Warning to the nuclear industry: beware the gasman

If there are any problems with refurbishment, gas is waiting in the wings ready to replace nuclear generation.

I gave a talk on the status of nuclear power at the CERI Natural Gas conference in Calgary this week and learned a lot about the situation of the Natural Gas (NG) industry. Frankly I hadn’t realized the world had changed so much in a few short years.

The development of increasingly sophisticated and effective technologies for the fracking extraction of gas has led to a profound revolution in gas markets. There are now vast reserves of gas available at low prices. As one person at the conference said “we are awash in cheap gas”. For example, just the state of Pennsylvania has gone from producing about 0.7 Bcf/day (billion cubic feet per day) in 2009 to almost 10 Bcf/day in 2013, a production level similar to that of Alberta. That state has gone from an importer of gas to a major exporter in a few years.

Such rapid and dramatic changes have come about from the fracking exploitation of large areas of gas deposits (“plays” as the gas people like to call them) such as the Marcellus and Utica plays in the US northeast just to the south of lakes Erie and Ontario. Consequently the geography of gas markets has shifted. The gas now used in Ontario is increasingly imported from US Marcellus producers rather than from Alberta.

In the last few years, very large gas deposits exploitable by fracking comparable in size to the Marcellus formation have been identified in north east British Columbia and Alberta notably the Montney and Horn River Basin plays. The BC government is encouraging the export of this gas via pipelines to the coast and then by LNG (Liquefied Natural Gas) tankers to Asian markets. However, this plan requires a big capital investment for new pipelines and LNG terminals and several years to obtain permits for their construction. Until then, this gas is stranded.

Therefore, Canadian producers are looking hard for new markets for large amounts of cheap gas. Electricity production is one possibility. Alberta will likely replace its current coal-fired generators with combined cycle gas generation but this would make only a small dint in the available supply. Replacing Ontario’s nuclear generators with gas-fired generation would consume a lot more gas. One panelist at the conference openly expressed the view that if refurbishment failed (with the implicit hope that it would) then a significant opportunity for gas would arise.

In the nuclear industry, we’ve always been told gas wasn’t a feasible base load generation option for Ontario because there wasn’t enough gas and it would cost too much. The revolutionary changes in gas supply and pricing mean that neither statement is true any longer. Now it would be possible to negotiate long (say 30-50 year) attractively priced gas contracts to generate electricity at rates competitive with today’s nuclear plants. Combined cycle natural gas generating plants can be built rapidly (about 2 years from green field) at low capital cost (about $ 1 billion for 800 MW) for electricity at similar wholesale or lower rates to nuclear plants. It appears to me that such a transition from nuclear to gas would now be feasible. I would imagine this issue is discussed in the Bruce Power board since it is partly owned by Trans Canada, a major player in gas and gas transmission.

Of course, nuclear generation still has the advantage that unlike gas generation it doesn’t produce green house gas emissions. However, if the refurbishment projects start to incur large cost overruns and schedule slippages, I’m not sure how well the climate change argument would hold up with politicians and the public. Incidentally, it seems Quebec hydroelectric exports to the US north east are declining making another a source of “green” electricity available.

The refurbishment projects must be delivered on time and on budget for Canada’s nuclear industry to survive. Complacency based on past attitudes such as “they need the reactors back on line so they’ll pay anything” would be fatal with the gasman watching so closely.

Reactor Costs – Checking out a bad analogy

The Canadian Nuclear Association has come up with an analogy to address the high capital costs of nuclear plants. It goes something like this:

We could live in a hotel with no upfront capital costs but most of us choose to pay a high initial capital cost to live in a house.

OK so it sounds cute but in my opinion comparing housing options has nothing with do with building nuclear plants. However, it does inspire me to pursue this capital cost argument a bit further.

