Post on 10-Jan-2016
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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)
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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%
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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
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
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
20
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
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
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
24
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
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 $1billion total project cost (eight project sample)– Nuclear owner involvement requirements higher due to stringent requirements in quality of design and construction– Past relatively low cost of EPC resources and utility’s desire to be lean led many to owners to reduce internal staff– 40% of respondents are building internal capabilities while others are increasing use of third-party owner’s agents – 55% of owners are proactively seeking to build longer term, mutually beneficial relationships with their key EPC suppliers
Implications. Develop robust internal capabilities to help manage risk and complexity of new project structures, including adequate resource dedication to project controls
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7 8 9 10 11
Project Value ($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%
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
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
29
For more information contact
Jim RispoliPresident Project Time & Cost2727 Paces Ferry Road, Suite 1-1200, Atlanta GA 30339 Email: James.Rispoli@ptcinc.com
Richard GoffiPrincipalBooz Allen Hamilton8283 Greensboro Drive, McLean VA, 22102Email: Goffi_Richard@bah.com