Nuclear power and the electricity...

Edward Kee

Nuclear power and the electricity Industry

Oct 2015

The NECG slides that follow are not a complete record of the presentation and discussion. The views expressed in these slides and the discussion of these slides may not be comprehensive and may not be the same as the views of NECG’s clients or the views of my colleagues.

© 2015 NECG

Oct 2015 1ANL/IAEA

Nuclearbusiness

model

Electricityindustrystructure

Electricity fundamentals

Oct 2015 2ANL/IAEA

New nuclear development factors


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

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

Oct 2015 3ANL/IAEA


Oct 2015 4ANL/IAEA

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


Oct 2015 5ANL/IAEA

Load Duration Curve

40,000

60,000

80,000

100,000

120,000

140,000

160,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

MW

Hourly LDC


Nuclear value linked toprimary energy alternatives

5 Oct 2015 6NEI International Uranium Fuel Seminar

Source: Figure 4.19; OECD Generating Costs 2015, LCOE – United States; 7% discount rate


EIA / AEO 2015– CCGT $64.4 - $66.3

– Coal $95.6

– Adv. nuclear $96.1

– Biomass $102.6

USA


Oct 2015 7ANL/IAEA

Source: Figure 4.9; OECD Generating Costs 2015, LCOE - Japan; 7% discount rate

Japan:



Oct 2015 8ANL/IAEA

Source: Figure 4.10; OECD Generating Costs 2015, LCOE - Korea; 7% discount rate

South Korea:



Oct 2015 9ANL/IAEA

Source: Figure 4.21; OECD Generating Costs 2015, LCOE - China; 3% discount rate

China:


Electricity industry structures

Government-owned electricity sector

Investor-owned regulated utility

Electricity markets

Oct 2015 10ANL/IAEA


Oct 2015 11ANL/IAEA

Government utility Electricityindustrystructure

TRANSMISSION

$

MWh

RETAIL SERVICES

DISTRIBUTION

Government

governmentsubsidies

CONSUMERS

$

System Dispatch

Nuclear ProjectElectricityMinistry

Ultimate credit source

Oct 2015 12ANL/IAEA

Regulated utility Electricityindustrystructure

TRANSMISSION

RETAIL SERVICES

CONSUMERS

DISTRIBUTION

Investors

System Dispatch

Nuclear Project

$

MWh

IRP & rate-making process

Utility Regulator


Electricity industry reforms

New approach to electricity industry structure

Vertical de-integration– Generation separated from regulated monopoly– Electricity market & competition

Link to traditional credit sources weak or broken– Project/owners may bear most project/market risk– Project company is ultimate credit source

Oct 2015 13ANL/IAEA


Oct 2015 14ANL/IAEA

Electricity markets Electricityindustrystructure

GeneratorGenerator

Generator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorTRANSMISSION

$

MWh

RETAIL SERVICESCONSUMERS

DISTRIBUTION

Electricity Market

Utility regulator

Market oversight


InvestorsNuclear Project

Generator

Economic drivers

Traditional electricity industry approach –regulated/government utilities plan and build a portfolio of generation units to:

minimize long-term total cost of electricity

New market-based electricity industry approach -electricity markets manage system dispatch to

minimize short-term marginal cost of electricity

Oct 2015 15ANL/IAEA


Market Approach

Short-term market risk– Prices vary hourly/daily/monthly– No spot market revenue for many key nuclear

attributes

Long-term market risk– Fuel costs (e.g., shale gas)– Technology (e.g., CCGT; renewables)– Policy/subsidy actions (e.g., renewable mandate)

Oct 2015 16ANL/IAEA


Demand

Bids

SMP (high)

Demand (high)

Illustrative trading period (eg, an hour)

Oct 2015 17ANL/IAEA

Spot price(system marginal price, SMP)

SMP (low)

Demand (low)

Spot

Pric

e (S

MP)


Demand

Bids

SMP (high)

Demand (high)


Oct 2015 18ANL/IAEA

Spot price(generator margin)

SMP (low)

Demand (low)

Spot

Pric

e (S

MP)


Demand

Bids

SMP (high)

Demand (high)


Oct 2015 19ANL/IAEA

SMP with low gas prices

SMP (low)

Demand (low)

SMP (high)

High natural gas prices

Low natural gas prices

Spot

Pric

e (S

MP)


Demand

Spot

Pric

e (S

MP)

Bids

SMP (high)

Demand (high)


Oct 2015 20ANL/IAEA

SMP with renewables

SMP (low)

Demand (low)

SMP (high)

SMP (low)

Renewables –negative bids due

to subsides


Demand

Spot

Pric

e (S

MP)

Bids

SMP (high)

Demand (high)


Oct 2015 21ANL/IAEA

SMP - extreme renewables

SMP (low)

Demand (low)

SMP (high)

SMP (low)


to subsides


Demand

Spot

Pric

e (S

MP)

Bids

SMP (high)

Demand (high)


Oct 2015 22ANL/IAEA

SMP extreme renewables& low demand

SMP (low)

Demand (low)

SMP (high)


to subsides

SMP (low)


Nuclear flexible operation?

