Edward Kee

Nuclear Power Economics and Markets

IBC - Decommissioning of Nuclear Reactors & Materials 29 – 30 September 2014; Miami, Florida

The NECG slides that follow are not a complete record of this presentation and discussion. The points of view, opinions, and conclusions expressed in this presentation and the accompanying discussion may not be the same as the views of NECG’s clients or the views of my colleagues.

© 2014 NECG

Disclaimer

29 Sep 2014 IBC 1

Program agenda

09.30 Changing face of nuclear economics– Electricity industry and nuclear business models– Electricity market dynamics– Impact of non-conventional natural gas– Renewable sector subsidies

10.00 Market analysis of nuclear power– Nuclear power global activity– Highlights of key markets

29 Sep 2014 2IBC

Changing face of nuclear economics

29 Sep 2014 IBC 3

Nuclearbusiness

model

Electricityindustrystructure

Electricity fundamentals

New nuclear development factors

Politics & public

opinion

29 Sep 2014 IBC 4

Politics and public opinion

Public support not sufficient

Public opposition– May rule out nuclear power (e.g., Austria)– Makes nuclear projects harder

Shapes role of government

Politics & public

opinion

29 Sep 2014 IBC 5

Electricity fundamentals

Electricity system– Long-term investments– Real-time dispatch

Value of nuclear electricity– Linked to other generation options– Availability of alternate fuels is key

Electricity fundamentals

29 Sep 2014 IBC 6

Electricity time scalesfrom seconds to centuries

Before

Physical &

financial contracts

Pre-dispatch

Dispatch & market clearing

Contract settlements

Spot marketprices

Real time system control

Decades

Months

Years

Weeks

Hours

Seconds

Real time

After

Generation investments

Investment returns

Months

Hours

Years

Reserves &

ancillary services

Decades

Real-time: Dispatch to meet demand; minimize system short-run marginal costs

Long-term: Invest to meet demand; minimize total system long-run costs

Electricity fundamentals

29 Sep 2014 IBC 7

29 Sep 2014 8IBC

Nuclear value based onprimary energy alternatives

Source: Figure ES.1; OECD Generating Costs 2010, LCOE in US$//MWh; 5% discount rate

Electricity fundamentals

Nuclear value linked toprimary energy alternatives

Source: Figure 4.10a; OECD Generating Costs 2010, LCOE in US$//MWh; 5% discount rate

South Korea:

Electricity fundamentals

29 Sep 2014 IBC 9

Electricity industry structures

Government-owned electricity sector

Investor-owned regulated utility

Electricity markets

Electricityindustrystructure

29 Sep 2014 IBC 10

Government utility

TRANSMISSION

$

MWh

RETAIL SERVICES

DISTRIBUTION

Government

Citizens andtaxpayers

CONSUMERS

$

System Dispatch

Power PlantsElectricityMinistry

Electricityindustrystructure

29 Sep 2014 IBC 11

Regulated utility

TRANSMISSION

RETAIL SERVICES

CONSUMERS

DISTRIBUTION

Utility regulator

Investors

System Dispatch

Power Plants

$

MWh

Electricityindustrystructure

29 Sep 2014 IBC 12

Electricity markets

TRANSMISSION

$

MWh

RETAIL SERVICESCONSUMERS

DISTRIBUTION

Electricity Market

Investors

Utility regulator

Power Plants

Market oversight

Electricityindustrystructure

29 Sep 2014 IBC 13

Electricity market issues

No electricity market revenue for– Capacity (may be short-term capacity market)– Clean (i.e., no CO2) operation– Long-term asset operation– Stable fuel costs

In US, low natural gas prices lead to lower market prices in on-peak periods

Out-of-market subsidies for renewables leads to distorted and even negative prices

Electricityindustrystructure

29 Sep 2014 IBC 14

Demand

Spot Price

Bids

SMP (high)

Demand (high)

Illustrative trading period (eg, an hour)

Spot price refers tosystem marginal price (SMP)

SMP (low)

Demand (low)

29 Sep 2014 IBC 15

Electricityindustrystructure

Demand

Spot Price

Bids

SMP (high)

Demand (high)

Illustrative trading period (eg, an hour)

SMP with low gas prices

SMP (low)

Demand (low)

