Nuclear new build in developing regions: A different set of risks

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Dozens of developing nations want to build nuclear power stations for the first time, but nothing will be built unless these countries ensure adequate liability protection for participants in nuclear projects, writes Paige Crewson of the leading international law firm Ashurst LLP.

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Paige Crewson, Ashurst LLP, UK

The International Atomic Energy Agency predicts a rise in global nuclear power capacity of between 40 and 100 per cent over the next 20 years Source: L3 MAPPS

The world is experiencing a nuclear renaissance fuelled by climate change concerns and public demand for a secure and affordable energy supply. The International Atomic Energy Agency (IAEA) has recently predicted a rise in global nuclear capacity of between 40 and 100 per cent over the next 20 years, through the construction of between 178 and 357 new reactors worldwide1.

The IAEA has reported being approached by as many as 53 different countries about new build programs in recent years. Even now, 54 reactors are under construction according to the World Nuclear Association.

While new reactors will be built in many regions, Asia is currently leading the way on development with 80 per cent of new construction projects starting in 2008 taking place there2. Eastern Europe and the Middle East and North Africa (MENA) region also have significant development activity under way. Participants in the sector should be generally aware of the existing nuclear liability regimes and the trend in the past two and a half decades towards tightening them to provide for increased liability, expanded incident and damage coverage and the creation of an international pool of funds.

What may be less familiar are the risks that arise when doing business in this sector in developing regions where there is an unsettled or non-existent nuclear liability regime. Before looking further at that situation, it is helpful to consider the regimes that are already in place.

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Existing Nuclear Liability Regimes

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Nuclear states have long recognized that a nuclear incident would have broad ranging and international repercussions and that a system of harmonised liability was needed. The first international nuclear liability regime ” the Paris Convention ” was established by several Western European states in 1960 under the auspices of the OECD. Countries from Central and South America, Africa, Asia Pacific and Eastern Europe also saw the need for an international liability and compensation regime and adopted the Vienna Convention in 1963.

The decaying Chernobyl sarcophagus in Ukraine

At the same time, most Paris Convention parties adopted the amendments in the Brussels Supplementary Convention. The provisions of the Paris/Brussels Conventions and the Vienna Convention are very similar, though not identical, and are based on the same basic principles:

(a) the operator of a nuclear installation has exclusive liability; the operator’s liability is strict and unrelated to fault

(b) the operator’s liability is limited in amount and time3, and

(c) exclusive jurisdiction is granted to the courts of one state, usually where the nuclear installation is situated.

In many ways, it was the Chernobyl4 tragedy in 1986 that prompted the international community to modify these first regimes. Although the Soviet Union was not party to either regime, Chernobyl confirmed that they were inadequate to ensure sufficient, equitable and rapid compensation after a large-scale nuclear incident.

Several international instruments were drafted, though not widely ratified, which amended the earlier documents to make more compensation available to more people. These included an instrument that bridged the regimes by giving the residents of party states to each regime the protection provided under the other regime. The amendments to the existing regimes did not alter the basic principles.

The current nuclear renaissance is accompanied by a push by the international community for the adoption of the original instruments by non-convention states and the adoption of the amending documents by convention and non-convention states alike. This push is having some effect. In Europe, members of the Paris and Brussels Conventions are preparing to ratify a document that greatly expands nuclear operators’ potential liability. In Eastern Europe and the Middle East, several states are developing or amending legislation in accordance with the Vienna Convention and its related instruments.

Despite the continued development, acceptance and adoption of the international liability regimes, many of the world’s nuclear power generating states have not yet become parties5. Some have developed their own legislation and compensation schemes. In the case of the United States, compensation is available at levels far beyond those provided for in any of the international instruments mentioned in this article. Others have no local laws in place to deal with the aftermath of a nuclear incident. The UAE, for example, commenced its tender process for new nuclear plants in Abu Dhabi before ensuring legislation and a regulator were in place.

