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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