29 Sep 2014 IBC 16

Electricityindustrystructure

SMP (high)

High natural gas prices

Low natural gas prices

PlantA

Plant B

Demand

Spot Price

Bids

SMP

Demand

Illustrative trading period (eg, an hour)

Total cost of power –High natural gas prices

Gas-fired uniton margin

Profits

29 Sep 2014 IBC 17

Electricityindustrystructure

PlantA

Plant B

Demand

Spot Price

Bids

SMP

Demand

Illustrative trading period (eg, an hour)

Total cost of power –Low natural gas prices

Gas-fired uniton margin

– lowergas prices

ProfitsLosses

29 Sep 2014 IBC 18

Electricityindustrystructure

Demand

Spot Price

Bids

Illustrative trading period (eg, an hour)

Out-of-market subsidies(e.g., PTC) - distorts bidding

SMP (negative)Demand

29 Sep 2014 IBC 19

Units (e.g., nuclear) bidding into market as price-takers or must-run will pay to operate when SMP is negative

Electricityindustrystructure

Uncertain revenue inelectricity markets

Market investments based on future revenues

Hard to predict future electricity market revenue– Market simulations with range of assumptions (new

entry, fuel prices, demand, market rules, etc.)– Scenarios to reflect major uncertainties and identify

key revenue risks and opportunities

New nuclear time-lines make this really difficult – Revenue starts at COD (10 years after project start)– Project operates for 60 years (or more)

Electricityindustrystructure

29 Sep 2014 IBC 20

Nuclear business models

Government or regulated utility

IPP with power contracts

Energy user cooperatives

Merchant project selling into market

Nuclearbusiness

model

29 Sep 2014 IBC 21

Nuclear project cash flow

0 10 20 30 40 50 60 70 80 90 100 110 120

Cost Revenue

10+ year development and construction period

Illustrative

Uncertain revenue

Liabilities for decommissioning and spent fuel disposition

Prolonged outage possible, with high cost and no revenue

Significant fixed costs (fuel + O&M)

Large and uncertain capital cost

Nuclearbusiness

model

29 Sep 2014 IBC 22

Traditional power projectbusiness models

Government utilityMonopoly utility rates; government guarantees

Regulated utilityMonopoly utility rates; corporate guarantees

Long-term PPA IPP

Ultimate credit sources Owner / Operator

Nuclearbusiness

model

29 Sep 2014 IBC 23

Government utility

TRANSMISSION

$

MWh

RETAIL SERVICES

DISTRIBUTION

Government

Citizens andtaxpayers

CONSUMERS

$

System Dispatch

Nuclear PlantElectricityMinistry PPA

Nuclear Plant

29 Sep 2014 IBC 24

Nuclearbusiness

model

Regulated utility

TRANSMISSION

RETAIL SERVICES

CONSUMERS

DISTRIBUTION

Utility regulator

Investors

System Dispatch

Nuclear Plant

Nuclear Plant

PPA

$

MWh

29 Sep 2014 IBC 25

Nuclearbusiness

model

Cooperative model

Cooperative (e.g., TVO)Cooperative member LT projected demand

Ultimate credit sources Owner / Operator

Nuclearbusiness

model

29 Sep 2014 IBC 26

Electricity markets

TRANSMISSION

$

MWh

RETAIL SERVICESCONSUMERS

DISTRIBUTION

Electricity Market

Investors

Utility regulator

Nuclear Plant

Market oversight

29 Sep 2014 IBC 27

Hedge contract

Nuclearbusiness

model

Merchant projectbusiness model

Merchant nuclear project developer

Expected power sales into electricity market

Hedge contracts (e.g., CfDs) with energy users

Out-of-market subsidies (e.g., carbon benefits)

Other (e.g., government loan guarantees)

Ultimate credit sources Owner / Operator

Nuclearbusiness

model

29 Sep 2014 IBC 28

Summary

Electricity fundamentals set nuclear value

Electricity industry structure defines options

Proven nuclear business models - government, regulated, cooperative

US electricity market issues (natural gas and renewable subsidies) may mean– Early retirements (e.g., Kewaunee & Vermont Yankee)– More decommissioning projects in near term

