Nuclear bonds are what we need

23 Oct

Nuclear

The deal on the financing of the new nuclear facilities at Hinkley Point has some interesting features. If EdF can manage the construction risk ( a big if, given the sagas at two other plants) they should earn a healthy (long term) rate of return, given the guaranteed, index-linked price offered for the electricity.

Unfortunately there are no obvious ways in which long term UK investors can take a punt on this. They could presumably buy the new bonds issued by China General Nuclear Power, priced at a mere 2.4% over treasuries, but they are only for five years and are dollar-denominated ( see http://goo.gl/DRPFnO).

The government could, of course, have structured the deal differently, and commissioned EdF to do the build while financing some of the costs by issuing its own sterling nuclear bonds – either on a conventional basis (as with China General) or as a kind of Social Impact Bond (see http://en.wikipedia.org/wiki/Social_impact_bond). The SIB could pay a coupon when the plant comes on stream, and link the coupon to the guaranteed electricity price.  If the place suffers a Fukushima-style disaster both capital & coupon on the SIB would be lost.

So far SIBs have been limited to non-energy programmes, but given the scale of the investment required there must be a case for looking at them here. For pension funds, they could be attractive, as they are a deferred, index linked asset to match their deferred, index-linked liability. And given the carbon benefits, even Prince Charles might be happy (last week, he was lecturing pension fund managers on the need for longer term, sustainable investments – hence the picture above). Come to think of it, perhaps he’s got room for some nuclear at Highgrove??.

The Thatcher government was bold enough to start index-linked bonds. It’s time for the coalition to step up to the mark and allow investors and taxpayers some upside on nuclear energy investment.

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