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Energy Drivers, Challenges, and the Future of Nuclear Power Presented to the Society of American Military Engineers Jim RispoliChris Honkomp Atlanta, GAAustin,

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Presentation on theme: "Energy Drivers, Challenges, and the Future of Nuclear Power Presented to the Society of American Military Engineers Jim RispoliChris Honkomp Atlanta, GAAustin,"— Presentation transcript:

1 Energy Drivers, Challenges, and the Future of Nuclear Power Presented to the Society of American Military Engineers Jim RispoliChris Honkomp Atlanta, GAAustin, TX February 2010

2 2 Agenda: Current trends, drivers and challenges in the electricity market Potential and limitations for renewable generation Options and challenges for expanded nuclear power Challenges to the owner to achieve effective project management Questions and answers

3 3 The US electricity market is supplied from a variety of sources, but largely depends on a coal baseload Regional Electricity Generation by Fuel TW hours TW-hr Source: EIA, BAH Analysis NERC Regions

4 4 Demand forecasts show many regions of the country dropping below target reserve margins by 2017 US Summer Reserve Capacity Margins by NERC Region Capacity Margins (%) Note: Includes uncommitted resources Source: NERC, BAH Analysis 15% Texas Western US Florida Upper Midwest NY-NE Midwest- PA-NJ Southeast South Central

5 5 This need could be filled by Natural gas, but it gets expensive to produce domestically Potential Inadequacy of US Domestic Supply in Meeting Demand Natural Gas Supply (tcf) Source: EIA Annual Energy Outlook 2009, Booz Allen Analysis Potential demand increase of up to 9 TCF due to carbon/coal regulation by mid-decade Note: Based on un-levered, after-tax calculation of IRR Source: Multiple company filings including Chesapeake Energy, Pioneer Natural Resources, and Bill Barrett Corporation, press releases and Booz Allen analysis All In Supply Cost for Unconventional Gas by Basin NYMEX Price Required for 15% IRR $ /MMBTU

6 6 The worlds major reserves of natural gas are located outside of the US, in similar regions that are oil rich Source: BP, Booz Allen Analysis Global Oil Reserves, 2007 (TCF) TCF Of Reserves 1,603 1,576 1,361 981 528 2116261

7 7 States are seeking development in renewable power but… States with Climate Action Plans States with GHG Emission Targets State Climate Action Plans States typically form expert advisory panels to review science and review emission sources May seek early actions (e.g., by 2010) and propose emission reduction goals Examine local reduction opportunities such as building efficiencies, uses of renewable energy, pollution prevention Increase public awareness and develop consensus State Climate Action Plans States typically form expert advisory panels to review science and review emission sources May seek early actions (e.g., by 2010) and propose emission reduction goals Examine local reduction opportunities such as building efficiencies, uses of renewable energy, pollution prevention Increase public awareness and develop consensus State GHG Emission Targets California enacted first enforceable state-wide GHG emissions from major industries –Caps emissions at 1990 levels by 2020 Most other states have targeted to reach 10% below 1990 emission levels by 2020 States may regulate internal sources or sources consumed in state State GHG Emission Targets California enacted first enforceable state-wide GHG emissions from major industries –Caps emissions at 1990 levels by 2020 Most other states have targeted to reach 10% below 1990 emission levels by 2020 States may regulate internal sources or sources consumed in state Source: Pew Center on Global Climate Change; Booz Allen Hamilton Analysis

8 8 …the quality of renewable resources vary widely across the US…

9 9 Note: Carbon Price = $30/tonne, Natural Gas Price = $7/MMBTU in 2008 & $10/MMBTU in 2015 Levelized Cost of Electricity by Technology ¢/kWh …and costs prevent renewable power from filling the larger base load gap

10 10 This potential resurgence in nuclear plant construction has captured the imagination of the global nuclear industry … But will this renaissance simply be a repeat of the previous build cycle where plans for hundreds of plants will be overcome by regulatory and economic factors This leaves nuclear power as the most logical resource to fill our future baseload energy needs

11 11 Many utilities are pursuing nuclear options, with a growing list of license applications submitted Count of Expected New Nuclear Power Plant Applications by # of New Units and State Source: NRC