Consider that a nuclear plant is built for $10 billion overnight cost. The latter means that not only the labour and material costs but also the cost of the funds borrowed during the time it takes to build the plant are all rolled into one overnight cost. The reactor cost quoted is not unreasonable and is probably a good guess for an Enhanced CANDU 6 (EC-6), the most likely candidate for Ontario’s new reactors.

Since we are talking about the housing analogy let’s go to amortization tables and find that the monthly mortgage payment at a 5% discount rate is about $5.34 per $1,000 borrowed in order to pay off the principle and interest in uniform payments over 30 years which was is the amortization period normally used for Ontario reactors. Applying this to the overnight cost we obtain an annual mortgage payment of $641 million.

Let’s assume that the plant is rated at 700 MWe (an EC-6) and it operates at 90% capacity factor. That gives an average annual electricity production of 5.52 billion kWh and thus, to cover the capital cost alone would require a little less than $0.116 per kWh. To this we would have to add O&M, fuel costs, decommissioning and used fuel management allowances and, since we are talking about a CANDU, a provision for refurbishment after 25-30 years.

The wholesale price of electricity in Ontario at periods of normal demand is around $0.02 to $0.04 per kWh. Roughly speaking Ontario Power Generation gets about $0.04 and Bruce Power about $0.06 per kWh wholesale for their generation. The consumer pays about $0.12 per kWh after transmission and distribution costs are added plus subsidies for renewables and debt repayment charges for past reactor construction. The foregoing numbers are a great oversimplification of a complex market structure superimposed over a lot of generally dumb political decisions but they do give us a basis for a rough comparison.

What jumps out at us immediately is that a $10 billion EC-6 doesn’t fit in the current economic framework for electricity in Ontario. Just paying the mortgage means the electricity produced is more than two to three times current wholesale prices before any add-on costs. Of course, there are many ways to play with the assumptions and juggle the numbers. Project finance and accounting experts know a myriad of dodges and tricks to come up with any cost of electricity one might desire. Low balling the initial cost to get the project approved is almost standard in the industry but can be counteracted to some extent by Blackett’s observation that the announced project cost should be multiplied by π to estimate the final project cost.

I like the following quote by David Fessler writing about investing in uranium (Jan 29, 2013)

“With regard to plant construction costs, natural gas is to nuclear as Wal-Mart is to Saks Fifth Avenue.”

This observation is proved yet again in Ontario. To fit current economics it looks like the new reactor capital cost should be in the range of $3-5 billion which won’t happen. (The capital cost of a comparable natural gas plant would be in the order of $1 billion but after that the economics depends on gas prices.) The usual way of getting around paying realistic amortization on the high capital costs of reactors is to have a government as your banker/guarantor which historically has proven to be the only feasible way of building them.

This also explains why refurbishing existing reactors to extend their useful lives is a much more attractive proposition economically than building new ones. In Ontario we’ve already paid for many of the older reactors but I hasten to add that we are still paying on our monthly electricity bills the construction debt for the four Darlington reactors, completed some 20 years ago.

Maybe the “hotel” in the CNA analogy is natural gas although there are comparatively lower capital costs? Strong reasons for building nuclear plants include mitigating climate change and reducing harmful pollution from fossil fuels but attractive economics isn’t one of them. However, in my opinion government subsidizing of nuclear power, as is done for wind and solar energy, is completely justified and necessary.

The house/hotel analogy just draws attention to this reality and in my opinion should shelved by advocates of nuclear power.

Premier of Ontario Resigns – Nuclear Fallout

On Oct. 15 Dalton McGuinty announced he will resign as Premier when a successor is chosen, presumably so he can spend more time lying to his family.

 McGuinty’s departure could well have serious consequences for nuclear power in Ontario.

For those who don’t know him, McGuinty is almost a dead ringer for the Norman Bates title character in the classic Hitchcock movie Psycho. I can recall watching it in a Halifax movie theatre around 1960 as part of a group of navy cadets. We thought we were really macho but Psycho scared the crap out of us. That made me leery of McGuinty from the beginning and as it turned out I was right.

