What follows is a piece by Aaron Stein, a research associate at the Royal United Services Institute (RUSI) and a doctoral candidate at King’s College London. Aaron has agreed to be an Arms Control Wonk “pinch hitter” and contribute posts about nuclear-related issues in the Middle East. He blogs at Turkey Wonk. Follow him on Twitter: @aaronstein1.
A Turkish Success Story?
After the revolts in Tunisia, Egypt, and Libya the Turkish model was, once again, back en vogue. While the idea of a Turkish political model has been around since shortly after the end of World War II, the culturally conservative and democratically elected Justice and Development Party (AKP) appeared to be an ideal model for the “Arab Spring” states to emulate. The AKP’s leadership strongly supported the Egyptian revolution and sought to leverage its regional popularity to carve out a larger role for itself in the Middle East. These efforts have failed. Yet, its recent nuclear energy related successes with Russian and Japanese nuclear energy firms may signal the start of a “Turkish nuclear financing model” for other cash-strapped countries in the Middle East to follow.
Turkey Opts for the “Pay Later” Option
In 1983, Ankara began to insist on a unique financing model for its nuclear tender known as Build, Operate, Transfer, or BOT. The financing model demands that the foreign supplier pay for the cost of construction and operate the reactor. The foreign firm was expected to recoup expenses through guaranteed electricity sales and then transfer the power plant to a local company. In return, the new local operator would pay the the foreign firm a percentage of the profits made from the sale of electricity until the reactor was decommissioned.
American nuclear companies have balked at these demands, but companies from Canada, Japan, and Germany have traditionally entered into negotiations with Ankara. However, in every case, Ankara’s refusal to include an off-take agreement – whereby the Turkish government would guarantee the cost of construction – derailed negotiations.
After a court case in the mid-1990s, Turkey changed its financing model from BOT to Build, Operate, Own, or BOO. The updated model kept the basic framework of the BOT financing model in place, but removed the demand for the foreign firm to transfer the nuclear plant to a Turkish partner company. The updated BOO model mandated that the foreign firm establish a local subsidiary to direct and oversee the financing and construction of the power plant. Ankara, however, refused to provide an off-take agreement and continued to demand that the foreign supplier assume the financing risk. This specific disagreement about guarantees plagued Turkey’s negotiations with foreign suppliers in the 1980s and 1990s and was the single biggest reason for Ankara’s inability to conclude an agreement with a foreign supplier for nuclear power plants.
In 2010, however, Turkey was finally able to reach an agreement with Russia’s Rosatom for the construction four VVER-1200 reactors at the Akkuyu site near the small city of Mersin. Rosatom has agreed to take a 100% equity stake in the project company (Akkuyu NPP JSC), to operate the reactor, to oversee the decommissioning of the reactor, to provide the fuel, and to take back the spent fuel.
Turkey has agreed to pay $12.35 U.S. cents per-kilowatt hour for 70% of the electricity produced at the first two plants for 15 years, or up until 2030. Turkey will also purchase 30% of the electricity produced from reactors three and four at the same price and for the same length of time. Akkuyu NPP JSC will then be able to sell the remaining electricity on the open market at normal market rates. After 2030, the project company will pay 20% of the profits to the Turkish government. If there any delays, the cost will be borne by the responsible party. Complicated enough?
The financing model, however, now appears to have hit a snag. According to Nuclear Intelligence Weekly, Russian President Vladimir Putin told Turkish Prime Minister Recep Tayyip Erdogan that “Russia is hoping to see Ankara provide both tax incentives and guarantees of a long-term price for power output from its four planned VVER-1200 reactors at Akkuyu on Turkey’s Mediterranean coast.”
Rosatom is also looking to sell 49% of its equity stake in Akkuyu NPP JSC to help decrease the financing risk. Russia’s demands likely have to do with Turkey’s recent selection of Japan’s Mitsubishi Heavy Industries (MHI) and GDF Suez as the winner of a recent tender to construct nuclear reactors at a second site on the Black Sea coast known as Sinop. Mitsubishi plans to build the Atmea-1 and GDF Suez will operate the reactor. However, unlike the Akkuyu project, Turkey’s state-owned utility EUAS has agreed to take at least a 35% stake in the Japanese/French project company. Rosatom received no such perk!
Jordan Follows Suit: The Death of the “Turn-Key” Model?
Despite these problems, the BOO financing model represents a real challenge to the “turn-key” reactor concept. Moreover, it represents a model for other emerging nuclear states to follow.
Jordan, for example, recently considered bids from Rosatom and Mitsubishi/GDF Suez. Both consortiums are reported to have offered Amman a “Turkish style” deal. Jordan eventually selected the Russian consortium, after making clear during the tender process that it expected heavy vendor financing. Yet, in a key difference from the Turkish case, Rosatom has only agreed to take a 49% stake in the project under the BOO model.
According to Nuclear Intelligence Weekly “Jordan w[ill] rely at least partially on funds from Gulf Cooperation Council (GCC) states, who in the wake of the Arab Spring pledged financing for poorer Arab states … which suffered repeated and prolonged disruptions in natural gas piped from Egypt.” It is unclear if the GCC will follow through on these pledges for a proposed Jordanian nuclear program, but such an arrangement could help ease the financing burden. If the GCC financing does fall through, Jordan could, like Turkey in the case of the Sinop arrangement, use a state-owned utility to partner with Rosatom to guarantee electricity sales.
Russia is reportedly going to supply Jordan with the reactor fuel and will take back the waste. The risk, therefore, is not proliferation, but rather the implications of the spread of BOO financing model for nuclear safety.
The model has some notable drawbacks. U.S. Nuclear Regulatory Commission (NRC) Chairman Allison Macfarlane has warned that the BOO model allows for nuclear energy novices to outsource all aspects of nuclear energy development – including the regulatory provisions – to foreign companies. Such an arrangement could be problematic from a safety point of view, or, in the event of an incident, could lead to questions about who is responsible for responding to a nuclear accident.
The BOO model works like a concession, whereby the foreign operator works through a local subsidiary to manage a foreign nuclear power plant. If that plant melts down, will the foreign operator then have to pay for the cost of clean up? And, if so, will they then look to their own government, or the government that hosts the reactor for help financing the expensive clean-up operation? Such details will surely be addressed in the inter-governmental agreement, but things have a way of getting murky when billions of dollars are at stake.
Yet for the non-oil producing states in the Middle East, the BOO model offers a number of very attractive features. As more and more states in the region look at ways to deepen their scientific base, the potential for local scientists/engineers/operators to work with foreign operators in the project company will continue to be a particularly attractive feature. Moreover, the BOO model allows for the host government to sidestep the cost of developing nuclear energy. Lastly, the model allows for states still enamored with the prestige of nuclear power to develop a nuclear power plant without first having to go through the timely process of training and developing suitable personnel to oversee construction and then operate the plant.
The approach is dangerous, but policymakers appear to have accepted that the benefits outweigh the risks. Turkey was the trendsetter in this regard, and now has a chance to establish itself as a “model” for other emerging nuclear countries.