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

Energy Drivers, Challenges, and the Future of Nuclear PowerPresented to the Society of American Military Engineers

Jim Rispoli Chris Honkomp

Atlanta, GA Austin, TX

February 2010

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

The US electricity market is supplied from a variety of sources, but largely depends on a coal baseload

Regional Electricity Generation by FuelTW hours

TW-hr

Source: EIA, BAH Analysis

NERC Regions

4

Demand forecasts show many regions of the country dropping below target reserve margins by 2017

US Summer Reserve Capacity Margins by NERC Region

Ca

pa

city

Ma

rgin

s (%

)

Note: Includes uncommitted resources

Source: NERC, BAH Analysis

15%

TexasWestern US

FloridaUpper

Midwest

NY-NE Midwest-PA-NJ

Southeast

South Central

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

Na

tura

l Ga

s S

up

ply

(tc

f)

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 BasinNYMEX Price Required for 15% IRR

$ /

MM

BT

U

6

The world’s major reserves of natural gas are located outside of the US, in similar regions that are oil rich

Source: BP, Booz Allen Analysis

ME (ex. Iran) Russia ROW Iran Non-ME OPEC USA TotalReserves, TCF 1603 1576 1361 981 528 211 6261Global Share 26% 25% 22% 16% 8% 3% 100%Production, TCF/Y 24 59 124 11 14 53 284R/P - Years 68 27 11 91 37 4 22

Global Oil Reserves, 2007(TCF)

TCFOf Reserves

1,603

1,576

1,361

981

528 211 6261

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

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

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Note: Carbon Price = $30/tonne, Natural Gas Price = $7/MMBTU in 2008 & $10/MMBTU in 2015

Levelized Cost of Electricity by Technology

¢/k

Wh

…and costs prevent renewable power from filling the larger base load gap

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

Many utilities are pursuing nuclear options, with a growing list of license applications submitted

Count of Expected New Nuclear Power Plant Applicationsby # of New Units and State

Source: NRC

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

8.0

8.5

9.0

9.5

10.0

10.5

40

20

0

50

Build Pulverized Coal

Build NGCC

Build Nuclear

11.0

10

30

5.5

6.0

6.5

7.0

CO

2 P

rice

($

/to

n)

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 operationSource: Energy Economic Database, NRC

Co

st

(1,0

00

Mw

Pla

nt)

(1)

Co

ns

tru

cti

on

Du

rati

on

(M

on

ths

)(2)

$6,000

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The overall level of cost over runs occurring over time was significant, regardless of the timeframe of construction planning

* Estimated rangeSource: EIA

Cost Projections vs. Realized Costs

209%Over

294%Over

348%Over

318%Over

381%Over

269%Over

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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

Est

ima

ted

C

ost

Est

ima

ted

C

om

ple

tion

$4.1 B$4.9 B $5.1 B

Mid-2009

Mid-2010

Early 2012

Note: Plant is single 1,600 MW unit

Where Finland’s Olkiluoto Plant was to be the model “Managed Performance” paradigm, it too experiences these problems

$6.3 B$7.3 B

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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 Agencies5%

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

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 2003Price Escalation

Supply Chain

Labor

NRC Review

Technology

None Low Moderate High Very High

First Wave Second 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 RationaleLikelihood 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

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Most of the problems causing prior adverse cost and schedule performance carry over to the current cycle

Contract Structure

TechnicalCapability

DesignChanges

Financing

Productivity

Escalation

NRCReview

Project Management

PerformanceIssues

Common Problems with Nuclear’s 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

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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

Reg

ulat

ory

Cost

Schedule Quality

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

FinancialPerformance

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

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In each area of uncertainty, owners are taking action to reduce the likelihood of occurrence and the potential impact of key risks

Identified Risks Mitigation 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

SupplyChain

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

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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

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Owners identified a wide variety of owner’s rights as critical to owner success, with a strong emphasis on project oversight

0% 10% 20% 30% 40% 50% 60% 70%

Owner SME

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

A number of discrete dimensions of “owners rights” exist and need to be adequately reflected in the contract

ContractorPerformance

ChangeControl

SpecificationConformance

ContractLimits

ContractorReporting

ContractorPersonnel

ProjectOversight

AuditRights

FeeCompensation

DisputeProtocols

“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

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Owners identified six key success factors and owner capabilities needed in today’s market for “mega-project” success

0% 10% 20% 30% 40% 50%

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

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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 utility’s 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 owner’s 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

0

20

40

60

80

100

120

0 1 2 3 4 5 6 7 8 9 10 11

Project Value ($B)

Ow

ner's

FT

Es

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

Competitive Pricing

High

LowLow High

Trust Based■ Historically stable Relationship■ No explicit future commitments■ No continuous improvement to

challenge status quo■ Limited cost transparency

Past

Trend

■ Purchase Order based interaction

■ No aggregation of spend

■ Negotiate price by SKU

Transactional

Strategic Partnership

■ Long term forward looking relationship

■ Shared and aligned future business strategies

■ Joint improvement initiatives■ Fact based negotiation■ Pricing/cost transparency

Command and Control

■ Demands lower pricing through position of power

■ Directly attacks supplier profit margins

■ Potentially installs supplier resentment

■ Short-term – not sustainable relationship

Coo

pera

tive

Rel

atio

nshi

p

Competitive Pricing

High

LowLow High

Trust Based■ Historically stable Relationship■ No explicit future commitments■ No continuous improvement to

challenge status quo■ Limited cost transparency

Past

Trend

■ Purchase Order based interaction

■ No aggregation of spend

■ Negotiate price by SKU

Transactional

Strategic Partnership

■ Long term forward looking relationship

■ Shared and aligned future business strategies

■ Joint improvement initiatives■ Fact based negotiation■ Pricing/cost transparency

Command and Control

■ Demands lower pricing through position of power

■ Directly attacks supplier profit margins

■ Potentially installs supplier resentment

■ Short-term – not sustainable relationship

Coo

pera

tive

Rel

atio

nshi

p

Source: External interviews, research documents, Booz Allen Hamilton analysis

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%

57%

88%

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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

1 2 3 4 4Planning & 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 owner’s 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

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

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For more information contact

Jim RispoliPresident Project Time & Cost2727 Paces Ferry Road, Suite 1-1200, Atlanta GA 30339 Email: [email protected]

Richard GoffiPrincipalBooz Allen Hamilton8283 Greensboro Drive, McLean VA, 22102Email: [email protected]