November 1, 2009

The New Nuclear Fuel Market

Thomas L. Neff, PhD

If the planned expansion of nuclear power materializes, it will amplify demands on a nuclear fuel supply system that is only beginning to recover from decades of neglect. Uranium production, which supplies about 70% of estimated reactor requirements, has increased only 5% since 2005, despite higher prices. However, enrichment — the process of increasing the concentration of uranium-235 atoms in uranium fuel so that it can drive modern reactors — is expanding more rapidly due to technological advances and growth.

The question is: Who will control these expanding markets for uranium and enrichment? Increasingly, enrichment plants will have the ability to take control away from utilities and uranium producers.

Fuel Competition: Uranium vs. Enrichment

Uranium and enrichment are substitutes for each other in the production of nuclear fuel. Mined uranium has only 7 out of 1,000 atoms that are U-235. The enrichment process uses separative work units (SWU) to increase the concentration of U-235 atoms. When uranium prices were low, it was economic to recover only about half of these essential atoms, using fewer SWU and more uranium. However, when uranium prices began to rise a few years ago, it became economic to recover more — using more SWU and less uranium. The potential range of substitution can be as much as 30%.

Utilities typically purchase uranium and enrichment separately. In the past, free contractual flexibilities allowed utilities to decide on the economically optimum mix of uranium and enrichment to make fuel, based on relative prices, by picking the "tails assay," or fraction of U-235 atoms thrown away in the enrichment process. These flexibilities caused uranium and enrichment suppliers to endure punishing swings in demand and prices.

Today, uranium and enrichment suppliers limit such contractual flexibilities. For enrichment companies, this means writing contracts with fixed tails assays. Utilities must deliver a specific quantity of uranium to the enrichment plant in exchange for a specific amount of fuel according to a set "transaction" tails assay that may be quite different from the "operating" tails assay set by enrichment plants.