Supply Chain Reaction

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Supply Chain Reaction

Localisation Issues for Nuclear New Build



© 2012 Deloitte Touche Tohmatsu Limited 2

Contents

Executive summary ......................................................................................... 3 Localisation Requirements .......................................................................... 4 Localisation Options .................................................................................... 5 Current Capacity ............................................................................................. 7 Key Challenges ............................................................................................... 8 Way Forward ................................................................................................... 9 Our experience in the nuclear sector ........................................................... 11 Contacts ........................................................................................................ 12




Executive Summary

Background

South Africa has recently faced a reality of power supply struggling to meet

rising demand driven by strong economic growth, a low cost of electricity,

rapid industrialisation and a mass electrification programme without any

significant increase in generation capacity. As a result the Integrated

Resource Plan (IRP) 2010 has been designed to guide the country’s energy

mix and planning for the next 20 years. The IRP 2010 has allocated 9600

MW for nuclear, to be completed by 2030, of which the first 1600 MW is dueto come online in 2023. If each plant is assumed to be 1600 MW, as does the

IRP 2010, it would entail a fleet of 6 reactors which will cost approximately

ZAR 400 bn.

According to the US “Utility Requirement Documents (URD)” approximately

half of the nuclear power plant costs are for nuclear island equipment whilst

the rest of the costs are split between the conventional island (~30%) and

balance of plant (~20 %).

The benefits of localisation include job creation, possible reduction in costs,

scientific and industrial development, autonomy, shortening of the supplychain as well as the establishment of centres of excellence which will benefit

other industries.

With the national and global economy facing numerous challenges and

constraints, it is important that a localisation programme for nuclear power

plants is effective both in terms of enabling the primary goal of delivering

electricity on schedule but also in terms of achieving secondary objectives

such as job creation and a sustainable supply chain.

Key Questions.

Some of the issues which need to be addressed are the following

What is the optimum degree of localisation for South Africa?

How should the localisation strategy be rolled out?

What are some of the risks/ considerations for nuclear build?




Localisation Requirements

Government Requirements

The Department of Energy has stressed that for the nuclear build programme

to proceed, localisation is critical to create industries that support the

programme and to ensure its long-term sustainability. In addition,

government support of nuclear will be influenced by its ability to create local

jobs.

The onus to invest in the local supply chain and manage the local content

percentage will rest with the vendor and thus it is important for the vendor to

commit to a maximum local supply consistent with government requirements

as well as a high level of technology transfer. Localization will, however, most

likely be carried out by the primary contractor of the plant.

Quality Requirements

Quality requirements will have an impact on the extent of localisation which

can be effected, due to the strict quality requirements that nuclear build

requires. With many of the vendors opting for modular construction, risk is

transferred to the supplier and thus the onus for safety falls on the supply

chain.

If the nuclear build contract is awarded in 2012 it is expected that

manufacturing will start in 2015. Safety is a key pillar of the nuclear industry,

leading to numerous quality requirements which are applicable to

manufacturing depending on the safety classification of the component.

Some of the quality requirements which apply to nuclear related safety are

the US NRC document 10CFR50 App. B, 10CFR21, NQA-1, IAEA-50-C-QA

and ISO-9001 and compliance with these is not only important for the South

African nuclear build but also if South Africa is to become part of the global

nuclear supply chain.

“Without local jobs,nuclear will lose thevital support of our people at large.Benefits generatedfrom nuclear must bemaximised − we must

localise. This might bea tall order, but SouthAfrica has the capacityto deliver and competeinternationally”

Dipuo Peters

Minister of Energy

.

“The Fukushimadisaster will definitelyresult in a call for enhanced safetystandards.”

Deloitte

Empowering Ideas 2011




Localisation Options

Any localisation strategy for nuclear new build needs to have a goal of being

economically viable and achieving long term sustainability by adding value to

other local industries and becoming cost competing in the global nuclear

marketplace after the completion of South Africa ’s nuclear new build.

The localisation of nuclear safety related components will likely follow a

phased, iterative approach with the first plant having a low, non-nuclear

component localisation with cooperation between international and local

companies leading to technology transfer and potentially resulting in a high

percentage of localisation for the last plant.

Many capable companies exist in the South African industry but they lack

nuclear experience, where specifications are often different from usual

industry standards

In terms of the manufacture of the largest components such as pressure

vessels, steam generators and steam turbines, vendors of Generation III

plants prefer large forging presses with a minimum capacity of 15 000

tonnes. Single, integral forgings are desired due to embrittlement and

material stress concerns during the plant lifetime. It is possible to employ

smaller forges and use split forgings which are welded together. These

welds require checking through the life of the plant which may not be the

preferred option in a post-Fukushima landscape.

Three high-level strategy options exist for localisation, each of which requires

a detailed roadmap for implementation.

Shallow Localisation

Shallow localisation relates to localisation mainly focused on construction

activities. The United Arab Emirates has opted for shallow localisation,

signing a USD 20 billion contract in 2010 with South Korea’s state-owned

KEPCO to provide four reactors on a turnkey basis including engineering,

procurement, construction, nuclear fuel, operations, and maintenance

support.