For some nine years he presided over an incompetent and scandal-ridden government shrouded in secrecy. Fittingly the last straw was the expensive cancellation of two gas powered generation plants under construction that McGuinty admitted was to ensure the election of members of his party in constituencies surrounding the plants. This was too much for even a passive public to take. The provincial parliament forced the release of some 56,000 pages of hitherto secret documents on the gas plants which apparently paint a dismal picture of government manipulations.

Unfortunately nothing was released concerning the government’s nuclear activities or its renewable energy policies. There were rumours of energy decisions made by a strange bag of motley types: a particularly strident renewables maven, a German energy Munchausen, a cabinet minister with only a fragile attachment to reality, and blowhard industry executives who successfully insisted on secret deals claimed necessary not to impair their competitive positions. Enormous mistakes were made in terms of granting absurdly long-term contracts, sole source contracts, defying the World Trade Organization to  force green energy jobs in Ontario, and ironically ignoring the input of the bloated multiple-agency energy bureaucracy they had set up which merely became grazing grounds for overpaid bureaucrats and consultants.   Energy is a real mess in Ontario.

So what will happen now? The least negative outcome is an even longer delay in starting construction of the new build reactors. The worst result is a decision to drop them altogether and perhaps postpone/cancel the refurbishment of Darlington. Assuming McGuinty’s party will be defeated in the election likely next year neither of the other parties is particularly keen on nuclear power. The NDP has long opposed it on ideological grounds but the big surprise is that the PC party, up until now a traditional supporter of nuclear power, has recanted and is now talking about importing hydroelectricity from neighboring provinces instead of more nuclear.

Overlaying the gloomy political picture are increasing qualms in the business community about the economics of nuclear particularly when compared to natural gas. This coupled with the complete inability of the nuclear industry to finish projects within a factor of two of the original budget and schedule is creating doubts in influential circles. The decision not to refurbish Gentilly is a recent example of where these perceptions lead.  It’s not so much McGuinty’s departure itself that will be the problem but unfortunately the precipitation of factors already out there occasioned by it may well result in a new negative attitude toward nuclear power on the part of decision makers.   I’m afraid the future of nuclear power in Ontario (and that essentially means Canada) is looking very grim indeed.

Korea to the Rescue?

Let’s play join the dots. 

The Ontario government announced last week a deal negotiated in secret with Samsung and KEPCO (Korean Electric Power Company) to build wind turbines and solar panels in Ontario. Some will be installed to generate power in the province buoyed by the available green energy subsidies and others will be manufactured for export.

KEPCO has just sold four of its APR-1400 reactors to the UAE (United Arab Emirates) for about $20 billion US   under a mostly fixed price contract. Around $5 billion a copy is a real bargain price for a Generation III+ reactor.  This sale is the first shot in an ambitious campaign announced by the Korean government to capture 20% of the world reactor market. Incidentally, losing this sale was a real blow to AREVA who were outcompeted by the Koreans and one can guess that the days of the no longer formidable Anne Lauvergeon as AREVA CEO are numbered.

The APR-1400 is an advanced light water reactor based on a design by Combustion Engineering called the System 80. The Koreans have used System 80 as the basis for a domestic Generation III reactor, the OPR-1000, of which six are operation and four under construction. The APR-1400 is essentially a System 80+ design. Two are now under construction in Korea with six more planned.   

As our readers will recall, Korea operates four AECL built CANDU 6 reactors at its Wolsung power station. The first of them, on stream in 1983, is now being refurbished in part by AECL.  Canada and Korea have a continuing close and productive collaboration in the nuclear area arising from the Wolsung projects.

