AECL’s destiny to be decided at Darlington?

A $15 billion project and future participation in global nuclear markets hang in the balance [Update July 5, 2009]

Atomic Energy Canada Limited (AECL) is part of one of three mega-consortiums which have submitted bids for the rights to build two new reactors, with options for two more, in the Toronto suburb of Darlington, Ontario. The project is worth at least $15 billion and has attracted French nuclear giant Areva and Westinghouse. The Ontario provincial government has said it will announce the winner in June 2009.

This procurement is not just another energy project. Winning is everything for AECL because its continued existence rests on the outcome of the selection process.

“If they don't win this competition, they're not in the business. It's over,” said Bryne Purchase, a former deputy energy minister in Ontario who is director of the energy and environment program at Queen's University.

Canada could literally shoot itself in the foot by awarding the Darlington job to either Areva or Westinghouse. That prospect is very much alive due to the “no love lost” paradigm that rules the relationship between liberal Ontario and conservative Ottawa. The call on the contract award rests with the Ontario provincial government, but support for the capability of AECL to deliver a winning bid rests with Ottawa.

What’s at stake?

If AECL wins the contract than the firm’s newly designed 1,100 MW ACR1000 reactor will be primed for lucrative global exports, but no one will buy it if it can’t be sold and successfully built on time and within budget on its home turf. If AECL does not get the Darlington job, then it is likely to drop out of the global competition for new reactor projects also being sought by Areva and Westinghouse. Perhaps one of the reasons for the aggressive pursuit of the Darlington deal by both firms is to produce that result.

With success would come job security for AECL’s workforce most of whom live and work in Ontario. Losing the bid could precipitate the sell off of the company’s assets and the loss of irreplaceable skills that support the Canada’s nuclear infrastructure. The National Bank of Canada has already recommended selling off 51% of AECL’s assets to investors to lift the burden of funding its expansion from shoulders of the central government.

There’s more. The winner of the Darlington deal will have a preferred path to contracts to replace the rest of Ontario’s reactors over the next two decades, all 20 of them, which currently supply 14 GW of electricity to the province. A win for AECL would also position the ACR-1000 reactor to be the preferred choice for other Canadian provinces notably New Brunswick and Alberta, both of whom are planning new reactor projects. A win in Ontario for AECL would open the door to as much as 5 GW of new construction in India and would add credibility to export sales elsewhere. It would keep AECL in the global game for new reactor projects.

What’s needed to win at Darlington?

The components of the bid are clear. The contract calls for two reactors with capacity of between 1,100 and 1,600 MW and holds out a carrot of options for two more of equal size. At $3,500/kw the initial scope is worth between $3.85 billion and $5.6 billion. Double that with two more reactors and the tab totals up to a range of $8-12 billion. Throw in the turbines and transmission and distribution networks, and you’ve got yourself a $15 billion package.

Ontario Energy Minister George Smitherman is acutely aware that $15 billion is a target and that cost overruns and delays could send the final price well beyond $20 billion. His ability to choose AECL, despite the 1000s of jobs in Ontario resting on the decision, may be complicated by the Harper government’s dithering over whether to sell off shares to investors. For their part, no investor will buy any shares until they know that Darlington is a done deal. Although it is doubtful the Harper government would make a decision to sell shares in AECL before June, raising the issue by releasing the bank study makes plenty of waves.

Ready or not?

The successful bidder must acquire a construction license from the Canadian Nuclear Safety Commission (CNSC) by 2012 and achieve hot start up and commercial operation in revenue service by the end of 2019. In terms of other contract evaluation criteria, the winner must satisfy a daunting 80% of the requirements with regard to capital and projected operating costs, supply technology that is ready for market, and cost certainty in critical EPC factors such as schedule and risk issues.

The problem for AECL is that its ACR-1000 reactor isn’t ready for market. It is still undergoing design certification by the CNSC. Worse, for AECL, it has substantial cost over runs at other reactor refurbishment projects in Canada.

The competition is ahead of AECL in terms of time-to-market. Areva’s 1,600 MW EPR is under construction, albeit late and over budget, in Finland, and another unit is being built in France. Westinghouse is breaking ground this month for the first of four 1,150 MW AP1000 reactors in China. However, GE-Hiachi pulled out of the bidding last April because it could not be ready with its ESBWR reactor design.

Selling AECL, Separating Chalk River

According to a report in the Toronto Globe & Mail, the National Bank report recommends the government sell off AECL in pieces. The commercial side, to be bought by new investors who would be the majority owners, would handle reactor sales and after-market service. The latter is a very lucrative industry.