Nuclearbusiness

model

Electricityindustrystructure

Electricity fundamentals

Politics & public

opinion

29 Sep 2014 IBC 29

Market analysis of nuclear power

29 Sep 2014 IBC 30

29 Sep 2014 31IBC

Global nuclear - all

0 20 40 60 80 100 120Iran

ArmeniaNetherlands

SloveniaBelarus

South AfricaBulgariaMexico

RomaniaUAE

BrazilArgentinaHungarySlovakiaPakistanFinland

SwitzerlandCzech Republic

BelgiumSpain

TaiwanGermanySwedenUkraine

UKCanada

IndiaSouth Korea

RussiaChinaJapan

FranceUSA

Operation Construction

29 Sep 2014 32IBC

Global nuclear – after 2000

0 5 10 15 20 25 30 35 40

Belarus

Brazil

Finland

France

UAE

Pakistan

Japan

USA

South Korea

Russia

India

China

Operation Construction

29 Sep 2014 33IBC

Role of government

China

IndiaRussia

KoreaUSAFranceJapan

UAE

UK

-10

0

10

20

30

40

50

60

70

80

New

nuc

lear

und

er c

onst

ruct

ion

and

plan

ned

(GW

e)

Role of Government

Long-term nuclear power

strategy

Nuclear fleet build in home

country

Nuclear is low cost energy option

National nuclear

vendor & supply chain

Nuclear learning &

scale benefits

Nuclear industrial capacity

development

Vendor ownership – nationalnuclear industrial strategy

Export market sales +

ownership

29 Sep 2014 IBC 34

Country activity

A look at key countries:– China– India– UAE– Turkey– US– Japan

29 Sep 2014 35IBC

China

Large and active build program

Focus on Chinese designs– CPR1000/ACPR1000 – now “Hualong One”– CAP1400 (larger version of AP1000)

Using domestic nuclear build program to build national nuclear industry– Exporting plants to Pakistan now– Plans to sell CAP1400 into export market soon

29 Sep 2014 36IBC

India

3-Phase nuclear plan– Locally-designed PHWRs– Fast breeder reactors– Thorium fuelled reactors

Re-joined international nuclear industry in 2008– Able to buy significant stockpiles of uranium– Promise to buy multiple “western” LWR units– Third-party liability law is a complicating factor– Only Russians building LWR to date

29 Sep 2014 37IBC

UAE

Fast-track approach for new nuclear countries

First sale of Korean APR1400 in export market

4 Barakah units– First two units under construction– On schedule

Nuclear + RO desalination– Replace gas-fired generators + thermal desalination

29 Sep 2014 38IBC

Turkey

Long-term efforts to start nuclear power program

Current approach seems viable– BOO projects, with foreign ownership and operation– Power sales

Part of output through PPA with government utility Rest of output to market

Akkuyu (Mediterranean) – Rosatom

Sinop (Black Sea) – MHI + GDF/Suez + Itochu

29 Sep 2014 39IBC

US

Two new nuclear plants – 4 AP1000 units (Summer and Vogtle)

TVA completion of Watts Bar 2

New project activity today– Merchant COL applications – moving slowly or on hold– Standard design review moving slowly

Economic stress on existing merchant units

29 Sep 2014 40IBC

Japan

Nuclear units still in post-Fukushima shutdown; recent discussion of early retirement for 7 units

Large economic impact from– Shift to imported LNG, oil, and other fuels– Building new coal power plants

Potential restructuring of electricity industry– Potential for nuclear plant issues as in US– Proposed approach for keeping existing units

profitable (like UK CfD)

29 Sep 2014 41IBC

UK

UK existing nuclear fleet nearing retirement

UK has one of the first electricity markets

In recent years, UK moved to– Reform the electricity markets– Provide incentives for new nuclear– Negotiate Hinkley Point C deal (EU State Aid review)

NuGen and Horizon moving ahead

29 Sep 2014 42IBC

Nuclear Decommissioning Outlook

US - early retirements (merchant units and maintenance issues); may be more coming

UK - old gas-cooled reactors will be closed and decommissioned

Japan – some units will not restart

Germany – political shutdowns

France – may retire some older units

29 Sep 2014 43IBC

© Copyright 2014 NECGAll rights reserved

Edward Kee

Nuclear Economics Consulting Group+1 (202) 370-7713edk@nuclear-economics.comwww.nuclear-economics.com

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