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TOWNHALL NEWSMAKER: EDWARD KEE ON ASIA’S NUCLEAR ENERGY BOOM — ‘POTENTIAL TO BE AMERICA’S FIRST WAVE’

Nuclear Townhall
January 13,  2011

 


Edward Kee

 

Edward Kee is an economic consultant who specializes in the nuclear power industry, particularly in Asia. He started his career as a nuclear engineer in the Navy building the nuclear power plants on the USS Carl Vinson, an aircraft carrier. He had the pleasure of seeing Admiral Rickover twice, once when he was interviewed as a Midshipman for entry into the program and again when he qualified as Chief Engineer on Nimitz-class aircraft carriers. After the Navy, he went to Harvard for an MBA and then joined a start-up in the independent power business. He moved to consulting, first at McKinsey & Co. and then at several economic consulting firms, including Putnam, Hayes & Bartlett and Charles River Associates, where he worked on electricity industry restructuring, electricity market design, and privatization of utilities as far away as Australia. He worked has on a variety of nuclear power engagements as a consultant, including one of the last big rate cases and some large litigation cases. He has focused on nuclear power industry issues almost exclusively since about 2006 and is now Vice President at NERA Economic Consulting. Kee gave a presentation titled “Asia Leads the Way,” at the recent Nuclear Asia Conference 2010 in Hong Kong, which prompted this interview.

NUCLEAR TOWNHALL:  “Asia Leads the Way.”  I guess we’re all aware that’s true by now. But could you specify exactly how this is unfolding.

KEE:  China is the leader in new nuclear build. The factors that drive nuclear power development in China, and elsewhere, can be divided into three categories: market fundamentals, industry structure, and the role of government. Market fundamentals include the need for electricity generation capacity and the availability of alternate generation fuels.

The market fundamentals in China are favorable for nuclear power. There is a large need for new generating capacity and some limits on the availability of competing generation fuels. The U.S., on the other hand, needs little new capacity and has significant coal and natural gas resources at relatively low prices.

Industry structure refers to how the electricity industry is organized. One extreme is a fully integrated and government-owned system, with the other extreme being electricity markets with merchant power plants. China has an electricity industry that is fully integrated and government-owned, with decisions based on the government’s 10-year plans that include nuclear power. In the U.S., some regions have moved to electricity markets where new capacity will be merchant power plants and some regions have the traditional U.S. investor-owned regulated utility approach. Both regions have a variety of public power utilities. It is difficult for any U.S. company – whether a merchant power plant developer, a regulated utility, or a public power utility – to make a large commitment to nuclear build as a result of commercial viability, regulator and public reviews, and other factors.

The role of government refers to the extent to which the government is involved in the nuclear power industry, directly or indirectly. This is a very important factor. A nuclear power plant is a capital-intensive 100-year project that may be consistent with long-term infrastructure development by governments, but may be a poor fit with the typical commercial investment process. China’s government has a pervasive role in the electricity industry, in the nuclear power industry, and in the entire economy. The term “State Capitalism” has been used to describe the large government-owned companies that are established to meet internal domestic demand in countries like China and then approach the world market to compete with commercial companies. The U.S. has the opposite model, with commercial reactor vendors contracting with commercial buyers, with a limited role for government in such temporary measures as DOE loan guarantees.

A key issue in my presentation was about the emerging role of state-owned entities competing with commercial vendors in the nuclear power industry.

NUCLEAR TOWNHALL:  How does that dichotomy work?

KEE:  A critical issue for the nuclear power industry is to get capital costs and construction times down. Getting up the learning curve and down the cost/experience curve comes from building a lot of identical units. As France demonstrated in the 1970s and 1980s, orders for a fleet of identical nuclear power plants brings lower costs, faster construction, and allows the development of a national nuclear power industry.

The nuclear industry has figured out that it is better to build a lot of identical units, and China is doing this in a big way. China’s program will achieve significant cost advantages and will allow it to develop a strong and capable industrial capacity. In U.S.’s commercial approach, there are multiple “standard” reactor designs being considered, but there may not be enough new nuclear plants built in the U.S. to establish any of these as a world standard. The relatively few units that may be built in the U.S. will not take the industry very far down the experience curve.

NUCLEAR TOWNHALL:  What’s the overall implication for the United States here?  Most people would look at this and say simple, “We’re falling behind. We’re losing our edge.”  Is there any other spin that can be put on this?