Bruce Power is reported to be interested in buying AECL’s reactor business. It has proposed to build a $6.2 billion dual reactor complex in northern Alberta to provide electricity, process heat/steam, and hydrogen by conventional electrolysis to the tar sands mining operations that dominate Canada’s energy exports. Also SNC_Lavalin Group is interested as it has a joint venture with AECL bidding on the planned New Brunswick nuclear project.

Significantly, the bank report recommends the government retain the Chalk River reactor which supplies most of North America’s medical isotopes. The newspaper reported that the National Bank recommends that the Chalk River site be excluded because AECL faces liabilities there of $7 billion to clean up hazardous and nuclear wastes at that site. These costs would be a deal killer for any investment plan for the rest of AECL.

Budgets up despite contract uncertainty

According to budget documents released in early February, the Harper government plans to spend $350 million in 2009-2010 on AECL of which $135 million is to complete the design of the ACR-1000. It is reportedly the largest budget for AECL in nearly two decades. The budget shows, if nothing else, clear intent to support AECL's drive to bring the ACR-1000 to market.

Another area that is getting a budget increase, and not one that is necessarily welcomed, is $100 million to cover AECL cost over runs in the refurbishment of the Bruce Power complex in Ontario and Point Lepreau in New Brunswick. The delays and “unexpected technical issues” in dealing with aging CANDU reactors, are highly visible to the Ontario provincial government which must make the decision about the Darlington project.

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For ACEL to succeed at Darlington, the company, the Harper government, and the Provincial Ontario government must find a way to hang together. If they don’t, they will all surely hang separately.

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Ameren gets boost from Missouri legislature

Despite a chilly reception from Gov. Jay Nixon

A committee of the Missouri House of Representatives voted 12-1 this week in favor of a bill (HB 554) that would allow Ameren (NYSE:AEE) to recover construction costs of a new nuclear reactor at Callaway, MO, while it was being built. The St. Louis Post Dispatch reported that the “lopsided vote” insures “smooth sailing” when the bill reaches the floor of the full house.

The legislation is reportedly an almost entirely new measure that includes provisions for consumer protection that were not in the version submitted by Ameren. The Missouri utility took some hard knocks for its aggressive stance. [Earlier coverage] The changes in the bill will also serve to soften the governor’s earlier opposition.

"I think if we put a good bill on the governor's desk, he will sign it," said bill sponsor and committee chairman Rep. Ed Emery, [right] a Lamar Republican.

Last week Gov. Nixon said that Ameren was “getting ahead of itself” in pursuing the change to the construction work in progress, or CWIP, law before actually obtaining the permit to build the nuclear plant. However, he also wants the high-paying union jobs the nuclear plant would provide, as long as consumers are protected.

"He's not going to give us a free pass," said lobbyist Irl Scissors, who represents pro-Ameren group Missourians for a Balanced Energy Future. "His statements encouraged the parties to get back to the negotiating table."

Rep. Jake Zimmerman, D-Olivette, told the Dispatch the substitute bill passed by the House committee is much better than what he called the "piece of junk" that had been submitted by Ameren. He still has problems with the bill but believes they'll likely be fixed in the Senate.

The Dispatch reports that the new version of the bill lengthens the time the Public Service Commission gets to approve a new plant from three months to six months. It moves the consideration of pre-construction costs to a regular rate case, which provides an opportunity for ratepayers to be protected if the plant isn't built. And it ensures that should Ameren decide to sell the nuclear permit or the plant itself that ratepayers would not lose their investment.

If passed by the House the bill will move to the Senate. Hearings, markup, and a vote are all expected this session.

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USEC still in the hunt for funding

It plans construction of a $3.5 billion uranium enrichment plant in Ohio

USEC (NYSE:USU) told the Associated Press last month that it is still in the hunt for investors for its $3.5 billion American Centrifuge Plant (ACP) to be built in Piketon, OH, about 90 miles east of Cincinnati.

"The market for our enrichment product remains strong with improving prices, and we like the prospect for growth in our industry," CEO John Welch said.

However, in a prepared statement about progress at Piketon, Welch said the future of the ACP project may depend on whether USEC gets a $2 billion Department of Energy-guaranteed loan guarantee for the plant.

"We do not believe public market financing for a large capital project such as the ACP is available to us, given current financial market conditions," Welch said. "We view the DOE loan guarantee program as the path for obtaining the debt financing to complete the American Centrifuge project."

The NRC issued the Construction and Operating License for the American Centrifuge Plant in April 2007. The license is valid for 30 years.

