Nuclear Power Economics and Markets

Nuclear Power Economics and Markets IBC - Decommissioning of Nuclear Reactors & Materials 29 30 September 2014; Miami, Florida Edward Kee

Disclaimer The NECG slides that follow are not a complete record of this presentation and discussion. The points of view, opinions, and conclusions expressed in this presentation and the accompanying discussion may not be the same as the views of NECG s clients or the views of my colleagues. 2014 NECG 29 Sep 2014 IBC 1

Program agenda 09.30 Changing face of nuclear economics Electricity industry and nuclear business models Electricity market dynamics Impact of non-conventional natural gas Renewable sector subsidies 10.00 Market analysis of nuclear power Nuclear power global activity Highlights of key markets 29 Sep 2014 IBC 2

Changing face of nuclear economics 29 Sep 2014 IBC 3

New nuclear development factors Electricity fundamentals Electricity industry structure Nuclear business model Politics & public opinion 29 Sep 2014 IBC 4

Politics and public opinion Public support not sufficient Politics & public opinion Public opposition May rule out nuclear power (e.g., Austria) Makes nuclear projects harder Shapes role of government 29 Sep 2014 IBC 5

Electricity fundamentals Electricity fundamentals Electricity system Long-term investments Real-time dispatch Value of nuclear electricity Linked to other generation options Availability of alternate fuels is key 29 Sep 2014 IBC 6

Electricity time scales from seconds to centuries Electricity fundamentals Before Decades Years Months Generation investments Physical & financial contracts Reserves & ancillary services Long-term: Invest to meet demand; minimize total system long-run costs Weeks Predispatch Hours Seconds Real time Hours Months Years Decades After Investment returns Contract settlements Spot market prices Dispatch & market clearing Real time system control Real-time: Dispatch to meet demand; minimize system shortrun marginal costs 29 Sep 2014 IBC 7

Nuclear value based on primary energy alternatives Electricity fundamentals Source: Figure ES.1; OECD Generating Costs 2010, LCOE in US$//MWh; 5% discount rate 29 Sep 2014 IBC 8

Nuclear value linked to primary energy alternatives Electricity fundamentals South Korea: Source: Figure 4.10a; OECD Generating Costs 2010, LCOE in US$//MWh; 5% discount rate 29 Sep 2014 IBC 9

Electricity industry structures Electricity industry structure Government-owned electricity sector Investor-owned regulated utility Electricity markets 29 Sep 2014 IBC 10

Government utility Electricity industry structure Government Electricity Ministry Citizens and taxpayers $ Power Plants System Dispatch TRANSMISSION CONSUMERS MWh $ DISTRIBUTION RETAIL SERVICES 29 Sep 2014 IBC 11

Regulated utility Electricity industry structure Investors Power Plants Utility regulator System Dispatch TRANSMISSION CONSUMERS MWh $ DISTRIBUTION RETAIL SERVICES 29 Sep 2014 IBC 12

Electricity markets Electricity industry structure Investors Power Plants Market oversight Electricity Market Utility regulator TRANSMISSION DISTRIBUTION CONSUMERS MWh $ RETAIL SERVICES 29 Sep 2014 IBC 13

Electricity market issues Electricity industry structure No electricity market revenue for Capacity (may be short-term capacity market) Clean (i.e., no CO2) operation Long-term asset operation Stable fuel costs In US, low natural gas prices lead to lower market prices in on-peak periods Out-of-market subsidies for renewables leads to distorted and even negative prices 29 Sep 2014 IBC 14

Spot price refers to system marginal price (SMP) Electricity industry structure SMP (high) Spot Price Demand (high) SMP (low) Bids Demand (low) Demand Illustrative trading period (eg, an hour) 29 Sep 2014 IBC 15

SMP with low gas prices Electricity industry structure SMP (high) High natural gas prices SMP (high) Spot Price Low natural gas prices Demand (high) SMP (low) Bids Demand (low) Demand Illustrative trading period (eg, an hour) 29 Sep 2014 IBC 16

Total cost of power High natural gas prices Electricity industry structure Profits SMP Gas-fired unit on margin Spot Price Demand Bids Plant A Plant B Demand Illustrative trading period (eg, an hour) 29 Sep 2014 IBC 17

Total cost of power Low natural gas prices Electricity industry structure Losses Profits SMP Spot Price Demand Gas-fired unit on margin lower gas prices Bids Plant A Plant B Demand Illustrative trading period (eg, an hour) 29 Sep 2014 IBC 18

Out-of-market subsidies (e.g., PTC) - distorts bidding Electricity industry structure Units (e.g., nuclear) bidding into market as price-takers or must-run will pay to operate when SMP is negative Spot Price Bids SMP (negative) Demand Demand Illustrative trading period (eg, an hour) 29 Sep 2014 IBC 19

Uncertain revenue in electricity markets Electricity industry structure Market investments based on future revenues Hard to predict future electricity market revenue Market simulations with range of assumptions (new entry, fuel prices, demand, market rules, etc.) Scenarios to reflect major uncertainties and identify key revenue risks and opportunities New nuclear time-lines make this really difficult Revenue starts at COD ( 10 years after project start) Project operates for 60 years (or more) 29 Sep 2014 IBC 20

Nuclear business models Nuclear business model Government or regulated utility IPP with power contracts Energy user cooperatives Merchant project selling into market 29 Sep 2014 IBC 21

Nuclear project cash flow Nuclear business model Large and uncertain capital cost 10+ year development and construction period Cost Illustrative Revenue Prolonged outage possible, with high cost and no revenue Uncertain revenue Significant fixed costs (fuel + O&M) Liabilities for decommissioning and spent fuel disposition 0 10 20 30 40 50 60 70 80 90 100 110 120 29 Sep 2014 IBC 22

