Worldwide Nuclear Commerce: Good News and Bad News

Estimates of new worldwide nuclear capacity by 2050 span an order of magnitude: from 67 GW to 740 GW. Regardless of the actual capacity built, it represents a decent chunk of business. Given that outlook, despite a weak market for nuclear projects in the U.S., experts say the American nuclear industry has no reason to be dejected—as long as it’s prepared to play in the global marketplace.

It’s a hoary setup for a joke, but it’s no joke in talking about nuclear power. When it comes to worldwide prospects for nuclear expansion, there is good news and there is bad news.

The bad news is found in the richest neighborhoods of the developed world: the U.S., Europe, and Japan. None of these markets show much, if any, prospect for growth for new nuclear power. Some, Japan and Germany in particular, are on an atomic energy downslope.

The good news? The rest of Asia, the Middle East, and some countries of the former Soviet Union all look positive for new nuclear development. China and India are engaged in big expansion programs. Turkey (see the story on Turkey’s nuclear ambitions in this month’s Global Monitor), the United Arab Emirates (UAE), Saudi Arabia, Jordan—all bullish on nukes. Poland and the Czech Republic also have begun the multi-year process of acquiring new nuclear power plants.

Is There a Role for U.S. Nuclear Companies?

When it comes to U.S. companies’ competitive position in the worldwide market, there is good news and there is bad news—that old refrain again. The good news is that America, historically the leader in worldwide nuclear commerce, is still widely admired for its nuclear technology and its culture of safety. The rules and regulations of the Nuclear Regulatory Commission (NRC), despite carping from the U.S. industry, are the gold standard for the rest of the world. That gives the U.S. an edge, although its preeminent position in global nuclear commerce is slipping, by all accounts.

The bad news for U.S. nuclear vendors is that the market for new nuclear plants around the world is no longer a U.S. monopoly. It’s a complicated, global market with well-equipped, well-financed, and well-managed competitors, primarily in Japan, Russia, South Korea, and, potentially, China. It’s unclear who is in the lead and who might prevail.

A Truly Global Market

This “good news/bad news” tale is the take-away from this year’s annual Platts nuclear energy conference, held in downtown Washington in early February, in the aftermath of an ice storm that left hundreds of thousands of electric customers without power in the territory to the north and west of the nation’s capital.

Mark Herlach, a veteran nuclear industry lawyer with Sutherland Asbill & Brennan, told the Platts crowd that the world market is a “counterweight” to the slumping prospects for nuclear in the U.S. and the developed world. U.S. vendors of nuclear technology must look elsewhere for business growth. It is there to be found. “The international market is absolutely essential for the continued health of the U.S. nuclear industry,” he said. Export opportunities for U.S. firms, he added, “are quite significant,” with some 70 reactors under construction worldwide and more to come.

How big is the world market? Nobody really knows, said Craig Piercy, the Washington representative for the American Nuclear Society (ANS). He noted that the International Atomic Energy Agency has come up with estimates of new nuclear capacity by 2050 ranging from a low of 67 GW to a high of 740 GW. With a spread that wide, it’s clear that precision in this forecast is considerably less than in the seven-day forecasts commonly seen on the Weather Channel.

Regardless of the forecast imprecision, said Jonathan Hinze of the nuclear consulting firm UxC, “Nuclear is still in a growth phase.” Only that’s not in places where it has been in the past. Today, 30 countries have civilian nuclear power plants operating. Of those, he said, “20 are in a steady state or decline.” The remaining 10 are in an “expansion phase.” On top of that, some 20 countries could turn out to be newcomers to nuclear, although only 10 look like prospects for development before 2030. According to Hinze, the growth markets, accounting for two-thirds of the additions for “the next decade or so,” are China, Russia, India, and South Korea.

The catastrophe at Japan’s Fukushima station, said Hinze, has cut deeply into the prospects for new nuclear. While UxC sees nuclear growing by 60% by 2030, that represents a 17% decline from its pre-Fukushima prediction. (Other reasons for nuclear’s rough road are addressed in the sidebar.)

Driving Factors for New Nuclear Power in the U.S. and AbroadIn a conversation between Edward Kee, vice president of NERA Economic Consulting and a long-time observer of nuclear power issues worldwide, and POWER Contributing Editor Kennedy Maize, Kee stressed that these are his views, and may not be the same as the views of his NERA colleagues or clients.