Medium Localisation

Medium localisation includes, in addition to civil works, the manufacture of

“non-nuclear” components such as pumps, valves, transformers and filters.

Argentina has followed this example where heavy components for the

existing two reactors were manufactured outside the country. The same

principle will apply to a future third reactor.

“Ultimately, at the endof the build programme theobjective is to have in place „deeplocalisation‟”

Rob Adam

CEO NECSA




Deep Localisation

Deep localisation involves the localisation of the greater part or the full

nuclear fuel cycle from uranium mining through to fuel disposal including the

manufacture of heavy reactor components. For South Africa it may possibly

include uranium conversion, enrichment and fuel manufacture, motivated by

the fact that South Africa has 8% of world uranium deposits. Both China and

South Korea have deep localisation of their nuclear industries which grewfrom an initially low base. The first Chinese Pressurised Reactor had less

than 10% local content (mainly non nuclear content) in 1987 progressing to

75% for the Ling Ao reactor in 2005 and targeting 95% local design and

manufacture for future reactors.

South Korea’s first three nuclear power plants were all built on a turnkey

basis from 1978 as a result of domestic industries not being capable of

meeting the quality requirements for nuclear power plant construction.The

South Koren government believed the risk of economic losses due to

construction delays, low performance, and safety problems for a non-turnkey

project at that stage was too large. In their view, starting off with turnkey

projects would guarantee succesful localisation and the development of the

required capability and experience for non-turnkey construction, which

requires long periods, could run in parallel. From the commencement of the

fourth plant domestic companies were allowed to act as sub-contractors toforeign main contractors which allowed on the job training and participation.

Local companies were established for design, engineering, and component

manufacture but had to operate initially under the quality plans and control of

foreign suppliers who were contracted to ensure a certain level of

localisation. By the mid 1990s South Korea had achieved 95 % localisation.




Current Capacity

With the scarcity of any large capex power projects between the completion

of Koeberg until the start of Medupi it can be assumed that large gaps exist

with respect to manufacturing skills and capabilities and adherence to

nuclear standards.

Government is leading studies to look at the feasibility of establishing a

heavy component industry for nuclear program. Only a couple companies in

South Africa currently have ASME III accreditation and the largest forging

press has only a maximum capacity of 1000 tonnes.

In addition, the Nuclear Industry Association of South Africa (NIASA) aim isto advance nuclear manufacturing knowledge and to support the

establishment and growth of nuclear manufacturing capability and capacity in

South Africa.

Any localisation study needs to look at the capacity of domestic

manufacturing companies, assess their capabilities and potentials and feed

into a localisation strategy. The localisation study will include the

identification of equipment or products which could be manufactured by these

companies and identify technology upgrading required of local manufacturers

and monitoring its progress as well as a socio-economic analysis.

“It is essential thatfacilities for thelocalized manufactureof equipment andsupply of material beoperational early in the project schedule”

International Atomic Energy AgencyIAEA-TECDOC-1513 Basic infrastructure for a

nuclear power project




Key Challenges

Localisation poses significant challenges due to the fact that established

international nuclear supply chain players already exist, South Africa is

geographically remote from sites of new nuclear expansion in the world, new

manufacturing industry would require financial backing from government and

nuclear component manufacturing requires facilities and high levels of skills

are presently not available in South Africa.

If the local manufacturing industry is unable to meet capacity requirements or

comply with the required quality it is possible that they will only be able to

compete for the balance of plant share of the build programme which will

have a significant effect on any localisation targets. The very heavy forging

capacity in operation today is located in Japan, China and Russia with India,

the UK, France and the Czech Republic having plants in the pipeline. The

cost benefits of investing in a heavy component manufacturing facility in

South Africa need to be analysed as large presses have an average

throughput of only about four pressure vessels per year. The growth in

nuclear power is, at present, uncertain and it could result in a large

investment to compete for a small market share or an opportunity to become

a global player in a growing market.

The ability to localise the manufacture of nuclear and conventional island

components depends also on the ability to meet quality requirements.

International accreditation is needed for design and fabrication of nuclear

grade components, showing compliance with nuclear mechanical and

pressure vessel codes and standards.

Steel supply constraints and energy price increases also pose a challenge

with a single nuclear power plant needing approximately 60 000 tonnes of

steel.

“Long lead timesassociated with manymajor nuclear plantcomponentsnecessitates procurement well inadvance of the plant‟s

licensing; the highvolume, global sourcingchallenge may not beimmediately evident toutility supply chainorganizations.Successful utilities willminimize scheduledelay risks, manage project costs, andrealize the oftensignificant supply chain benefits associated withlarge capital projects.”