Another recent development was the positive outlook for the sale of a HANARO research reactor from Korea to Jordan. Sales of research reactors are also part of Korea’s aggressive marketing plan. The essential technology for HANARO was transferred to Korea by AECL during the negotiations for the sale of the last three Wolsung CANDUs. Although as I understand it, HANARO doesn’t mean “Maple that works” in Korean that’s exactly what it is.

I see a real constellation of possibilities offered by the above.

  • Is the APR-1400 a feasible power reactor choice for Ontario?
  • Would a HANARO reactor be a feasible research and isotope production platform for Canada?
  • Is KEPCO an aggressive and successful player that could take over AECL and run with it?  

I believe that the answers are, if not a straight “yes”, at least a “let’s seriously look at it”. Given the penchant for secrecy, perhaps unknown to us these ideas are already being considered by governments. In any case, Korea would make an excellent nuclear partner for Canada.

Refurbishment: maintaining Canadian nuclear expertise

If it ain’t broke, we didn’t build it.

 

Well not really, it just seems that way.

 

The need to replace the pressure tubes in CANDU reactors after 25 years or so of operation has always been considered a significant disadvantage of the design. Retubing is very complex since the tubes are integral parts of the reactor core. The whole operation must be done in high radioactivity fields in cramped spaces within the reactor confinement structure. Special remote handling tools and techniques need to be developed on a custom basis since each reactor will be somewhat different. To make matters even more complicated, often the owners “take the opportunity” to replace many other components, steam generators for example, while the reactor is down. The whole process has come to be called refurbishment.

 

To be fair other types of reactors also need mid-life repairs. In the past ten years or so the tops (lids) of several US light water reactor pressure vessels have had to be replaced due to premature corrosion. This is a big undertaking in itself but is still a much smaller job than retubing a CANDU. Many US reactors are licensed for 40 to 60 year lifetimes and the possibility of an 80 year or longer lifetime is being researched. 

 

Refurbishment of CANDUs has had a chequered history. The first two Pickering reactors had to be retubed in the 1970’s because a poor alloy was originally selected for the pressure tubes. This set the precedent for refurbishment as an expensive and lengthy undertaking. Refurbishing all four of the Pickering A reactors by OPG cost at least $3 billion total for just two of the reactors. It was subsequently decided that refurbishing the other two was too expensive and they were essentially shut down permanently.  Bruce Power has been soldiering on for the last few years refurbishing two or three of the four Bruce A reactors at a total cost apparently approaching $4 billion. The New Brunswick reactor overhaul, as reported previously in this blog, continues to be over budget and is lagging months behind  schedule with no end in sight.      

 

As for future CANDUs, it’s disappointing to me that the ACR -1000 design envisages refurbishment after 25-30 years. My hope was that they could have avoided this problem by designing more robust pressure tubes. It could be more even difficult to retube an ACR (if one is ever built) because the core has much smaller dimensions – hell in a very small place?

 

In spite of all its problems, there is an upside to refurbishment. With no possibility of building new reactors for five or ten years or more, it’s the only game in town for Canada’s nuclear industry. 

 

The funding for these projects buys goods and services provided by the many companies, great and small, that comprise the nuclear industry. Without it many of them wouldn’t survive.  Cost overruns are mainly labour costs which keep highly skilled engineers employed; preserving the specialized expertise needed to eventually build new reactors. Furthermore, it is apparent that even though refurbishing an existing reactor is costly, it is still much cheaper than building a new one.

 

So roll on refurbishment, it will likely continue to be the sustaining activity of our nuclear industry for years to come.

Ontario: Stop the Nuclear Renaissance we want to get off.

Have the wheels fallen off the Nuclear Renaissance in Canada?

 

The Ontario government has announced that it’s suspending its competition for new nuclear reactors because only the AECL bid met its requirements but even so their price was much too high.

 

Media reaction was muted and at first many including me assumed the suspension to be a political ploy on the part of Ontario government to induce the federal government to subsidize its new nuclear plants. In fact, many approving noises were made in the media, mainly making the point that there’s no particular need to rush to a decision. This because electricity demand is declining in Ontario due to the recession (but for how long?), additional generation facilities (including refurbished nuclear stations) are due to come on line in the next few years and the delay will give us time to see how other supply choices work out.