POWER: What is the most important factor in determining whether new nuclear capacity will get built in any given country?

Kee: The most important factor for a nuclear new build decision is how the cost of electricity from a nuclear project compares to the cost of electricity from other sources.

The availability and cost of alternate generation fuels in a region or country is a primary driver of this comparison. In North America, abundant and cheap natural gas prices, combined with low and predicable capital cost for [combined cycle gas turbine] plants make gas-fired CCGTs a low-cost electricity option. In countries or regions that rely on imported generation fuels (for example, Korea and Japan), power plants burning imported coal may have lower costs than plants using imported [liquefied natural gas], but nuclear electricity may be the lowest cost option.

Government investments in a nuclear power project depend on the commitment of the government to the project. In theory, this should be based on an [integrated resource planning] process that is similar to those used for regulated utilities. But the government utility is likely to be a nonprofit entity with financing through government-guaranteed debt, lowering costs. The government may also see benefits from a nuclear power project that go beyond the electricity sector, including increased energy security (that is, less dependence on imported fuels), development of nuclear industrial capability, added domestic jobs, and other factors. For some governments, a nuclear power program may also be a part of a general national effort to move the economy to a higher level of technology and skills.

POWER: What about merchant plants? Can new nuclear plants get built in a market environment that is based on short-term, spot market prices for energy?

Kee: Any nuclear power project is much harder in restructured electricity markets. The difficulty is even greater if the only revenue for a nuclear power project must come from the electricity market (that is, a merchant nuclear project). No merchant nuclear project has been developed. The trend appears to be toward revenue guarantees, loan guarantees, and other mechanisms to firm up revenue and lower costs for nuclear projects in electricity markets.

All existing nuclear power plants were built as either regulated utility assets or as government utility assets. In the traditional regulated and government industry approach to the electricity industry, long-term planning was done to develop capacity expansion plans to meet reliability, cost of service, and other objectives.

An existing and operational merchant nuclear project may be profitable when electricity market prices are high, but that does not mean a new nuclear power plant will be profitable. Electricity market prices in 10 years, when a new nuclear plant would enter commercial operation, may not be high enough for profitability. There is even less certainty about electricity market prices during the nuclear power plant’s 60-year commercial operating life.

The UK Hinkley Point project may provide an example of what must be done to get a new nuclear power plant built in an electricity market. A package of investment incentives (for example, long-term [contracts for differences] with high strike prices, loan guarantees, etc.) are intended to provide long-term financial certainty for the Hinkley Point investment. The UK Electricity Market Reform (EMR) process is intended to encourage and guide investment in nuclear power projects. Decades of a market-based investment approach left the UK with a thin reserve margin and no replacement capacity for its soon-to-be-retired nuclear fleet.

The UK EMR and the Hinkley Point deal are considered a massive intervention in the electricity market. The UK was one of the first countries to restructure its electricity industry (in the early 1990s) and it now appears to be one of the first countries to make significant modifications to the electricity market model needed to ensure appropriate generation investment.

POWER: Is the cooperative, Finnish approach a useful mechanism for structuring the financing of a new nuclear build?

Kee: TVO and the Finnish Mankala structure is a viable approach to developing and owning nuclear power plants, as demonstrated by the TVO projects at Olkiluoto (OL1, OL2, and even OL3). The OL3 nuclear project has project development problems that are separate from and not caused by the TVO corporate structure and financing approach.

The Finnish Mankala approach allows energy users (including private for-profit companies) to join together to own a power plant, with the owners sharing the costs and receiving a share of the power output, without tax issues. This approach is similar to the U.S. generation and transmission (G&T) cooperative approach, except that the members of U.S. G&T cooperatives are all nonprofit entities.

POWER: Some countries have pushed exports of their technologies and nuclear vendor services. Is this wise?

Kee: If the benefits to the country implementing an export push strategy are greater than the costs, this may be a winning strategy.

For the U.S., the options available to push exports are largely limited to supplying Export Credit Agency loans to non-U.S. buyers of U.S. nuclear technology. Other countries, especially those with a government-owned nuclear vendor, have more options available to push exports.

Government-owned companies in the nuclear sector compete with privately owned companies. While a private company seeks to maximize long-term profits, a government-owned company may focus less on earning project profits and more on gaining market share, increasing domestic nuclear industry employment, supporting geopolitical goals, or achieving other objectives.