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Key risks facing investors in jurisdictions with unsettled or non-existent nuclear liability regimes

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Technology suppliers, operators, fuel manufacturers, contractors and consultants (‘interested parties’) who are looking to supply services and materials to developments in jurisdictions where national law is unsettled or non-existent are exposed to a very different set of risks than those they would be exposed to when involved in projects in convention states.

Where a country has no nuclear liability legislation in place and has not signed up to any international instruments, local tort, contract and criminal law will apply to any damage resulting from a nuclear incident. Depending on local law, this means that there could be:

(a) No automatic channelling of liability: Without exclusive liability, victims may be able to seek recovery (potentially on an unlimited basis) from any interested party. This, in itself, is a significant shift from the position on developments in convention countries where any person involved in the project other than the operator would normally be relieved of any liability.

Those parties who are named as defendants by a victim would, without question, bring third party actions against the other interested parties, likely initiating a chain of fourth and fifth party actions and other related proceedings in doing so. Extreme complexity, huge cost and endless delay would be the main characteristics of such nuclear liability litigation. Convention states severely restrict this expansion of the proceedings.

The involvement of multiple defendants has a further impact on interested parties. Where multiple negligent acts are committed by a number of different persons, any of which could have independently caused the same damage, then any one of those persons may be sued (in most jurisdictions) for the entirety of the loss. It is only where different damage is caused by different persons that each person is only liable for the loss that they caused. In a nuclear damage scenario, all negligent acts that lead to the nuclear incident are likely to cause the same damage.

Using a personal injury or property damage claim resulting from the Chernobyl disaster as an example, several parties could be seen to have had a role in causing the same damage, including:

(i) project managers for prioritizing fast construction over safety

(ii) designers for failing to engineer any sort of shell around the reactor core

(iii) operators for running tests with the safety system deactivated

(iv) mechanical and electrical engineers and contractors for creating a safety system capable of human override

(v) emergency response crews for exacerbating rather than extinguishing the fire

(vi) safety regulators for failing to perform its role correctly, and

(vii) the relevant government body liable for delaying communication about the incident so that residents of radiation exposed areas could take suitable precautions.

Nuclear reactors under construction Source: IAEA

The practical result is that those defendants with the deepest pockets are likely to end up paying the most, even if their contribution to the incident is only marginal. The size and number of such claims could easily lead to the ruin of many consultants and subcontractors without affording any substantial contribution to the compensation of the damage caused. Additionally, even where the installation state has acted negligently it may be able to rely on a defence of state immunity, which would leave the deepest pockets unavailable to victims and other interested parties.

(b) A fault-based system of recovery: While an interested party cannot be found liable unless victims meet the burden of proving that it is actually at fault (according to the local standard of proof), such an interested party will be compelled to defend allegations of negligence. In doing so, they would seek to establish that the fault lay with other defendants or third parties. This would be particularly challenging if the physical evidence is destroyed or inaccessible as a result of the nuclear incident. These burdens would add considerably to the costs and duration of proceedings for claimants and interested parties alike. The interest and costs payable on an award of compensation alone could be substantial. In convention states, the operator is strictly liable, regardless of fault, so that victims need only prove the extent of the damage they have suffered.

An advantage to interested parties undertaking nuclear projects in non-convention states is that defences that are restricted or precluded in convention states may be available under local law. Liability for nuclear damage may be excused on the grounds of force majeure or acts of God, and contributory negligence by the victim may be available as a defence.

(c) Potentially unlimited liability: Although it is possible for convention states (depending which conventions and amendments they are party to) to apply unlimited liability in terms of amount, most convention states have applied a maximum liability figure to give certainty to operators (who are, as explained above, the only party exposed to liability). In the absence of any limitation of liability, as may be encountered in a non-member state, interested parties could be exposed to financial liabilities beyond those ever encountered to date. The magnitude of losses would be nearly impossible to predict.