12 12 A combination of higher gas and carbon prices favor new nuclear construction Economic Technology by Gas Price and Carbon Cost (Nuclear Overnight Costs of $4,300 / KW; Coal Price $2 / MMBTU) 60 Natural Gas Price ($ / MMBTU) 5.0 7.5 8.08.59.0 9.5 10.0 10.5 40 20 0 50 Build Pulverized Coal Build NGCC Build Nuclear 11.0 10 30 5.56.0 6.5 7.0 CO 2 Price ($/ton )

13 13 But previous build cycles unexpected results and cost overruns haunt current planning efforts (1) Reflects the median cost of building a hypothetical 1,000Mw nuclear plant at current price of labor and materials (2) Reflects duration between construction permit and operation Source: Energy Economic Database, NRC Cost (1,000 Mw Plant) (1) Construction Duration (Months) (2) $6,000

14 14 The overall level of cost over runs occurring over time was significant, regardless of the timeframe of construction planning * Estimated range Source: EIA Cost Projections vs. Realized Costs 209% Over 294% Over 348% Over 318% Over 381% Over 269% Over

15 15 Observations and Emerging Lessons Learned 70% increase ($3.2 billion) in forecast completion cost from initial estimate 33% increase (18 months) in forecast construction duration from initial estimate Significant decline in experienced talent due to prolonged nuclear construction slowdown –Engineers, craft workers, project managers, manufacturing expertise (castings) Time required for contractors to reach full productivity much longer than initially anticipated Level of employee guidance and oversight necessary, due to inexperience, to ensure quality exceeds supervisory estimates Insufficient time lag between design completion/approval and scheduled construction resulting in overly optimistic schedules Estimated Cost Estimated Completion $4.1 B $4.9 B $5.1 B Mid-2009 Mid-2010 Early 2012 Note: Plant is single 1,600 MW unit Where Finlands Olkiluoto Plant was to be the model Managed Performance paradigm, it too experiences these problems $6.3 B $7.3 B

16 16 To understand these issues, Booz Allen Hamilton interviewed a broad set of mega-project participants and analyzed directly relevant research 42 interviews were conducted with mega- project expert stakeholders EPCs Owners Government Agencies 5% Industry Associations Nuclear Suppliers 2% Booz Allen SMEs Other SMEs Levels of Interviewees Manager Director C-Level SVP VP More than 60 documents were collected and reviewed from a variety of sources U.S. Government sources – Department of Energy – Nuclear Regulatory Commission – Department of Labor – Sandia National Labs Industry associations – Construction Institute – Nuclear Energy Institute – World Nuclear Association – Canadian Construction Institute – ACEC Academic sources – University of Texas – Massachusetts Institute of Technology – University of Chicago Publications – Engineering News Record – Power Engineering Miscellaneous – Bechtel – Standard & Poors – Independent Project Analysis 48% 12% 18% 6% 10% 22% 26% 14% 7% 31%

17 17 The findings of that study may again be significant as many underlying conditions are recurring Price escalation occurred throughout the first wave Significant price escalation has occurred since 2003 Price Escalation Supply Chain Labor NRC Review Technology NoneLowModerateHighVery High First WaveSecond Wave Vendors started going out of business in the 1980s The trend continued and the current situation is worse – 1 supplier for reactor vessel forgings (JSW) Area of Uncertainty Rationale Likelihood of Occurrence Long period of nuclear build inactivity has created a diminished pool of craftsmen and engineers Potential competition for labor due to contiguous and parallel planned projects In the past the NRC required separate licensing for construction and operation The new licensing process (COL) combines licensing for construction and operation of nuclear plants The first wave started with smaller plants, providing a learning curve Second wave is starting with large, high priced plants, involving FOAKE Source: External interviews, research documents, Interview with SME with over 40 years of experience in nuclear power plant development, involved in over 45 U.S. nuclear power plants Regulatory PSCs adopted adverse prudence decisions that affected balance sheets PSCs have become risk averse due to the recent history of cost and schedule overruns

18 18 Most of the problems causing prior adverse cost and schedule performance carry over to the current cycle Contract Structure Technical Capability Design Changes Financing Productivity Escalation NRC Review Project Management Performance Issues Common Problems with Nuclears Initial Cycle Carryover Issues to the Current Cycle Observed Challenges Potential Impact Design Changes NRC Review Escalation Productivity Financing Project Management Technical Capability Contract Structure

