.e. high financial leverage. The high financial leverage liability is alleviated by limitations in time and amount. These princi-
conflicts with the most basic financial requirements. ples are designed to favour legal certainty in case of nuclear accidents,
allowing clear and efficient compensation for citizens and businesses.
In summary, the prescriptive regulatory requirements can be a Nuclear liability regimes substitute the traditional provisions available
barrier for PF. The requirements forbid the SPV to be the operator/ in tort provisions to the ad hoc provision, which are exclusive to the
licensee, i.e. the capabilities required for the operator/licensee, and the nuclear sector (IAEA, 2002).
financial requirements. This happens because the SPV is a newly in- The strict and exclusive liability of the nuclear operator/licensee
corporated company with no assets or capabilities. Furthermore, the introduces a further constrain limiting the applicability of PF. As de-
prescriptive requirements affect directly the security interest of lenders scribed in Section 3, a fundamental design principle of PF is the ability
(Section 3.1). Without the support of lenders, PF is unlikely to take to de-risk the SPV. In PF, the SPV acts as the operator/licensee, who
place. cannot transfer the risk of nuclear accident to other stakeholders. In
practice, the risk is partly shifted to mandatory insurances, and it is
limited in time and amount. However, the strict and exclusive liability
3.2. Extensive completion risk characterising nuclear projects
reduces the flexibility in transferring the nuclear risks to external
contractors. As a consequence, the SPV and lenders must bear part of
Usually, PF is suitable for those projects characterised by limited
the nuclear risk, particularly in countries where the limitations in
completion risk (Section 2.2). However, all recent NPPs developed in,
amount, exceed the minimum requirements introduced by the inter-
high-income countries, demonstrate a significant completion risk
national nuclear regimes. A remarkable example is Japan where the
(Heffron, 2013). For instance, the OL3 project suffered severe delays
Fukushima accident demonstrated the inconsistency between the
and over budget due to licensing problems (Ruuska et al., 2009). The
amount guaranteed by the international regimes and the actual damage
construction site was shut several times by the RB. The RB also forced
of the nuclear accident. Consistently, the third- party liability regimes
the reconstruction of the base slab due to the inconsistency to pre-
constitute a further obstacle towards PF in the nuclear sector. This
scriptive regulatory requirements concerning the porosity of the con-
barrier is synergic with the barriers introduced in the previous Sections
crete. The NPP called FL3 in France employed the similar technology of
3.1–3.2.
OL3. Similarly, FL3 suffered major delays and over budget also due to
licensing problems (Ruuska et al., 2011). Recently Westinghouse was
bankrupt due to an over-budget NPP located in the US (Michael and J,
4. Discussion and conclusion
2017). All these examples highlight the completion risk in NPP projects
derived from the legal and regulatory framework.
PF is widely applied in the energy infrastructure with exception of
In summary, NPP projects are affected by a significant completion
the nuclear sector. The paper examined the barriers introduced by
risk, making them difficult to be financed on a PF basis. The obstacle is
nuclear law, as well as understanding the characteristics of NPPs.
particularly critical if considered in conjunction with the other barriers
Financing a NPP on PF basis it is possible, but the following barriers
discussed in Sections 3.1, 3.3.
inhibit the application of PF to NPPs: (1) prescriptive regulatory over-
sight, (2) vast completion risk, and (3) limiting nuclear liability re-
3.3. Limiting nuclear liability regimes characterising nuclear projects gimes. These three barriers conflict with two PF requirements:(1) low
completion risk, and (2) strong security interest for lenders.
Internationally, the nuclear sector is characterised by a unique lia- The pervasive role of nuclear law is inconsistent with the PF re-
bility framework taking the name of “nuclear liability regimes”. quirements of having a deregulated context, particularly on matters
Historically, the first nuclear liability regime was the Price-Anderson such as ownership, control, insolvency, contracting and financing. The
Act of 1957. Starting from the early stages of nuclear development, pervasive role of nuclear law is a significant barrier, particularly when
several countries started implementing ad hoc “nuclear liability re- it is based on prescriptive mandatory requirements. Conversely, per-
gimes” (IAEA, 2010b; Nuclear Energy Agency OECD, 2017). The acci- formance-based regulatory systems are deemed to be more flexible and
dents of Three Miles Island and Chernobyl fostered the expansion of can better suits PF compared to prescriptive ones.
nuclear liability regimes worldwide. Internationally two main regimes It is possible to overcome or at least mitigate these barriers by
evolved, one associated with the OECD (which was mainly connected to hindering PF in the nuclear sector. Firstly, a strong banking law, and in
Europe during the early stages of development), and the second asso- particular a strong security interest, is required. This aspect does not
ciated with the IAEA as summarised in Table 2. Recently the IAEA and relate to nuclear law, but it is essential in PF. Secondly, a flexible li-
the OECD promoted a further harmonisation between the two regimes, censing process such as the performance-based approach is more sui-
resulting in a third, harmonised nuclear liability regime. table for PF. The traditional prescriptive based approach could impose

Table 2
International conventions establishing nuclear liability regimes (Heffron, Ashley and Nuttall, 2016).
OECD Nuclear Liability Regime IAEA Nuclear Liability regime

Paris Convention on Nuclear Third Party Liability 1960 Vienna Convention on Civil Liability for Nuclear Damage 1963
Brussels Convention Supplementary to the Paris Convention 1963 Protocol amending the Vienna Convention on Civil Liability for Nuclear Damage 1997
Protocols amending the Paris + Brussels Supplementary Conventions 2004 Convention on Supplementary Compensation for Nuclear Damage 1997
Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention 1988

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critical obstructions for PF, particularly concerning the (1) ownership other disciplines, to overcome the practical impediments to JUST
requirements, (2) indivisibility between operator and licensee, (3) transition. Further researches can highlight the barriers to JUST tran-
capabilities required for the operator/licensee, and (4) financial re- sition for other infrastructure as well as the gaps between energy law
quirements. and the other disciplines, such as finance, engineering and social sci-
It is unlikely that PF in the nuclear sector is employed as a pure form ences. The identification of these barriers and gaps it is a critical step to
of non-recourse financing in the short term but in a prescriptive based improve energy law and to enable the JUST transition.
framework. Most likely, the PF transactions would require the support
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