KEE:  I don’t like to think about the nuclear industry as a short-term game that we are either winning or losing – it is more useful to look at the long-term. The fundamental factors, including low natural gas prices and low demand growth, make new nuclear investment difficult in the U.S. right now. These poor fundamentals make it particularly hard for first-of-a-kind reactors that will be more risky and expensive. This has led some U.S. buyers to wait until plant designs are proven and cost less. But if everyone waits for the second wave, there will be no first wave.

The good news about nuclear build in Asia is that it has the potential to be America’s first wave. China has selected a couple of reactor designs – the AP1000 and the CPR1000 – as the primary ones and is busy building them. As China constructs multiple units, the learning from these projects can be transferred to the U.S. Already, lessons from the Sanmen units are being brought back to Vogtle and Summer and should help those U.S. projects control cost and stay on schedule when construction actually starts.

NUCLEAR TOWNHALL:  In other words, you learn more from actually building reactors than from just designing computer simulations.

KEE:  One of my favorite Rickover stories is his comparison of paper reactors and real one. In 1953, he wrote a famous letter saying there were two types of reactors, paper ones and real ones. Paper reactors are small, light, flexible and cheap to build. They always seem to be in the design stage. Real reactors are large, heavy, difficult, complicated and are always behind schedule. Yet they are actually being built. His point was that it’s easy to do things on the drawing boards but it’s the actual construction experience that counts. China’s experience in building the AP1000 and its modules will make a huge difference to the American industry. Building the first Sanmen unit has already resulted in improvements in things as mundane as rebar placement and pouring concrete. It seems trivial, but these improvements will save months in future construction.

NUCLEAR TOWNHALL: Some say that the biggest growth for nuclear is going to be in the developing world outside of India and China. How do you see that unfolding?

KEE:  The fundamentals in the developing world are good – these countries need a lot of power. But selling a nuclear reactor to a country without an established nuclear industry and bureaucratic infrastructure is difficult. When the country does not have a well-developed electricity industry, it is even harder. For countries looking to build their first nuclear power plant, the IAEA milestone approach lays out a detailed roadmap to develop laws, nuclear regulations and regulators, skilled engineers, and other things prior to ordering the first nuclear plant. This process may take 15 years. The UAE approach, where a country spends a lot of money up front, is much faster but may not be possible for many developing nations.

I have heard from several countries that they do not want to compound the problems of establishing a new nuclear power program with the risks of an unproven plant design. There are few Gen III designs with operating experience, but as China and Korea build nuclear power plants, the comfort level with their plant designs will increase, with implications other first-time buyers.

NUCLEAR TOWNHALL: Is Russia going to be a player?  How will the Russian’s willingness to handle the entire fuel cycle play into this?

KEE:  Rosatom, the integrated Russian nuclear company, is backed by the Russian Government. They have some proven VVER/PWR designs and have built them in several countries. Now, they are trying to expand their market by going well beyond the hardware. They are putting together fuel arrangements whereby they will not only supply the fuel but take it back as well. This means a smaller country does not have to devise its own high-level waste solutions, which is a very strong selling point. But there is more. The Russians are also bundling finance and operations with their sales. Four Russian units were sold to Turkey on a BOO (Build, Own, Operate) basis, with the Turkish government purchasing power at an agreed price. It will be hard for any commercial reactor vendor to match the deals that Rosatom is offering, especially in the developing world.

NUCLEAR TOWNHALL:  How do small modular reactors fit into this?  Is there any chance we’re going to be able to grab the lead in this technology?

KEE: There is a lot of R&D activity in small, innovative reactors going on around the world. The Asian small activity is all government-funded so it’s a lot quieter than in the U.S., where companies are constantly releasing their press releases. In China, small reactor activity is aimed at building actual prototypes. It’s Admiral Rickover’s letter all over again – you learn a lot from building reactors than from designing them.  I am not sure how the story will end but I expect that a large part it will be written outside the U.S.

NUCLEAR TOWNHALL:  Having as much experience as you do in Asia, what’s the impression of American technology over there?  Do they still think of U.S. as a leader in research? 

KEE:  The NRC is the gold standard for nuclear regulation. A reactor design that is approved here will have little or no issues in getting approved in Asia. In fact, most of the reactors being built in Asia are based on U.S. designs. Once these prototypes are built, however, the issue will be who can build them quickly and at low cost. Except for intellectual property rights, the question of where the design originated and which company designed it may not be as important as who builds it and how many. We’re not alone in this business anymore.

NUCLEAR TOWNHALL: Thanks very much for your time.
 

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