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Energy Drivers, Challenges, and the Future of Nuclear Power Presented to the Society of American Military Engineers PowerPoint Presentation
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  1. Energy Drivers, Challenges, and the Future of Nuclear Power Presented to the Society of American Military Engineers February 2010 Jim Rispoli Chris Honkomp Atlanta, GA Austin, TX

  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 Fuel TW hours NERC Regions TW-hr Source: EIA, BAH Analysis

  4. Demand forecasts show many regions of the country dropping below target reserve margins by 2017 US Summer Reserve Capacity Margins by NERC Region South Central Southeast Texas Florida NY-NE Midwest- PA-NJ Upper Midwest Western US Capacity Margins (%) 15% Note: Includes uncommitted resources Source: NERC, BAH Analysis

  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 ‘All In’ Supply Cost for Unconventional Gas by Basin NYMEX Price Required for 15% IRR Potential demand increase of up to 9 TCF due to carbon/coal regulation by mid-decade $ /MMBTU Natural Gas Supply (tcf) 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 Source: EIA Annual Energy Outlook 2009, Booz Allen Analysis

  6. The world’s major reserves of natural gas are located outside of the US, in similar regions that are oil rich Global Oil Reserves, 2007 (TCF) 211 6261 528 981 1,361 TCF Of Reserves 1,576 1,603 Source: BP, Booz Allen Analysis

  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 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…

  9. …and costs prevent renewable power from filling the larger base load gap Levelized Cost of Electricity by Technology ¢/kWh Note: Carbon Price = $30/tonne, Natural Gas Price = $7/MMBTU in 2008 & $10/MMBTU in 2015

  10. This leaves nuclear power as the most logical resource to fill our future baseload energy needs 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

  11. Many utilities are pursuing nuclear options, with a growing list of license applications submitted Count of Expected New Nuclear Power Plant Applications by # 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 $2 / MMBTU) 60 50 Build Nuclear 40 CO2 Price ($/ton) 30 BuildNGCC 20 10 Build Pulverized Coal 0 7.0 6.5 7.5 5.0 5.5 6.0 8.0 8.5 9.0 9.5 10.5 11.0 10.0 Natural Gas Price ($ / MMBTU)

  13. But previous build cycles’ unexpected results and cost overruns haunt current planning efforts $6,000 Construction Duration (Months)(2) Cost (1,000 Mw Plant)(1) (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 operation Source: Energy Economic Database, NRC

  14. The overall level of cost over runs occurring over time was significant, regardless of the timeframe of construction planning Cost Projections vs. Realized Costs 381%Over 269%Over 318%Over 348%Over 294%Over 209%Over * Estimated range Source: EIA

  15. Where Finland’s Olkiluoto Plant was to be the model “Managed Performance” paradigm, it too experiences these problems $7.3 B $6.3 B $5.1 B $4.9 B $4.1 B Estimated Cost Estimated Completion Mid-2009 Mid-2010 Early 2012 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 Note: Plant is single 1,600 MW unit

  16. To understand these issues, Booz Allen Hamilton interviewed a broad set of “mega-project” participants and analyzed directly relevant research More than 60 documents were collected and reviewed from a variety of sources 42 interviews were conducted with mega-project expert stakeholders Other SMEs • 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 12% Owners Booz Allen SMEs 18% 48% Nuclear Suppliers 2% 10% Industry Associations 6% Government Agencies5% EPCs Levels of Interviewees VP 22% 31% Director 26% SVP 7% 14% Manager C-Level

  17. The findings of that study may again be significant as many underlying conditions are recurring Rationale Area of Uncertainty Likelihood of Occurrence None Low Moderate High Very High • Price escalation occurred throughout the first wave Significant price escalation has occurred since 2003 Price Escalation • 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) Supply Chain • 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 Labor • 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 NRC Review • PSCs adopted adverse prudence decisions that affected balance sheets • PSCs have become risk averse due to the recent history of cost and schedule overruns Regulatory • The first wave started with smaller plants, providing a learning curve • Second wave is starting with large, high priced plants, involving FOAKE Technology 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 First Wave Second Wave

  18. Project Management Contract Structure NRCReview TechnicalCapability Escalation PerformanceIssues Design Changes Productivity Financing Most of the problems causing prior adverse cost and schedule performance carry over to the current cycle Carryover Issues to the Current Cycle Common Problems with Nuclear’s Initial Cycle

  19. To an owner, there are several major areas of uncertainty that jeopardize the financial success of a “mega-project” Financial Risk Build-Up Technology Risk Regulatory Risk Risk • First-of-a-kind engineering • Late engineering / changes in design • Low startup performance • Permit-related cost recovery • NRC licensing • NRC construction inspection program • Political / elections • DOE funding Cost Regulatory Technology Financial Performance Schedule Quality Project Execution Financial Risk Project Execution Risk • Balance sheet exposure • Dilution of equity • Lack of adequate financing • Interest rates • Contractor performance • Cost escalation • Delivery performance • Lack of effective oversight • Vendor coordination • Construction management Source: External interviews, research documents, Booz Allen Hamilton analysis

  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 • 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 • Price escalation of key materials • Price escalation of key components • Labor price escalation • 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 Supply Chain • Delay in delivery of key components • Materials and components out of specification and tolerances Project Execution • 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 • Project site-related risks • Construction and project management risks • 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 • Shortage of craftsmen • Shortage of engineers • Labor productivity lower than expected

  21. In each area of uncertainty, owners are taking action to reduce the likelihood of occurrence and the potential impact of key risks (continued) Technology Issues • 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 • Late engineering generates delay in construction • Changes in design generate delays and additional work • Plant production output falls below expected performance Financial Issues • 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 • Balance sheet exposure • Earnings dilution • Inadequate project finance • Currency risks

  22. Owners identified a wide variety of owner’s rights as critical to owner success, with a strong emphasis on project oversight % Interviewees Identifying Owners’ Rights Owners’ Rights

  23. A number of discrete dimensions of “owners rights” exist and need to be adequately reflected in the contract 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 ContractorPerformance DisputeProtocols ChangeControl FeeCompensation SpecificationConformance “Owners Rights” AuditRights ContractLimits ProjectOversight ContractorPersonnel ContractorReporting

  24. Owners identified six key success factors and owner capabilities needed in today’s market for “mega-project” success Success Factor/Capability % Owners Identifying Success Factor/Capability

  25. Owners identified a high degree of owner involvement and better partnering with EPCs as key factors to leverage Current Relationships and Future Aspirations Owners’ FTEs Against Project Size ($B) Utility – Nuclear Oil & Gas – Alternate Oil Transport – Airport Transport – Light Rail Standard Building Owner Involvement and EPC Relationship Observations and Implications • 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 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 Reported Use of Contracts with Target Costs Target Costs and Performance Incentives Observations and Implications Owners Not Using or Not Reporting Use of Targets • 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 43% 57% Owners Reporting Use of Targets Reported Use of Performance Incentives Use of performance incentives by owner Preference for bonus structure over penalty

  27. Cost Influence Curve Ability to Influence Cost Cumulative Project Cost 100% Higher 1 2 4 4 3 Planning & Design Phase Lower 0% Owners also identified front end loading, risk, and project management as key capabilities needed today for “mega-project” owner success Front-End Loading, Risk Analysis and Project Management Observations and Implications • 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 Risk Analysis

  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 Rispoli President Project Time & Cost 2727 Paces Ferry Road, Suite 1-1200, Atlanta GA 30339 Email: Richard Goffi Principal Booz Allen Hamilton 8283 Greensboro Drive, McLean VA, 22102 Email: