Is AECL worth anything more than its parts?
A fluid and confused political environment clouds the future
More than a year after the Canadian government offered its crown corporation Atomic Energy of Canada Ltd (AECL) for sale, some commercial interest has appeared on the scene. However, early hopes of a deal have been dashed to bits.
An agreement is in peril though because construction giant SNC Lavalin's proposed partner has backed out.
The Ontario Municipal Employees Retirement System said April 22 that it feels SNC-Lavalin "does not have a long-term vision of the nuclear business."
That business-speak can be translated to mean that SNC-Lavalin simply wants AECL for its maintenance and refurbishment business, but has no plans to develop new reactor technologies nor seek export earnings with the new design.
According to the Toronto Globe & Mail for April 21, Ontario Energy Minister Brad Duguid said in an interview, “The feds have really made a mess of this process."
“Our expectation and our hope is that the federal government will get their act together on this sooner rather than later. And that this restructuring will be complete soon so that we can have a partner at the other side of the table.”
Neither OMERS nor SNC would not comment to the newspaper on the pension fund’s about-face. Montreal-based construction giant SNC-Lavalin reportedly remains in protracted negotiations with the government though the company will not say anything about them.
And even if SNC-Lavalin did want to develop the new ACR1000 reactor and seek international deals, the pension fund is not convinced the market is as robust as it might have been prior to the Fukushima crisis that began March 11 with a record earthquake and tsunami.
The twin geophysical events wrecked four nuclear reactors in Japan resulting in radiation releases that have since forced the evacuation of over 115,000 people from a 13 mile radius around the plants. Worldwide developers of new nuclear power stations are taking a second look at their plans.
Did the government make promises to OMERS?
The pension fund came into the deal expecting the federal government in Ottawa to backstop AECL on cost over runs and to support R&D for completion of the new reactor design. So far, only the sound of crickets can be heard Canada's capital city leading the pension fund to believe any hallways conversations about financial guarantees are not being echoed in written policy.
The government has refused to pay New Brunswick province for cost over runs on the Point Lepreau reactor and it has refused to pay for costly purchases of replacement power while the reactor is out of service well beyond its original outage schedule.
Where does this leave Ottawa in its quest to rid the government of what it sees as AECL's financial burdens and long-shot revenue opportunities?
Jacinthe Perras, a spokesperson for the government's Natural Resources Agency, which manages AECL, told FCW the official line on the sale of the crown corporation is to restructure the firm's commercial division.
"A key objective has been to establish a more competitive CANDU Inc under private ownership and to protect the interests of Canadian taxpayers. The goal of a restructured, more competitive CANDU Inc is to position Canada's nuclear industry and its workforce to seize domestic and global opportunities."
Reasons early elation turned to gloom
Brad Duguid, the Ontario Provincial Government's Energy Minister, told the Toronto Globe and Mail last winter he is "elated" that AECL's future might no longer be up in the air. AECL employs thousands of people in Ontario and that in turn generates a lot of jobs and tax base revenue. Duguid said sale of AECL might revive the dual reactor new build at Darlington, but there may be little chance of that given the circumstances surrounding the sale.
An interesting insight into why SNC Lavalin wants to buy AECL is the financial partner it sought to bring to the table. Not only does the Ontario Municipal Employees Retirement Systems (OMERS) fund bring deep pockets, it also sends a signal about the inherently conservative business strategy behind SNC Lavalin's acquisition plan.
While AECL has been pushing the new 1,100 MW ACR1000 reactor design, SNC Lavalin, according to industry sources, apparently wants no part of it. The reasons are no one has ever built one and therefore the costs are an unknown. Given the Ottawa government's resistance to covering cost over runs at other AECL projects, taking on the risk of a first-of-a-kind new nuclear build seems to be outside the boundary of risks OMERS would accept in an investment.
Refurbishment market looms large
Instead, the construction giant and its partner are looking at AECL in terms of the Canadian and global markets for refurbishment of the existing fleet of Candu reactors. This is a tried and true business with well-know reactor designs and a skilled workforce that is still on the job. Plus, SNC Lavalin has a lot of experience itself working on Candu reactor sites.
There are 43 Candu reactors worldwide. Of that number, 17 Candu reactors are in Canada, 4 in South Korea, 2 in China, 1 in Argentina, and two in Romania. India has 13 Candu type reactors with three more under construction.
In Canada, according to the Ontario provincial government's energy plan published in November 2010, there are 10,000 MW of nuclear reactor generating capacity, all Candu units, that will need refurbishment over the next decade. Overseas, Candu reactors in Argentina and South Korea will require AECL's services.
AECL's future is beginning to look like Studebaker, a famous car maker which moved from the South Bend, Indiana to Ontario, Canada, but which failed to capture market share for its new designs. Instead, the factory lingered for years as a supplier of replacement parts for the cars that were still on the road.
When asked about this business case, Leslie Quinton, a spoksperson for SNC Lavalin, told FCW the firm has no comment on press reports about the negotiations.
"We are bound by a confidentiality agreement and cannot disclose any information."
No road ahead for Darlington?
The business strategy inherent in SNC Lavalin's investment partner raises questions about who will supply two new reactors for Ontario's Darlington project and for a proposed new reactor at the New Brunswick Point Lepreau power station.
Anne Smith, a spokesperson for Ontario Power Generation, told FCW there are no scheduled milestones for the selection of a contractor to build two new reactors at the Darlington, Ontario site. This project had been a subject of hot competitive efforts by AECL, Westinghouse, and Areva, but the provincial government cancelled the offering in 2009 without making choosing a winning bid.
Steve Aplin, Vice President of HDP Group, an energy consultancy in Toronto, says he knows why the Ontario Provincial Government (OPG) got cold feet on Darlington.
"Darlington is the lynchpin of the entire conversation about the future of AECL. OPG would have gone with the ACR1000 reactor if the federal government in Ottawa had backstopped AECL on any cost over runs for construction of a first of a kind project. They refused, but AECL did not offer OPG a Candu 6 which would have been a cost effective choice with the benefit of lots of experience to bring one in within the budget and on schedule."
AECL has invested a lot of money and time in the ACR1000 design. The Canadian Nuclear Safety Commission (CNSC) said Jan 28, "there are no fundamental barriers to licensing the reactor design in Canada."
There is a second reason why OPG is not moving forward with two new reactors at Darlington. Aplin points out it is swimming in cheap natural gas from Alberta at $4 mbtu and has 6,000 MW of coal-fired plants with many years of service left in them.
Any path for a new reactor at Point Lepreau?
Another competitive landscape is a proposal for a clean energy park at the Point Lepreau power station in New Brunswick province. There AREVA, the French state-owned nuclear giant, is proposing to build a new reactor, an 1,100 MW design trade named the 'ATMEA-1."
To prove the effort is serious, on Feb 22, AREVA submitted the ATMEA-1 design to the Canadian Nuclear Safety Commission for a pre-project design review. Significantly, the AREVA ATMEA-1 at 1,100 MW is the same size as the AECL ACR1000.
Asked about the status of efforts to build a new reactor at Point Lepreau, Jim Hennessy, a spokesman for the New Brunswick Department of Energy, told FCW there are informal discussions taking place with Areva, but no new milestones in terms of work to prepare a contract for bids.
Instead, the government is punting any decision into the future under the auspices of an energy plan.
"We have a new government in place [following elections in Sept 2010] in New Brunswick, and they have established an Energy Commission to renew the Province’s energy policy, as well as shape a 10 year energy plan. The province’s future electricity generation requirements and options are being reviewed as part of the Commission’s work. The Energy Commission is planning to release its recommendations by May of this year," Hennessy said.
Kathleen Duguay, a spokesperson for New Brunswick Power, echoed Hennessy's comment. She said, "there is no discussion ongoing regarding the business case for a new reactor."
AREVA's vision for Point Lepreau is for a new reactor, plus a biomass energy plant, that would supply electricity to the province and export it to U.S. New England states.
