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Navigating Nuclear Risks

New approaches to contracting in a post-turnkey world.

Fortnightly Magazine - July 2008

a nuclear project.

Second, the contracting approach and related terms and conditions will allocate the risks to the natural owners, thus appropriately aligning incentives and mitigating the overall project risk profile. This will have benefits for how both regulators and financiers view the overall viability of the project, expediting regulatory approvals and leading to more favorable financial market confidence and financing terms. The differences in the risk profile of the project’s sub-components—most notably major equipment and labor productivity—call for alternative contracting approaches to ensure appropriate risk allocation. Thus, dividing the project into discrete, but natural, groupings that share similar risk profiles, and can leverage similar risk-mitigation strategies, should lead to contract approaches that allow owners, EPC contractors and OEMs to think in a more integrated manner and avoid surprises.

Third, managing the financial implications of project development and construction is supported by achieving an appropriate alignment of risk through decomposition of decisions, work, project conditions and external events into discrete risk packages. The intent is to increase visibility into potential impacts and risk-mitigation approaches, thereby minimizing risk to financiers and the owner. Financial strategy can be structured around these risk profiles and actively managed as the project proceeds from stage-to-stage to reduce uncertainty of outcomes, and therefore reduce project-risk-driven financing costs. Regulatory strategy also can be structured in parallel to attempt to complement flexible financial structuring to improve cost recovery certainty at clearly defined milestones.

Each of these factors increases the likelihood that desired outcomes will be attained and the owner will be protected. Of course, the importance of each will differ depending on the project situation, but the fundamentals generally apply in all circumstances. As projects move closer to actually breaking ground, the challenges of thorough pre-planning and execution will become more acute. Owners that can demonstrate they have preemptively addressed these risks will find that market confidence in their ability to execute is an invaluable asset.