Also, a government vendor may be able to take commercial risks that a private vendor could not take. When private firms compete head-to-head with government-owned firms in the world nuclear power market, the private firms may have difficulty.

Bob Evans of Enercon Services said he sees a slowdown in international growth for nuclear, particularly among “new entrants” to the nuclear club. The causes are shifts in political support; difficulties in finding capital; market forces associated with competing technologies, such as gas and renewables; and an “apparent” declining interest in low-carbon technologies. Countries continue to “talk the talk” of carbon dioxide reduction, he indicated, while being unwilling to “walk the walk.”

Specifically, noted Evans:

  • The Czech Republic in 2012 said it wanted to add units to the Temelin station and is evaluating bids. But the government has changed hands, and the program has slowed. Evans said it’s probable that a decision could come in 2014–2015, but that may be unraveled by a lack of political will.
  • Poland says it wants to build four nuclear units by 2020, to overcome that country’s dependence on local lignite and imported (from Russia) natural gas. But the Poles “have announced delays in the plans for issuing a tender,” in part because national elections are this year. So Evans said he doubts Poland can pull off the trick of new nuclear by 2020.
  • Vietnam has a very ambitious program to build eight to 10 units over the next 15 years. It has signed agreements with Russia and Japan. But the country recently announced a two-year delay for the first units and said it will develop 5,000 MW of new gas-fired capacity using offshore production.
  • Jordon has solicited bids for 1,000 MW of new nuclear capacity and picked Russia’s Rosatom as the vendor. But the government recently announced a two-year delay in the project, said Evans, because Jordan probably doesn’t have enough money to get it going, even though Russia is offering customers a “build, own, operate” arrangement, which means the Russians will finance the deal.

“Overall, it looks like further delays for new entrants” into the nuclear generation family, said Evans, although there are some positive developments in the UAE, the UK, Turkey, Saudi Arabia, and Finland.

Even SMRs Aren’t a Sure Bet

Several of the Platts speakers mentioned that successful development of small modular reactors (SMRs) could bring other countries, which don’t need the size and cost of conventional 1,000-MW and larger plants, into the nuclear club. South Africa, for example, invested heavily in the small pebble-bed reactor but abandoned the project in 2010 for financial reasons.

But air seems to be leaking out of the SMR balloon lately. Westinghouse in February announced it would end its SMR project, after a decade of development and many millions of dollars of investment. After losing two attempts to win U.S. Department of Energy (DOE) funding for its 225-MW SMR, the Pittsburgh-based company said it will concentrate on its NRC-certified AP1000 full-scale designs, which are actually being built in the U.S. (four units) and China (also four units). Westinghouse CEO Danny Roderick said, “The problem I have with SMRs is not the technology, it’s not the deployment—it’s that there’s no customers.”

Global Nuclear Trade Politics

Where does the U.S. stand in the now intensely competitive world nuclear market? That’s unclear (an anagram of “nuclear”). The U.S. once possessed a total world monopoly. It owned all nuclear technology and could dispense it at will. That’s no longer the case.

Richard Stratford, who heads the U.S. State Department’s nuclear energy office, sketched out the history of the development of nuclear commerce around the world and of U.S. involvement. It’s a case of moving from total control to being just another competitor in a complex global market.

In the days of U.S nuclear exclusivity—and later superiority, in the 1940s and 1950s through the early 1970s—U.S. law specified that any commerce outside the U.S. had to come through Washington. As Richard Goorevich at the DOE noted, U.S. policy—particularly the Atoms for Peace program, which aimed to spread civilian power technology around the world—was not about economics. It was aimed at undercutting communism and the Soviet Union.

During the early period, noted Stratford, the U.S. used the International Atomic Energy Agency, a United Nations creation, as a “pass-through” on nuclear commerce, with little attention to nonproliferation concerns. But India’s 1974 detonation of its “peaceful nuclear explosion,” using Canadian technology and U.S.-supplied heavy water, changed the dynamics of the U.S. approach to nuclear commerce. The Nuclear Non-Proliferation Act of 1978, and a new Section 123 to the Atomic Energy Act, resulted.

Those legal provisions gave the State Department the task of reviewing agreements for nuclear commerce between the U.S. and foreign countries on a country-by-country basis. It’s a cumbersome, time-consuming process involving careful, sometimes contentious, negotiations with countries seeking access to U.S. nuclear technology. But, said Stratford, it largely has worked.