Despite the lack of any official interest in a new reactor, AREVA is pressing forward with a marketing push. Jarret Adams, a spokesman for the firm based in Bethesda, MD, told FCW:
"We continue to have discussions with NB Power and the province of New Brunswick regarding the possibility of a Clean Energy Park at the Point Lepreau site. This is a long-range project, but it is moving forward. The announcement last week of pre-design review of the ATMEA-1 reactor is a significant step forward."
Cost over runs leave bitter legacy
One of the sore points about AECL in New Brunswick is that the refurbishment of the existing Point Lepreau reactor is way behind schedule and $400 million over budget not counting the cost of buying replacement power. Utility and provincial government officials are livid about being rebuffed by the Natural Resources Department in Ottawa which has refused to reimburse the utility for AECL's cost overruns.
Last January New Brunswick Premier Shawn Graham threatened to take legal action against the federal government if it didn't cover the cost overruns on the $1.4 billion project. He said the cost of buying replacement power for the out of service reactor was $1 million/day.
For its part, the government in Ottawa has twice stiff armed Graham telling him it will only pay for what is in the original contract and not for any new costs. This state of affairs has left the folks in New Brunswick with a bad taste in their mouths which is why they may be talking to AREVA instead of AECL about a new reactor.
Provincial politics will play a role in any new energy decisions. The problem for AREVA and AECL is that the time horizon for politicians is often the next election, but for reactor vendors, it is the more along the lines of the next two-to-four decades.
New Brunswick may be moving its plans regarding new baseload power ahead more quickly following a report in February that a $200 million wind farm in the northern end of the province froze solid shutting down completely due to a buildup of ice on the blades.
GDF Suez, the firm that owns the 33 turbine wind farm said that in a dry winter the project runs at about 35% of its 99 MW capacity. A wet winter has played havoc with the turbines forcing the utility to buy replacement power from other sources.
Export potential missed?
How's this for government support of its own crown corporation? In 2009 Lisa Raitt, then the Natural Resources Minister in the federal government, told reporters "the Candu division is too small to establish a strong presence globally in the high growth markets that are the key to its success."
But Bruce Power CEO Duncan Hawthore, who declined to bid on AECL, told a business group in Toronto in January "you cannot be schizophrenic about the nuclear power industry." He went on to criticize the government for failing to uphold its commitment to long term sponsorship of Canada's nuclear industry.
Hawthore said the government can't seem to make up its mind what it wants to do with AECL. He says the options run from killing it to selling it. He said Ottawa needs to make up its mind.
Consultant Steve Aplin says the export paradigm might work if AECL could build confidence with potential customers about its future. He points to a plan to build two new reactors in Romania.
The country has two Candu 6 units completed in 1996 and 2007. This gives the country a "predisposition to consider more," Aplin says, but they won't sign up for new reactors from AECL until the firm gets control of cost over runs like the one at Point Lepreau.
Another opening is for Canada to re-establish commercial ties to India which built Candu reactors in the 1950s. Nuclear exports to India stopped in 1974 after India used one of the Canadian reactors to produce material for a nuclear weapons test.
However, with the re-establishment of India's ability to buy fuel for its civilian reactors through the Nuclear Suppliers Group, Canada is exploring export opportunities again. A delegation from the Nuclear Power Corporation of India Ltd. (NPCIL) attended a nuclear energy trade meeting in Ottawa Feb 26.
India is now building an indigenous 700 MW heavy water reactor based on the Candu design. It plans to increase its installed base on reactors from 5 GWe to 20 GWe by 2020. Much of this construction will be done by Russia's Atomstroyexport and France's AREVA. American firms are locked out of the Indian market for now because of India's draconian supplier liability law.
Canada could take some market share in the Indian nuclear market, but only if the government backstops the construction projects for costs. Given its reluctance to do that with domestic projects, it may have also doomed the possibility of export earnings as well.
With OMERS now pulling out of the deal, the Canadian government is once more at square one in terms of crafting a financially viable future for AECL.
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