Demystifying the key challenges facing the US nuclear revival

“Those who choose to ignore history are bound to repeat it.” This simple statement summarizes the current state of the nuclear industry. Over the past thirty years, the nuclear industry’s reputation has suffered from persistent fears caused by the scare at Three Mile Island and the Chernobyl tragedy. During this time, a single catastrophic failure at a nuclear plant would have doomed the entire industry. As a result, the nuclear operators promoted information and resource sharing across companies aimed at improving safety and performance, and the outcomes are staggering – the industry currently operates at a 90+% capacity factor and has cut the cost of production in half since the 1980s. Remarkably, nuclear operators have been able to achieve high performance while continually setting new safety records. Until recently few outside of the industry noticed.

The American ‘nuclear revival’ is now a popular topic in the media, as reports over the past year have focused on the rising costs and risks of satisfying the country’s future energy demands. The combination of sustained high oil prices, public concern over fossil fuel emissions and the threat posed by depending on fuel sources from politically unstable countries has led to the desire for renewable energy sources. The challenge facing many forms of renewable energy – such as wind, solar or geothermal power – is that these sources cannot practically scale to meet the nation’s growing needs, which brings nuclear energy to the forefront as a sustainable energy source for our future.

In years past, the media and public has focused on the how to safely dispose of the spent fuel and the Yucca Mountain storage facility enters the discussion. While this is a controversial topic, the debate is more political than scientific. The fact remains that waste has been safely secured on plant sites for decades and new methods and technologies are continually being developed to make storage safer. Other countries have solved the dilemma and the United States government has put forth options to overcome this challenge. Overall, the benefits are clear – nuclear power provides the best source of low-cost, low-emissions energy to the world. While public opinion is beginning to soften toward nuclear power, new nuclear is far from a done deal.

As the industry moves forward, it faces three key challenges:

• Aligning the right incentives to spur investment in new nuclear plants

The industry faces the classic chicken-egg dilemma when evaluating whether to embark on the massive investment required to construct the next wave of nuclear plants and associated infrastructure. And again, history hasn’t been kind to the industry. A classic example is the case of Shoreham Nuclear Power Station constructed in New York that never generated any commercial power, despite the fact that construction was fully completed. Unfortunately, Shoreham fell victim to negative public sentiment in 1989 and never fulfilled its promise of providing low cost power to the energy-constrained New York market. After eleven years of construction and $6 billion of invested capital, the state of New York was forced to intervene to help the utility recover its investment. This is a lesson that few in the industry have forgotten.

As the Chief Financial Officer of one of America’s leading nuclear operators recently pointed out to financial analysts, the risks haven’t changed that dramatically in the past twenty years. The construction of a new nuclear plant represents an extremely significant portion of a utility’s overall enterprise value. Given the current market capitalizations of utilities, a single nuclear plant could consume 10-30% of their overall value of one of these companies. Current estimates place the cost of building a new nuclear plant between $3-5 billion dollars, with a total construction time of seven to ten years from initial permitting to the plant going online. 

Thus, what makes today’s climate ripe for utilities to invest in new nuclear plants? The answer is two-fold:  the recent backing of the federal legislation and the potential profits derived from generating low-cost power in deregulated wholesale markets.

The US government’s Energy Policy Act of 2005 included several provisions that serve as incentives for utilities to begin re-investing in new nuclear construction. These incentives are designed to protect first movers through the three primary phases of a nuclear plant’s lifecycle:

• Construction – cost-overrun support of up to $2 billion for up to six new nuclear power plants;
• Operational – tax credits of up to $125 million per year, estimated at 1.8 US¢/kWh during the first eight years of operation for the first 6,000 MW of capacity;
• Liability – extension of the Price Anderson liability protection through 2025 for NRC licensees.

These incentives clearly benefit the utility that constructs and operates a new nuclear plant; however, they fall short of incenting financiers in the debt and equity markets. Congress remedied this oversight with the recent legislation passed to provide loan guarantees to lenders of up to $18.5 billion for the development of next generation nuclear plants. This amount is in line with the anticipated capital requirements to spur the initial 6,000 MW of the next nuclear wave.

In early November 2007, Entergy made a ground-breaking announcement with its plan to spin off its unregulated nuclear fleet. Management’s rationale was simple: in the commodity markets of the Northeastern United States, the unregulated nuclear plants would be able to generate enough free cash flow to repay debt-burdens and operate as a pure-play growth investment for shareholders. While there are several other factors in play with the transaction, the fundamental reasoning boils down to producing low-cost energy that can be sold into high price power markets. The fact remains – nuclear power is generated at a quarter of the cost of natural gas, which is often the marginal fuel that dictates marginal prices.

