WNA China Symposium Hong Kong

October, 2011

The Ongoing Evolution of Nuclear Power Economics

The World in 2011

An accident somewhere is an accident everywhere

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The World in 2011

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Success somewhere is success everywhere

“I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” (Steve Jobs)

“That’s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But its worth it in the end because once you get there, you can move mountains.” (Steve Jobs)

“Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose.” (Steve Jobs)

The World’s Nuclear Capacity

4 operating serious emerging

364

614

Today 2030

13 15Canada

101

116

USA

4 9Latin

America

125 126

Europe

4 12Other

13 20E Europe

23 39

Russia

10

136

China 66110

Asia5 31

India

WNA 2011

Measuring Success

• For global success, new build nuclear must demonstrate that it is competitive in an economic sense.

• Nuclear is capital intensive with long project schedules

• Nuclear has low operating costs due to low cost of fuel

• In many markets, the belief is that nuclear is not economic, is too expensive and needs subsidies

• In reality nuclear has been and continues to be economic relative to the alternatives in most jurisdictions

• Economics will improve as climate change concerns continue to increase (adding a cost for carbon)

• Economics are being challenged by low gas prices and high nuclear plant costs (primarily in the west)

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Economics of New Build Nuclear

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Categories of generation costs

• Investment (capital) costs and interest charged on these

• Fuel costs

• Operations & Maintenance (O&M) costs - fixed and variable

For nuclear, fuel cost includes used fuel management/waste disposal.

Decommissioning of nuclear plants is an additional investment cost, but comes many years in the future (and is accounted for in the fuel cost)

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35-40%Fuel 70-80%15-20%

15-25%5-10%20-35%

40-50%15-20%50-60%

O&M

Investment

CoalGas CCGTNuclearCost Component

Current Operating ReactorsEconomic performance• Low production (marginal) costs

– Fuel and O&M typically below 2 US cents per kWh– Best plants achieving 1.3 to 1.6 US cents per kWh in Europe and US

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

CoalGasNuclearPetroleum

U.S. Electricity Production Costs 1995-2008Production Costs = Operations and Maintenance Costs + Fuel CostsSource: US Nuclear Energy Institute (NEI)

Economics of new nuclear plants

• Nuclear has high investment costs, takes long time to come into operation, then has low and stable operating costs

• Gas plants have low investment costs, are built quickly and have high and variable operating costs

• Coal plants have moderate investment costs, are built relatively quickly and have moderate variable operating costs

• Which is the most economic depends heavily on:– (1) fossil fuel price and price for carbon, if any

– (2) interest/discount rate used

– (3) nuclear investment cost

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(1) Fuel Price

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Fuel as a Percentage of Electric Power Production Costs 2007

ConversionFabrication

Waste Fund

Enrichment

Uranium

Source: Global Energy Decisions; Energy Resources International, Inc.Updated: 5/08

Coal Gas Nuclear

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The New Gas Age

• Access to shale gas in North America has been a game changer

• Technically recoverable reserves in the USA increased by 240% from 2010 to 2011

• Price to remain below $5 /MMBTU for the next decade

• Long term price to be 20% lower than last year’s forecast

• OECD Study assumes a price of $7.78 for USA

• Is shale gas coming to other parts of the world?

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Source: EIA AEO 2011

“Nuclear is a business, not a religion ...... there must be a shortage of natural gas and stable high prices to make the economics right. This condition cannot be met due to the influx of shale gas into the market. Shale is good for the country, bad for new nuclear development.”John Rowe, Chairman and CEO of Exelon (August 15, 2011)

Addressing Green House Gases

• Climate change remains the environmental issues of most concern globally

• Placing a cost on carbon would discourage use and promote alternatives

• Greenhouse gas abatement can be helped by (1) carbon taxes, (2) carbon emission trading schemes or (3) incentives to non-carbon emitting technologies

• All would benefit new nuclear build

• Carbon prices impact the LCOE

– Coal ~ $1 / tonne = $1 / MWh – Gas ~ $1 / tonne = $0.50 / MWh

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Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "

(2) Discount Rate

• Discount rate depends on interest rates, view of the future, project risk

• Public sector – low (3-5%) and private sector higher (5-15%)

• Low discount rates reflect lower perception of risk - favours projects with high investment costs, longer schedules and low marginal costs i.e. hydro and nuclear plants

• High discount rates reflect higher perception of risk - favours projects with low investment costs, shorter schedules and high marginal costs ie gas plants

• However, the perception is that gas plants are low risk and nuclear plants are higher risk

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(3) Nuclear Investment Cost

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Costs are continuing to diverge between East and West

• US EIA assuming a cost of $5,339/kW for its AEO 2011 (an increase of 37% from 2010)

• China (at last year’s symposium) announced its first 4 AP1000 reactors will cost $2,000 /kW with the next units expected to be $1,600 /kW

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Location Factors

• Site specific characteristics• Local supply chain• Contractual structure• Regulatory regime• Government policies

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Confidence

Sustaining the Nuclear Renaissance

• Recent studies show that nuclear generation can be an economic option in most jurisdictions

• Nuclear costs in the west have increased over the past decade– Increased costs coupled with lower gas prices is challenging nuclear

competitiveness in North America• Asian activity is revitalizing the industry

– Recent new builds costs in China and Korea are benefiting from standardization • Nuclear capital cost and risk reduction can be achieved by maximizing

use of recent experience in Asia– Use of global supply chain to lower both cost and risk.

• As the fastest growing nuclear country in the world China has great responsibility to the global industry – to successfully implement its program safely and economically– and to share its lessons learned with the world 

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Our Nuclear Future

• An accident somewhere is an accident everywhere

• Success somewhere is success everywhere

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“We don’t get a chance to do that many things, and every one should be really excellent. Because this is our life. Life is brief, and then you die, you know? And we’ve all chosen to do this with our lives. So it better be damn good. It better be worth it.” (Steve Jobs)

Thank You

Milton Caplan

MZConsulting Inc. - Presidentmilt.caplan@mzconsultinginc.com

www.mzconsultinginc.com+1.647.271.4442