19 19 To an owner, there are several major areas of uncertainty that jeopardize the financial success of a mega-project Financial Risk Build-Up Source: External interviews, research documents, Booz Allen Hamilton analysis Technology Regulatory Cost ScheduleQuality Risk Technology Risk First-of-a-kind engineering Late engineering / changes in design Low startup performance Regulatory Risk Permit-related cost recovery NRC licensing –NRC construction inspection program Political / elections DOE funding Financial Performance Financial Risk Balance sheet exposure Dilution of equity Lack of adequate financing Interest rates Project Execution Risk Contractor performance Cost escalation Delivery performance Lack of effective oversight Vendor coordination Construction management Project Execution

20 20 In each area of uncertainty, owners are taking action to reduce the likelihood of occurrence and the potential impact of key risks Identified RisksMitigation Mechanisms Price escalation of key materials Price escalation of key components Labor price escalation Adopt tailored indices and hedging strategies Pre-purchase equipment with long-lead times Use an open book relationship with EPC to understand cost and schedule buildup and drivers Conduct a rigorous cost, schedule and risk analysis leveraging an independent engineer Price Escalation Supply Chain Project Execution Delay in delivery of key components Materials and components out of specification and tolerances Build necessary skills and oversight processes for global sourcing management to protect against issues and delays Leverage demand and relationships to acquire an advanced queue position Leverage modular fabrication to reduce complexity and field work Define and execute robust QA/QC programs Project site-related risks Construction and project management risks Invest appropriate time and resources in front-end loading for project planning and design Embed recurring risk assessment as a management process Build an integrated project management resource model and capability Leverage third-party owner agents to augment internal capabilities Shortage of craftsmen Shortage of engineers Labor productivity lower than expected Develop a model labor agreement with defined escalation rates to minimize exposure Decompose schedule and related work packages to enable productivity target attainment Partner with learning institutions to establish workforce strategy and recruit and train needed staff Labor Issues

21 21 In each area of uncertainty, owners are taking action to reduce the likelihood of occurrence and the potential impact of key risks (continued) Late engineering generates delay in construction Changes in design generate delays and additional work Plant production output falls below expected performance Proactively determine level of plant design completion required prior to starting construction Implement design change control limitations to avoid non-constructability modifications Leverage minimum performance guarantees combined with OEM warranties to help achieve performance targets Evaluate impact of technology changes on interdependent systems and cost and schedule Balance sheet exposure Earnings dilution Inadequate project finance Currency risks Develop a systematic approach to risk and liability identification and mitigation planning Adopt a communications model for maintaining rating agency and bank awareness and confidence Develop appropriate regulatory approaches to minimize financing costs Technology Issues Financial Issues

22 22 Owners identified a wide variety of owners rights as critical to owner success, with a strong emphasis on project oversight Owners Rights Contractor Performance Change Control Specification Conformance Contract Limits Contractor Personnel Contractor Reporting Project Oversight Audit Rights Fee Compensation Dispute Protocols % Interviewees Identifying Owners Rights

23 23 A number of discrete dimensions of owners rights exist and need to be adequately reflected in the contract Contractor Performance Change Control Specification Conformance Contract Limits Contractor Reporting Contractor Personnel Project Oversight Audit Rights Fee Compensation Dispute Protocols Owners Rights Scope Description Contractor Performance: Conditions of performance, reflecting risk sharing, and processes for assessment and action Change Control: Nature of involvement in review and approval of proposed change orders Specification Conformance: Protocols for acceptance and sign-off on technical and operational compliance and design changes Contract Limits: Guarantees and commitments by the contractor with related remedies Contractor Personnel: Extent of review and approval authority for key staff adds and removals Contractor Reporting: Requirements to the contractor for information flow to owner Project Oversight: Role definition for owner and contractor with related methods Audit Rights: Extent of review by owner and expectations on access Fee Compensation: Considerations and processes for assessing and awarding fees Dispute Protocols: Processes and mechanisms for use in issue resolution