Traditional power project business models Nuclear business model Ultimate credit sources Owner / Operator Monopoly utility rates; government guarantees Government utility Monopoly utility rates; corporate guarantees Regulated utility Long-term PPA IPP 29 Sep 2014 IBC 23

Government utility Nuclear business model Nuclear Plant Electricity Ministry Government Nuclear Plant System Dispatch PPA Citizens and taxpayers $ TRANSMISSION CONSUMERS MWh $ DISTRIBUTION RETAIL SERVICES 29 Sep 2014 IBC 24

Regulated utility Nuclear business model Nuclear Plant Investors Utility regulator Nuclear Plant System Dispatch PPA TRANSMISSION CONSUMERS MWh $ DISTRIBUTION RETAIL SERVICES 29 Sep 2014 IBC 25

Cooperative model Nuclear business model Ultimate credit sources Owner / Operator Cooperative member LT projected demand Cooperative (e.g., TVO) 29 Sep 2014 IBC 26

Electricity markets Nuclear business model Investors Nuclear Plant Hedge contract Market oversight Electricity Market Utility regulator TRANSMISSION DISTRIBUTION CONSUMERS MWh $ RETAIL SERVICES 29 Sep 2014 IBC 27

Merchant project business model Nuclear business model Ultimate credit sources Owner / Operator Expected power sales into electricity market Hedge contracts (e.g., CfDs) with energy users Merchant nuclear project developer Out-of-market subsidies (e.g., carbon benefits) Other (e.g., government loan guarantees) 29 Sep 2014 IBC 28

Summary Electricity fundamentals Electricity industry structure Nuclear business model Politics & public opinion Electricity fundamentals set nuclear value Electricity industry structure defines options Proven nuclear business models - government, regulated, cooperative US electricity market issues (natural gas and renewable subsidies) may mean Early retirements (e.g., Kewaunee & Vermont Yankee) More decommissioning projects in near term 29 Sep 2014 IBC 29

Market analysis of nuclear power 29 Sep 2014 IBC 30

Global nuclear - all USA France Japan China Russia South Korea India Canada UK Ukraine Sweden Germany Taiwan Spain Belgium Czech Republic Switzerland Finland Pakistan Slovakia Hungary Argentina Brazil UAE Romania Mexico Bulgaria South Africa Belarus Slovenia Netherlands Armenia Iran Operation Construction 0 20 40 60 80 100 120 29 Sep 2014 IBC 31

Global nuclear after 2000 China India Russia South Korea USA Japan Pakistan UAE France Finland Brazil Belarus Operation Construction 0 5 10 15 20 25 30 35 40 29 Sep 2014 IBC 32

Role of government New nuclear under construction and planned (GWe) 80 70 60 50 40 30 20 10 0 USA Japan Korea France UAE UK China Russia India -10 Role of Government 29 Sep 2014 IBC 33

Vendor ownership national nuclear industrial strategy Nuclear industrial capacity development National nuclear vendor & supply chain Export market sales + ownership Nuclear fleet build in home country Nuclear learning & scale benefits Long-term nuclear power strategy Nuclear is low cost energy option 29 Sep 2014 IBC 34

Country activity A look at key countries: China India UAE Turkey US Japan 29 Sep 2014 IBC 35

China Large and active build program Focus on Chinese designs CPR1000/ACPR1000 now Hualong One CAP1400 (larger version of AP1000) Using domestic nuclear build program to build national nuclear industry Exporting plants to Pakistan now Plans to sell CAP1400 into export market soon 29 Sep 2014 IBC 36

India 3-Phase nuclear plan Locally-designed PHWRs Fast breeder reactors Thorium fuelled reactors Re-joined international nuclear industry in 2008 Able to buy significant stockpiles of uranium Promise to buy multiple western LWR units Third-party liability law is a complicating factor Only Russians building LWR to date 29 Sep 2014 IBC 37

UAE Fast-track approach for new nuclear countries First sale of Korean APR1400 in export market 4 Barakah units First two units under construction On schedule Nuclear + RO desalination Replace gas-fired generators + thermal desalination 29 Sep 2014 IBC 38

Turkey Long-term efforts to start nuclear power program Current approach seems viable BOO projects, with foreign ownership and operation Power sales Part of output through PPA with government utility Rest of output to market Akkuyu (Mediterranean) Rosatom Sinop (Black Sea) MHI + GDF/Suez + Itochu 29 Sep 2014 IBC 39

US Two new nuclear plants 4 AP1000 units (Summer and Vogtle) TVA completion of Watts Bar 2 New project activity today Merchant COL applications moving slowly or on hold Standard design review moving slowly Economic stress on existing merchant units 29 Sep 2014 IBC 40

Japan Nuclear units still in post-fukushima shutdown; recent discussion of early retirement for 7 units Large economic impact from Shift to imported LNG, oil, and other fuels Building new coal power plants Potential restructuring of electricity industry Potential for nuclear plant issues as in US Proposed approach for keeping existing units profitable (like UK CfD) 29 Sep 2014 IBC 41

UK UK existing nuclear fleet nearing retirement UK has one of the first electricity markets In recent years, UK moved to Reform the electricity markets Provide incentives for new nuclear Negotiate Hinkley Point C deal (EU State Aid review) NuGen and Horizon moving ahead 29 Sep 2014 IBC 42

Nuclear Decommissioning Outlook US - early retirements (merchant units and maintenance issues); may be more coming UK - old gas-cooled reactors will be closed and decommissioned Japan some units will not restart Germany political shutdowns France may retire some older units 29 Sep 2014 IBC 43