Congress also created, in Section 57 B of the Atomic Energy Act, provisions for U.S. transfer of nuclear technology to foreign countries. The regulations implementing that provision are in Section 810 of the Code of Federal Regulations. The program is called the 810 program. This is a convoluted process that requires the secretary of energy to sign off on some agreements between U.S. vendors and foreign buyers of peaceful, civilian technology.

Given the cumbersome U.S. law and rules, U.S. nuclear technology vendors feel disadvantaged in global competition with firms such as Rosatom, France’s AREVA, South Korea’s Kepco, and multiple Japanese (and Japanese-American) vendors. The State Department’s Section 123 procedure, and the DOE’s Section 810 process—which are not coordinated, although the two agencies work closely to harmonize their activities—represent to some U.S. vendors a serious impediment.

At the Platts meeting, Donald Hoffman, CEO of EXCEL Services Corp., complained that U.S. vendors face a tilted market. Foreign vendors, often state-owned or state-connected, can use their alliances with their governments to be more nimble. He and others highlighted the ability of the Russians to use state-supplied capital to offer “build-own-operate” deals to foreign countries. The customer only faces the financial risks of buying the power under contract. The U.S. Congress, Hoffman said, must do more to streamline law so the U.S. companies can compete more effectively.

Is this vendor complaint valid? According to the State Department’s Stratford, the cumbersome 123 process has not really been an obstacle to U.S. vendors. He said he could point to no cases where the lack of a state-to-state agreement had derailed an international deal. Instead, he said, it is sometimes the case where the foreign government’s policies have slowed the ability of U.S. vendors to supply nuclear technology to non-U.S. markets.

That’s been the case in India, Stratford said, where the Indian government has a new law that allows the utility to seek damages from the nuclear technology vendor in the case of an accident. In the U.S., the Price-Anderson Act shields vendors from liability, and similar rules operate in most of the world. But India has specifically repudiated this approach. That has vitiated the highly touted 2009 U.S.-India nuclear cooperation deal. The Indian law has also stymied deals between India and Canada.

The real problem for U.S. vendors, noted Craig Piercy of the ANS, is the tension between the old atomic mantra of control versus the new reality of influence. The U.S. can no longer control how the rest of the world develops its nuclear capabilities. But many in Congress in both parties don’t quite get it, Piercy said, so going forward is difficult, particularly when Section 123 agreements must go to Congress for a 90-legislative-day review. That period, Stratford mentioned, is a “term of art.” It really means something on the order of six months or more.

At the same time, the DOE Section 810 technology transfer approvals require traveling a byzantine pathway that includes several other federal agency sign-offs and ends up with the energy secretary himself. The law specifies that the determination by the secretary that the transaction does not harm the interests of the U.S. cannot be delegated to a lower-level agency official.

What’s ahead for U.S. nuclear technology exports? The DOE is revising and streamlining its Section 810 rules, hoping to make nuclear technology transfer easier and more transparent. The State Department is moving ahead on a large number of expiring or new Section 123 export agreements, including Thailand, Norway, Taiwan, Vietnam, Jordan, Saudi Arabia, China, and South Korea.

Will Congress change the law to fast-track nuclear commerce? Not promising. In mid-December last year, Rep. Ileana Ros-Lehtinen (R-Fla.), chair of the House Foreign Affairs Subommittee on Middle East and North Africa, introduced a bill (H.R. 3766) that would make exporting U.S. nuclear technology more difficult. Her bill is aimed at the dispute between the U.S. and Iran over uranium enrichment and the possibility of nuclear weapons proliferation. The State Department’s Stratford said the bill would add seven new conditions to 123 agreements, making it more difficult to approve bilateral export agreements.

Richard Myers at the Nuclear Energy Institute denounced the bill. “If this legislation were enacted,” he said, “it would further isolate the United States from the growing international marketplace—where our pre-eminence in civilian nuclear technologies has long since faded—by unilaterally establishing new terms for U.S. nuclear energy cooperation and trade that many prospective partner countries have already rejected. In just the past few years, contract awards by Vietnam and Jordan for nuclear energy facilities supplied by Russia and Japan show the folly of H.R. 3766’s paternalistic, one-size-fits-all mandate that sovereign nations forswear uranium enrichment and reprocessing.” ■

Kennedy Maize is a POWER contributing editor.