 

However, rumours (or more likely deliberate leaks) are now emerging that the bids received were very high. One report said that the AECL bid was $26 billion for two ACRs. That in my view is absurdly high.

 

So what are the facts? As regular readers of this blog will guess, the aspect that annoys me most about the Ontario competition is the continuing secrecy and lack of transparency surrounding the whole process.

 

For example, we need to know such things as:

  • Why were the AREVA and Westinghouse reactors rejected?
  • Did the evaluators consider the ACR technically superior to the other two reactors?
  • What were the prices quoted for each of the reactors?
  • What does the Ontario government consider a reasonable price as compared with the AECL bid price?

General answers to these questions and others must be forthcoming.  After all the citizens of Ontario have spent a lot of money on the answers although of course we’ll never know how much. We don’t need to know a high level of detail. Nevertheless, we must be told enough to have confidence in the soundness of the judgment that was made.

 

In the end it may be that the prices of new nuclear plants have simply become so high that few jurisdictions can afford them.  If Ontario can’t afford new reactors then the same must hold for New Brunswick, Alberta and Saskatchewan. In that case there will be no Nuclear Renaissance in Canada which would be a shame since we need this energy option but not at any price.    

ACR-1000 Cost Overruns Already?

Team CANDU, the consortium formed to construct the ACR-1000, is asking the federal government to cover cost overruns on ACR-1000 construction years before even the first shovel goes in the ground.  Wow, is that ever a vote of confidence in the design!

Like many others, I had the impression that Team CANDU had sufficient financial weight of its own to cover any budget slippage.   Surely industrial heavy weights such as SNC-Lavalin, Babcock & Wilcox Canada, and GE-Hitachi Canada ought to be able to absorb some of the budget overrun. AECL, the other Team CANDU partner, is an agency of the federal government and at least theoretically has access to the huge resources of the feds.

If Team CANDU is issued a blank check by the feds, apparently what they want, what incentive will they have to stay on budget? It looks like an open-ended cash-for-life deal. An unwillingness to take any risk would tell me they have no tangible commitment to the reactor.

Team CANDU complains that Westinghouse and AREVA have government subsidies and that makes them favoured. Aside from the fact that AECL, a federal government agency is doing all the development and design of the ACR-1000, the real problem is that AREVA‘s EPR and Westinghouse’s AP1000 are so much closer to realization than the ACR-1000. Chances are the wrinkles in AECL’s two competitors will all be worked out in other countries and at no expense to Canadians before construction even starts on the first ACR-1000. Nothing in the way of federal subsidization can make up for that gap. 

The financial model that I would prefer is firstly that the bid price accepted by Ontario be realistic. (It’s necessary to state this because Ontario Power Authority tosses around prices of $3 billion per reactor, low balling by a factor of around two.) Let’s say the actual bid price is about $5 billion for an ACR-1000. As first of a kind construction, it’s likely that it would be over budget by at least 50%, giving $7.5 billion as the true cost and even that’s being very optimistic.

In order to be credible Team CANDU must absorb some of the inevitable loss on the first one built. For example, a billion or two of the overrun would be a reasonable fee for the experience gained especially when divided between the five large corporations. Otherwise Team CANDU is just making political noise to get a risk-free government subsidy for an open ended project.   There’s nothing unusual about that and we Canadians have seen that many times before but it just doesn’t bode well for the fate of the ACR-1000.

Sad to say AECL’s abandonment of the MAPLE reactors raises a finite risk that the first ACR-1000 might never be successfully completed.   I’d like to see the Team CANDU partners take on some of that risk. Personally, I wouldn’t give Team CANDU a nickel unless they ante up a sizeable chunk of their own cash.