Deloitte

Nuclear Renaissance and the Global Supply

Chain




Way Forward

In order to formulate a localisation strategy, including deciding on the degree

of localisation, it is crucial to balance the needs of job creation with those of

cost, schedule and sustainability. Deep localisation is desirable but this can

potentially be a difficult process and needs to take into account both the

capability of local industry as well as the global supply chain. Other regions

such as the UK, the Middle East and Eastern Europe have plans to build

nuclear plants at same time as South Africa which may result in supply chain

constraints and a potential unwillingness for vendors to invest too much

across a wide global region. A shortage of skills may be a further issue

limiting localisation.

How the localisation strategy will be rolled out is as important as the degree

of localisation chosen. A roadmap with milestones needs be developed

which should include regular reviews and feedback from both local and

international experts. A minimum percentage of local content for the first

plant needs to be set, perhaps a figure of 10 - 30% as a starting point for SA

based on the Chinese example. In addition to manufacturing reaching

desired levels, parallel programmes need to be implemented for skills

development and technology transfer. It is important that all elements are

synchronised as time is money, especially in the nuclear industry, which is

capital intensive. Any delay will widen the gap between the heavy capitaloutlay and the point at which money starts to flow back in, resulting in

significant effects on the projected cost per kilowatt hour.

Prior to the nuclear programme being confirmed it would be advantageous

for potential SA suppliers to work towards being pre-qualified and to focus on

understanding the codes and standards that vendor companies are going to

apply to their new build projects in order to benefit from potential government

investment in manufacturing and technology and skills development.

Potential SA suppliers need to be pre-qualified when nuclear supplier tenders

are issued.

Nuclear power plants require large capital and financial risks are inherent due

to the long construction times.Thus, the support of Government in helping to

achieve a localisation target is central and their role is to provide a supportive

and realistic planning framework, confidence to the market that this is a fleet

approach which will be funded, a mature regulatory framework and incentives

to invest and transfer technology. The Internation Atomic Energy Agency

(IAEA) states that “any support by the government to maximize the local

scope of supply should be in place well in advance of the start of

construction.” Government also needs to play a strong leadership role in

maintaining close collaborations with national and international organisations

and to define the programme structure assigning clear roles and

responsibility for each organization involved.

“Performing a widelyaccepted cross-industry based assessment of supply chain functionscan help identifyenhancements tosourcing processes that balance cost drivers,

construction delay risk,and procurementefficiency.”

Deloitte

Nuclear Renaissance and the Global Supply

Chain




An overlooked element in the discussion of localisation is the need to

introduce resilience and flexibility to adapt to a changing and volatile global

environment. In this sense thinking rigorously about the future and analysing

trends allows the nuclear programme to build in the ability to respond to

future events. The formation of information networks through international

collaboration allows the response to be both timeous but also informed and

best-practice.

Any feasibility study on the capacity of local industry should also focus on

relevant knowledge, skills and experience both within and outside the nuclear

industry in South Africa and the integration and coordination of these

resources. The IAEA recommends the establishment of a Nuclear Energy

Programme Implementing Organization (NEPIO) which coordinates across

stakeholders including government ministries, regulatory bodies, utilities, grid

operator, industry and educational and research institutions and assists

government in planning and preparing decisions. The South Korean

programme showed that a wide range of expertise including economists,

lawyers, educators and psychologists is needed in such an organisation in

addition to engineers and scientists.

In addition to aligning itself with the IRP 2010 it is critical that the nuclear

power programme is closely aligned with national economic development

plans. It needs to be shown that the nuclear programme will create jobs and

that the additional electricity supply will accelerate economic development

leading to the generation of capital for a self-sustaining industry.

In terms of ensuring that quality requirements are met throughout the new

build process it is vital that, as part of the plan for localisation, subcontractor

networks are formed and focused on. Quality of supplier companies dependson the quality of their subcontractors. Recent nuclear industry supply-chain

failures have included cost overruns and delays on new-build power stations

in Finland and France have occurred due to suppliers’ inability to comply with

regulations.




Our experience in the

nuclear sector

Deloitte has a long and established history within the nuclear sector with

deep industry knowledge to help clients at all stages of their business’

development; from business planning for new build to procurement of

contracts to deliver nuclear decommissioning.

Deloitte has worked closely with the nuclear industry internationally and thus

has particular knowledge of key policy and regulatory issues connected to

the industry. Our team has worked with most significant participants across

the full spectrum of the industry and has developed an excellent

understanding of the issues faced from all sides.

Consequently, we believe we are ideally placed to help participants in this

sector manage and address the many opportunities and risks they currently

face in the light of the nuclear renaissance. Our team has worked extensively

with Governments, international bodies, utilities, contractors and regulators

enabling us to deliver industry tailored solutions to our clients.




Contacts

Shamal Sivasanker Director: Power Solutions

Jacek GuzekAssociate Director: Capital Projects

Mobile :+27 (0) 82 855 0318

Email :[email protected] Email : [email protected]

Anton Torlutter Executive Lead: Capital Projects &Operations

Alastair RamlakanSenior Consultant: Power Solutions

Email :[email protected] Email :[email protected]

mailto:[email protected]


















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