Local law typically prescribes a time limit for bringing claims and this often extends to 30 years. The length of this limitation period may result in difficulties in establishing the causal link between the nuclear incident and the damage suffered, thereby adding to the need for expert opinions and increasing legal costs.

Furthermore, longer exposure to liability could make insurance even more difficult to obtain. The conventions reduce this period considerably (the duration dependant, again, on which conventions and amending instruments have been entered into in a given jurisdiction), balancing the fact that many injuries sustained from nuclear radiation would not become apparent for a considerable period against the need for compensation to be distributed quickly.

(d) Claims in many courts: If there is no requirement that all claims arising from a nuclear incident are heard in the same courts of the same state (as is the case for a nuclear incident that occurs in a convention state6), the interested parties may be called upon to defend or pay claims in a number of jurisdictions.

As well as adding to cost, this creates further uncertainty as liability limitations in time and amount, cost and interest awards, and other aspects of local law may differ depending on the location of the claim. It could lead to forum shopping where claimants perceive that they will obtain a better result in another jurisdiction.

In the event of a nuclear incident, the government of the affected country may step-in to manage the claims process and ensure that one court or tribunal hears the claims of all domestic victims. This would be reactive, meaning that there would be no certainty as to the arrangements that are put in place. It would also not necessarily address any foreign claims.

For interested parties assessing their exposure to liability for a nuclear incident on a project in a non-convention state, there is no single solution that can be applied everywhere. This is because local law will have a substantial impact on the approach adopted. Nevertheless, methods of reducing exposure to nuclear damage liability can generally be considered and applied as appropriate to a given situation. The obvious avenue of protection for an interested party is to obtain robust contractual indemnities against third party claims from creditworthy counterparties and waivers of liability, to the extent permissible under local laws and any convention to which its home state is bound.

Artist’s rendition of Hongyanhe nuclear power plant in China.

In the absence of (or possibly in addition to) sufficient indemnities and waivers, an interested party may wish to insure against potential nuclear damage claims. The levels of insurance would be beyond typical all-risk or professional indemnity policies, and nuclear liability insurers anticipate a significant increase in demand in the coming years.

Ultimately, there are no easy answers to ensuring adequate nuclear liability protection for participants in nuclear projects in non-convention states, given their potential exposure to legal risks. Regardless of the risks, many have expressed an interest in participating in such projects due to the potential rewards of their involvement. The key to successfully balancing the benefits against the risks is understanding the relevant local law and tailoring contractual protections accordingly.

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FOOTNOTES

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1. IAEA, Nuclear Technology Review, Vienna (2008). These projections were made before the financial crisis in late 2008. At the time of writing, no projections had been published that analyzed the consequences of the crisis for nuclear power.

2. There were ten construction starts in 2008: Fangjiashan-1, Fuqing-1, Hongyanhe-2, Ningde-1 and -2 and Yangjiang-1 (all 1000 MW) in China, Novovoronezh 2-1 and Leningrad 2-1 (both 1085 MW) in the Russian Federation, and Shin-Wolsong-2 (960 MW) and Shin-Kori-3 (1340 MW) in the Republic of Korea.

3. The Vienna Convention imposes only a minimum amount of liability, so it is possible that member states may choose to leave liability unlimited in amount, and some states, have in fact, exercised this option.

4. 24 years ago, a nuclear accident occurred at Chernobyl during testing of a reactor. An unexpected power surge caused an explosion that sent radioactive material a kilometre and a half into the sky. The resulting fire caused a prolonged and widespread release of large quantities of radioactive substances.

5. The vast majority of nuclear power plants in operation today worldwide are not covered by the liability regimes the instruments establish.

6. The principle that all claims be brought in the courts of one state will only apply to those victims residing in a state that is party to the same regime or the 1988 Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention.

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ABOUT THE AUTHOR

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Paige Crewson is a senior associate in the London office of Ashurst LLP, a leading international law firm. She is involved in complex energy, transport and infrastructure projects, including advising on new-build and refurbishment nuclear projects in North America and the Middle East.

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