• Agreeing upon standards that will continue to promote safety and performance across the industry

Given today’s volatile financial markets, locking in costs is critical to securing project financing in the debt and equity markets. Investors want to avoid the construction delays and design issues that were the Achilles heal during the last wave of nuclear construction. The good news is that today’s technology enables complex modeling of the entire plant and dramatically reduces the cycle time to respond to questions about safety and operational standards.

As a whole, the industry has made significant strides in reactor design since the last wave of nuclear construction. The reactors that will be built in the future were designed with the better/safer concept in mind, and they are expected to perform beyond the current operating standards for safety and reliability. While the advanced nuclear designs have improved the standards of how the automated pieces of the plant will perform, they have not necessarily helped to create an industry-wide standard for how the processes and systems will work to operate the new plants. Today’s large nuclear operators, such as Exelon and Entergy, have grown through the acquisition of companies and plants. As new plants have been added to their operations, the companies have invested significant resources for driving standardization in the name of safety, efficiency and cost savings.

To fully realize the value of standardization and technology, utilities must seek to form strategic relationships with other utilities with the intent of lowering overall costs and meeting construction deadlines. Alliances should be formed based upon the type of plant design being constructed. By doing so, utilities will begin to seek out supply chain networks to source the required raw materials and services to support their construction efforts. The key is to create specialized partnerships where the supplier of critical parts and equipment will work in concert with their customers to optimize the entire construction process.

Such partnerships will require all aspects of engineering, construction and procurement to agree upon the right work and material scope to make up standardized construction modules, which can be thought of as compatible units on steroids. By doing so, and working with an integrated program management function, the strategic partnerships will be able to coordinate development phases across multiple construction sites. This will not only lessen the burden on constrained resources at the construction site, but also on the production lines of the suppliers for the large scale components and parts.

A company that brings these principles to life is UniStar, which is a joint venture between Constellation Energy and EDF to build Evolutionary Power Reactor (EPR) in the United States. In evaluating UniStar’s planned business model, they have formed strategic partnerships with Areva and Bechtel to help drive significant savings from using a standard approach to construction and operations. This is in addition to the savings that are projected from leveraging the EPR’s Generation III technology and design which projects to save one billion dollars over the plant’s lifetime. Once a standard construction format has been approved, UniStar should continue to benefit from reduced construction costs as the Nuclear Regulatory Commission will only have to focus on specific differences between the construction sites.

• Managing the potential construction boom and apparent skilled labor shortage in the industry

Another significant challenge facing the nuclear industry is attracting the necessary human resources to construct and operate the next wave of nuclear generation. The fact that the nuclear industry is facing an aging workforce challenge is well documented. The assumption in many reports is that the aging personnel will retire and completely leave the workforce in the next few years. This however will not be the case. Given the large requirements of constructing and operating plants, experienced people will be needed to screen, hire and train the new entrants into the nuclear labor pool. So, while an employee’s thirty years of experience with a particular company may come to an end, new retirees will find themselves in a position where their skills are in high demand and they will re-enter the workforce as well-paid contractors or consultants.

Again, nuclear operators would be wise to learn from other industries. In the banking industry, companies have perfected a global HR sourcing model that enables them to find people from around the globe. Under the model, candidates are screened and hired centrally before being made available to fill open positions. This helps the banks to centrally understand their supply of people and to balance that against the demand within their organizations. A similar approach could be applied in the nuclear field, whereby recent retirees could be centrally pooled and assigned to consult or work on particular nuclear construction projects as needed.

This model can also apply to craft labor. In the future, a labor market will exist where a boilermaker from Poland or a welder from the Czech Republic could tap a global network to find an opportunity to work on the construction of a nuclear plant in the United States. The HR sourcing model would enable this by identifying the right people and then managing the visa and immigration issues to allow the right worker to perform the right job, no matter how remote the location.

In moving beyond the allocation of resources, the industry must also begin to consider measures to attract new talent from the university system and the broader utilities industry. This starts with designing programs to support nuclear engineering courses at universities and cultivating interest groups. For example, the Swiss Nuclear Society promotes an interest group called the Young Generation Group.  The purpose is to introduce young engineers to experienced industry practitioners and to build a sense of community that will continue to move the industry forward.

As Alan Greenspan once said, “the time may have come to consider whether we can overcome the impediments to tapping [nuclear power’s] potential more fully.” By taking these steps to prevail over the three challenges discussed, the nuclear industry will be fulfilling its potential to become the world’s primary source of low-cost, low-emissions energy.

The article is co-authored by Ryan Sather and Dan Krueger.

Dan Krueger is Global Managing Director of Accenture's Utilities Plant &
Asset Management practice. Dan has been with Accenture 21 years.
daniel.p.krueger@accenture.com

Ryan Sather is a Senior Manager, Utilities Strategy practice. Ryan has
been with Accenture since 1998.
312/693-7015
ryan.r.sather@accenture.com

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