This time they really mean it
In the latest round of what passes for a soap opera plot in the heavy industry world of nuclear energy, the government of Canada has announced yet again it will offer a crown corporation, or at least parts of it, for sale. The part it wants to sell off is the CANDU heavy water reactor technology developed by Atomic Energy Limited of Canada (AECL) and its workforce.
According to the Toronto Star for May 29, Canadian Natural Resources Minister Lisa Raitt told the news media AECL “faces stiff competition from much larger rivals.” The Star citied an internal government assessment of AECL’s prospects and says, “Atomic Energy's commercial CANDU reactor division "can be best served by a strategic alliance with one or more partners with global scale that can leverage the technology, skills and experience of AECL in Canada and internationally."
The review said a strategic alliance could take the form of a joint venture or merger with another nuclear reactor supplier or the sale of a minority or majority equity interest in AECL.
According to a May 28 report by World Nuclear News, the report came with a conclusion that was no surprise to anyone citing AECL’s inability to access capital markets to grow its operation.
Ms. Raitt also came to some considerable political grief after losing confidential government papers about the future of AECL. They were found but not beffore a tearful Raitt offered to resign. Her offer was turned down by PM Harper. A 20-something aide took the fall for the gaffe.
What price for AECL and what for?
Nobody has put a price on the private equity offering, and it has not yet been released for bids. If Raitt (left) or the Harper government has any idea of what they will accept from investors, they aren’t saying anything. What is likely is that any private equity firm will not also take with the sale accountability for covering cost overruns at Darlington, Ontario, should that $22 billion project be awarded to AECL.
This is the sharp stick that has been poked in the ribs of the central government in Ottawa by the provincial government in Ontario. For nearly a year the Ontario government has delayed making a decision on who to award the new $22 billion nuclear build at Darlington. The primary reason, according to media reports, is “sticker shock” at the costs submitted by bidders and the realization of what cost over runs could do to the success of the project and electricity rates for customers.
Since AECL is a creature of the federal government in Canada, what Ontario has been doing is holding the bids hostage until it can get a guarantee from Ottawa that if the award goes to AECL, with its 30,000 employees in Canada, that cost over runs for the Darlington project will be made good through federal reimbursement. That’s a tough negotiation ploy and has insured there is no love lost between the provincial and central governments over this issue.
Betting dollars for donuts
As the folks in Ontario see it, if AECL is a crown corporation, then unexpected costs, and schedule delays, should be paid by Ottawa assuming AECL is the builder. If another firm is chosen, you can bet dollars to donuts Ontario will issue a fixed price contract with draconian penalties for schedule delays and excessive costs. Of course the question then becomes whether anyone besides AECL would take such a contact. More likely, a risk sharing framework for costs would have to be worked out to achieve success.
All this pressure from the provincial government has added momentum to a process that has been underway for some time. AECL has required increasing subsidies from Ottawa especially for its Chalk River nuclear isotope reactor and for design and development of its next generation commercial nuclear reactor – the ACR1000.
Drawing a line at Chalk River
Chalk River, which is more than 50 years old, is yet again shut down due to a heavy water leak causing chaos in the medical world because it supplies more than half the isotopes used in the U.S. and Canada. The Harper administration has shown some common sense and is separating Chalk River from its sale of AECL.
Further, the federal government will commit to replace the reactor with a new one and take on the over $7 billion in cleanup liabilities associated with the site. An effort to replace Chalk River with two smaller reactors was scrapped last year due to multi-million dollar cost-over runs and repeated failures to get the units to work. In addition to building a new conventional reactor to make medical isotopes, Raitt said the government would seek to privatize that operation while setting aside legacy liabilities to be resolved by the government. Presumably, that would include the $7 billion in cleanup and the eventual decommissioning of the Chalk River reactor complex.
Who will offer new lamps for old?
AECL has not made a profit in the last five years. Last year alone the cost of R&D subsidies for AECL amounted to $350 million. The ACR1000 has just entered design review with the Canadian Nuclear Safety Commission, but despite getting that far, it has not booked any sales nor even firm prospects of one. There are questions of how well it would fare as an export product. It looks like the future of the ACR1000 depends almost entirely on whether AECL gets the Darlington bid award.
Other bidders for Darlington, and likely equity investors in AECL itself, include Areva, SNC Lavalin, a Canadian construction company, Ontario’s Bruce Power, which is also thinking about building an twin-unit ACR1000 power station in Alberta, and General Electric. Westinghouse has stated it wants to supply nuclear reactor components to Darlington, but is not publically on record as being interested in AECL itself.
Ontario’s energy minister George Smitherman (left) has been expected to make a statement on who will take the Darlington Project by June 21. However, the Toronto Star reported he may postpone that announcement until he can see how AECL will be chopped up for sale to be sold off in pieces and to whom.
What he is probably worrying about is that the federal government is going to sell AECL off and, with it, deep six to any obligation to subsidize new reactor R&D and, more importantly, backstop cost over runs if the Darlington project is awarded to AECL.
The worst possible outcome for Ontario is that AECL is left without enough resources, in a private eqity deal, to actually execute a contract at Darlington. Then Ontario has 30,000 jobs to worry about and still needs a builder for its reactor complex. Someone other than AECL might hire its engineers, but cherry picking the best of them might also involve their assignment to the equity firm's projects that are already underway at other nuclear reactor projects in other countries.
Nuclear engineers – pack a bag
In terms of who would bid on the commercial division, that depends on what they think they are buying. Globally, AECL’s current and projected market shares are not significant. The installed base of heavy water reactors is aging and the technology never caught on globally. See World Nuclear’s profile of Canada’s power reactors for more details. Scroll down past the profile of its uranium industry.
The newest offering, the ACR1000, is still on the drawing boards. It is not a product with a defined time-to-market. It could need several hundred million more in R&D and design work before it is ready for sale domestically or for export. This leaves just one factor of immediate value and that is AECL’s workforce.
In a global industry where dozens of new nuclear reactor projects are scrambling for qualified, experienced nuclear engineers, the 30,000 workers on AECL’s payroll looks like a gold-plated body shop.
While there will be continuing work to maintain AECL’s reactors in Canada, and build Darlington if AECL gets the award, the fact is a private equity bidder for AECL most likely would have immediate work for its top nuclear engineers on projects worldwide. Note to ACEL engineers – pack a bag because you are going to need it.
Prior coverage on this blog
- March 8, 2009 – AECL’s destiny to be decided at Darlington
- November 28, 2008 – Is Westinghouse in or out at Darlington?
- November 9, 2008 – Ontario delays reactor new build decision
- May 16, 2008 – AECL gives up on Maple reactors
- April 9, 2008 – GE-Hitachi pulls out of Ontario bidding
- April 4, 2008 – AECL leaves the ice in the U.K.
- March 1, 2008 – Canada posts ‘For Sale” sign at AECL
- December 16, 2007 – Isotope maker restarts after controversy
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