24 24 Owners identified six key success factors and owner capabilities needed in todays market for mega-project success Success Factor/Capability Key Success Factors and Capabilities Higher degree of owner involvement Better partnering and relationship-building with EPC Front-loading Thorough risk identification and clear allocation Effective project management Break-up of large contacts into smaller parts Clear stakeholder communication Clearly defined contractual responsibilities Open book policy % Owners Identifying Success Factor/Capability

25 25 Owners identified a high degree of owner involvement and better partnering with EPCs as key factors to leverage Observations. Owner involvement is increasing as is the importance of effective owner-EPC relationships –Owners indicated an average of 20 to 25 internal personnel per $1billion total project cost (eight project sample) –Nuclear owner involvement requirements higher due to stringent requirements in quality of design and construction –Past relatively low cost of EPC resources and utilitys desire to be lean led many to owners to reduce internal staff –40% of respondents are building internal capabilities while others are increasing use of third-party owners agents –55% of owners are proactively seeking to build longer term, mutually beneficial relationships with their key EPC suppliers Implications. Develop robust internal capabilities to help manage risk and complexity of new project structures, including adequate resource dedication to project controls Owners FTEs Against Project Size ($B) Owner Involvement and EPC Relationship Observations and Implications Transport – Airport Oil & Gas – Alternate Oil Utility – Nuclear Transport – Light Rail Standard Building Current Relationships and Future Aspirations Source: External interviews, research documents, Booz Allen Hamilton analysis

26 26 Use of target cost contracts and performance incentives has increased to improve partnering between owners and the EPCs Owners Reporting Use of Targets Owners Not Using or Not Reporting Use of Targets Reported Use of Contracts with Target Costs Use of performance incentives by owner Preference for bonus structure over penalty Reported Use of Performance Incentives Target Costs and Performance Incentives Observations and Implications Observations. Owners use incentives to align owner and EPC objectives on target and reimbursable contracts –Debate exists over whether penalties or bonuses are more effective –Incentive structures need to be carefully designed, sized and tested to meet the specific needs of the situation and to motivate desired behaviors Implications. Performance incentives should be considered if the project is not lump-sum turn-key or fixed price. Care must be taken in design to ensure EPC can control performance and that the behaviors created will help achieve owner objectives 57% 43%

27 27 Owners also identified front end loading, risk, and project management as key capabilities needed today for mega-project owner success Price escalation of key components (turbines, large forgings, valves, etc) Price escalation of key materials (steel, nickel, copper, cement) Labor price escalation - (Engineers and Craftsmen) Delay in delivery of key components (turbines, large forgings, valves, etc) Materials and components out of specifications and tolerances Project site related risks (archaeological discoveries, environmental hazards, unpredictable site conditions) Delays to safety related issues (incidents affecting critical path activities) 100% 0% Lower Higher Cost Influence Curve Cumulative Project Cost Ability to Influence Cost 12 3 44 Planning & Design Phase Risk Analysis Observations. Front-end loading (FEL), risk analysis and project management are becoming more important owner capabilities and keys to mega-project success –40% of owners responding indicated FEL / front-end engineering and design (FEED) as top success factors for managing project costs –Owners noted a comprehensive design effort, completed to an adequate degree (40%+) before construction begins, as a key front-end activity –Owner leadership and investment were noted as central to FEL / FEED success –35% of owners responding indicated risk identification and appropriate allocation as a top success factor –Project oversight was identified by the owners as the factor most important to project success –Owners identified communication of commitments, creation of a detailed owner schedule, using constructability reviews, applying physical progress reporting, and overall performance measurement as critical to project management Front-End Loading, Risk Analysis and Project Management Observations and Implications

28 28 Summary The electricity industry is facing significant challenges from both demand growth, renewable mandates, carbon management and challenges in execution of their capital projects Traditional energy choices may not be effective in the future Nuclear generation has become a much more attractive option The principal challenge to a nuclear renaissance may be ourselves and our ability to make appropriate business decisions, and execute our projects successfully

29 29 For more information contact Jim Rispoli President Project Time & Cost 2727 Paces Ferry Road, Suite 1-1200, Atlanta GA 30339 Email: James.Rispoli@ptcinc.com Richard Goffi Principal Booz Allen Hamilton 8283 Greensboro Drive, McLean VA, 22102 Email: Goffi_Richard@bah.com


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