France– Grey control rods to follow load; focus is on units

freshly refueled; high level of nuclear in mix is driver

Ontario– About 300 MW of each 760 MW unit at Bruce available

for load following; uses steam dump to condenser– Bruce A “mothballed” for over a decade, then restarted

and placed in operation – alternative to retirement

Columbia– Seasonal operation in hydro-rich US northwest

Oct 2015 23ANL/IAEA


Uncertain electricitymarket revenue

Future electricity market revenue hard to predict– Market simulations with range of assumptions

(entry/exit, fuel prices, demand, market rules, etc.)– Micro issues and macro issues– Scenarios to reflect major uncertainties– Bilateral power markets harder to predict

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

Oct 2015 24ANL/IAEA


Nuclear business models

Government or regulated utility

IPP with power contracts

Energy user cooperatives

Merchant project selling into market

Oct 2015 25ANL/IAEA

Nuclearbusiness

model

Oct 2015 26ANL/IAEA

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

Oct 2015 27ANL/IAEA

Revenue certainty in IPP model

Long-term PPA IPP


Government or regulated utility

Nuclearbusiness

model

Oct 2015 28ANL/IAEA

Government utility

TRANSMISSION

$

MWh

RETAIL SERVICES

DISTRIBUTION

Government

governmentsubsidies

CONSUMERS

$

System Dispatch

Nuclear ProjectElectricityMinistry

Ultimate credit sourceInvestors

PPA

Nuclear Plant

Nuclearbusiness

model

Investors

Oct 2015 29ANL/IAEA

Regulated utility

TRANSMISSION

RETAIL SERVICES

CONSUMERS

DISTRIBUTION

Investors

System Dispatch

Nuclear Project

$

MWh

IRP & rate-making process

Utility Regulator


Nuclearbusiness

model

PPA

Nuclear Plant

Oct 2015 30ANL/IAEA

Electricity markets

GeneratorGenerator

Generator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorTRANSMISSION

$

MWh

RETAIL SERVICESCONSUMERS

DISTRIBUTION

Electricity Market

Utility regulator

Market oversight


InvestorsNuclear Project

Generator

Hedgecontract

Nuclearbusiness

model

Oct 2015 31ANL/IAEA

Revenue certaintyin merchant nuclear model

Merchant nuclear project

Power contracts (e.g., CfDs)

Non-market subsidies

Other?

Ultimate credit sources

Power sales into market

Nuclearbusiness

model

Vendor partner can help buyers with– Nuclear procurement and EPC contract– Oversight & management of nuclear project– Operation, with nuclear operator on vendor team

Prefer vendor “skin in the game”– Manage project cost and schedule– Focus on long-term plant performance

May help with funding

Oct 2015 32ANL/IAEA

Vendor ownership –buyer views

Nuclearbusiness

model

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

Oct 2015 33ANL/IAEA

National nuclearindustrial strategy

Export market sales +

ownership

Nuclearbusiness

model

Revenue certaintykey to new nuclear

Traditional approaches to electricity industry cover nuclear project/market risk

Long-term PPA may be feasible

Merchant nuclear approach difficult– Multiple approaches for revenue adequacy/certainty– Power contracts add revenue certainty– Project design/operation flexibility for market risk– Careful analysis of project economics needed

Oct 2015 34ANL/IAEA

Nuclearbusiness

model



Case Study 1:Hinkley Point C

Hinkley Point C deal– Based on EMR– Revenue certainty from 35-year power contract (CfD)

EMR passed into law in late 2013– Adds generation planning to UK electricity market– UK government control over timing, type, and amount

of new generation capacity

Oct 2015 35ANL/IAEA

Nuclearbusiness

model



Case Study 2:US merchant nuclear

US merchant nuclear financial pressure– Kewaunee & Vermont Yankee retired early; other units

threatened by financial losses

State action:– NY regulator - reliability contract for Ginna– Illinois – proposed Low Carbon Portfolio Standard– Iowa – state renewed power contract for Duane Arnold– Ohio – regulator considering “re-regulation” contracts

Proposed federal clean power plan

Oct 2015 36ANL/IAEA

Nuclearbusiness

model



Summary

Electricity fundamentals set nuclear value

Electricity industry structure defines options

Nuclear business models:– Proven – government, regulated, cooperative– Uncertain – BOO, PPA/CfD, vendor ownership– Unproven – merchant nuclear using project finance

Oct 2015 37ANL/IAEA

Nuclearbusiness

model



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