USEC began construction on the American Centrifuge Plant in May 2007. USEC said in a statement on its web site that it plans to provide about 3.8 million SWU of production by 2012.

In September 2009, USEC awarded a $1 billion contract to Fluor Corp. of Irving, Texas, for engineering, procurement and construction.  However, it is unclear how much progress has been made with the construction phase.

USEC is competing with Areva for the loan guarantee. Areva also applied for a loan guarantee for its planned $2 billion plant, the Eagle Rock facility, to be built 18 miles west of Idaho Falls, ID. It has applied for an NRC license. Areva plans to break ground in 2011.

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Hot fuel could freeze U.S. nuclear trade with India

India - No reactor deals without reprocessing

U.S. vendors of nuclear reactors seeking to build at least 10 GWe of civilian facilities in India to generate electricity may be frozen out of the market over the issue of reprocessing of the spent fuel from the plants.

In an exclusive report in The Hindu March 6, Siddharth Varadarajan writes that India has formally requested the start of negotiations with the U.S. over “arrangements and procedures” under which American spent nuclear fuel would be reprocessing in that country. India wants to keep the uranium to insure adequate fuel for its rapid expansion plans of atomic energy facilities.

The terms of the “123 agreement” on bilateral nuclear cooperation, Washington provide just 18 months to complete the negotiations.“ This means that unless the parties agree to an extension, the talks have to conclude with an agreement by August 2010. It is the first test of the deal negotiated by the Bush administration with the new Obama administration.

The 123 agreement gives India prior consent to reprocess spent nuclear fuel in principle. It stipulates that this right can only be exercised if and when India builds a facility dedicated to reprocessing safeguarded nuclear material under IAEA safeguards.

The second part requires an agreement with the U.S. on “arrangements and procedures under which such reprocessing will take place in this new facility.” The U.S. is also seeking the right to approve the design and operating procedures for the facility.

If India started work today, it would be at least three-to-five years before it could break ground and, in all likelihood, somewhere between 2018-2020 before the first fuel bundle could be processed by the plant. The expected capacity could be about 500 tons per year.

Not your ordinary diplomatic horse trading

The Hindu reports that on Feb 3, Foreign Secretary Shiv Shankar Menon [right] wrote to Under Secretary for Political Affairs William Burns invoking this provision and asking the U.S. to propose dates and an agenda.

The Hindu reports the request is important for two reasons. First, because it will provide the first test of President Barack Obama’s intentions for balancing traditional American non-proliferation concerns about reprocessing with the broader foreign policy interests that make up the strategic partnership with India. Second, the prospects of American companies winning a significant share of the multi-billion dollar Indian market for nuclear energy “depends crucially on India being satisfied that it will be able to reprocess the spent fuel which accumulates from the running of U.S.-supplied reactors.”

Last January during a visit of an officially sanctioned U.S. trade group to India, Atomic Energy Commission Chairman Anil Kakodkar went out of his way to tell the delegation there would be no reactor purchases without reprocessing.

Officials from the U.S. India Business Council (USIBC) later confirmed to the Washington Post this conversation took place.

"This means that some of the American nuclear fuel suppliers will not be able to make some very near-term sales of uranium to India directly. And India needs fuel desperately," Ted Jones, a USIBC spokesman, said. "But the official was clearly using this as a leverage to get the reprocessing rights."

India sees the reprocessing issue as an essential element of insuring a reliable supply of nuclear fuel for its civilian reactors. India also has ramped up its R&D efforts to design and build ‘fast reactors’ which could burn MOX fuel.

Some Russian and French reactor exports to India reportedly come bundled with reprocessing consent. If the U.S. fails to resolve the reprocessing request to India’s favor, it could have the effect of freezing U.S. vendors out a market that the U.S. opened in Fall 2008.

Other hurdles in terms of U.S. nuclear trade with India include apparent failure to resolve long standing disputes over protection of intellectual property, technology licensing, and tax and tariff rules.

Larsen in talks with three firms to build India’s reactors

Larsen & Toubro Ltd. expects to sign separate initial pacts soon with General Electric, Areva, and Russia's state nuclear firm Rosatom to build nuclear reactors in India, a senior executive with Larsen said.

"We are engaged in dialogues to make nuclear reactors in India," M. V. Kotwal, (right) senior vice-president of heavy engineering at Larsen, told Dow Jones Newswires.

Larsen has also signed deals to build nuclear reactors with Atomic Energy of Canada Ltd. (AECL) and Westinghouse.

"I expect the orders for nuclear reactors to start coming in about 18 months time," Mr. Kotwal said.

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