Managing nuclear assets for competition30 November 2001
The cost structure of nuclear plants makes them - in theory - more competitive with other forms of generation in a wholesale commodity production environment. However, regulatory, management and other challenges have made them far more marginal than they were designed to be, putting their economic future at risk. By Howard Mueller and Jong-Hyun Kim
Electric power markets around the world are undergoing very rapid restructuring, moving towards a far more deregulated, competitive market for power and energy. Nowhere is that trend more evident than in the generation sector, where wholesale competition is more readily initiated and leads to more immediate and intense competitive results.
Competitive markets create new challenges for nuclear power assets. Nuclear power plants are generally more capital intensive than other generators, but were designed to operate with lower operating costs.
Recent developments in the USA and elsewhere have led to new ways to manage nuclear assets more competitively and successfully. EPRI's Strategic Asset Management (SAM) planning framework, together with other planning tools and operations management technologies, has helped focus asset management and resource allocation decisions for the power industry in a competitive marketplace. In particular, it has helped in ways that enhance the value of nuclear plants in a deregulated environment.
How did we get here?
In thinking about the future course of nuclear generation in the rapidly changing US or global electricity marketplace, it is important to remember how we got here — how nuclear power came to have both the opportunities and challenges it currently faces to its place as an important source of electric energy.
Nuclear power was developed and deployed to play a key role in the generation mix of the electric power industry across the globe. It was designed from the outset to provide low operating cost, baseload generation. A key objective behind the movement towards nuclear generation was to move away from a dependence on fossil fuel sources of any sort — to reduce dependence on coal, oil, and natural gas. The key drivers of that direction were broad environmental concerns (recalling that nuclear directions predated most major environmental control legislation), as well as general concern about what appeared to be diminishing oil and gas resources (recalling that this predated the oil price shocks that so shaped perceptions about energy markets). Only later did nuclear power become a primary response to the policy need to reduce dependency on what were perceived to be volatile and unreliable oil markets.
Nuclear power was not initially an unusually capital-intensive form of generation. Its capital costs were more expensive than coal, but not dramatically so. With low fuel and operating costs, nuclear remained for many years less expensive than coal at the busbar in the US marketplace, far less expensive than oil or coal in regions without domestic fuel resources. In a world of rate-base regulated electric power, there was a basis for assured recovery of capital investment.
Only later did rising operating costs and the very high capital costs of the 1980s create an environment in which the ability to recover what were sometimes "above market" investment costs — or even to generate at competitive operating costs — become the challenge that they have during the late 1990s, especially in the US marketplace. Most of the regulatory legislation in the US has provided for relatively assured recovery of plant investment. That leaves the issue of the position of nuclear power as a competitive source of power generation focused largely on operating costs and operations management, and the issue of ongoing plant investment focused largely on creating production facilities that can operate as successful competitive generators.
Where we stand now
Nuclear power production is today becoming an increasingly competitive wholesale production and marketing business, not only in the US, but throughout the world as the industry "liberalises" or restructures on a global basis. In this business, the value of plant is driven by the value of power in the market. Successful asset managers will focus their efforts on two things:
• Doing those things that create highest value.
• Running their organisation excellently to harvest their knowledge and skills concerning value drivers and asset value management.
The key to success is a very clear challenge, a challenge not unlike virtually every other kind of manufacturing facility: producing a product at a cost that can generate a profit when sold at a price set in the marketplace — in this case, at the busbar. Nuclear power, at least in the USA, is returning to a more competitive position — on an annual average basis. Unfortunately, prices are no longer set on an annual average basis. There are many hours in the year, perhaps most hours, when many plants still produce at costs that are above market-clearing prices. On the other hand, there are hours, perhaps many hours, when prices are now far above the costs of production.
It is the ability of asset managers to make money under precisely this kind of market condition that will give them the ability to succeed as a competitive business.
A generally predicted result of this marketplace is that nuclear assets are likely to become concentrated in the hands of those companies or organisations that can best leverage the value of the assets - those that can best respond to the requirements of a competitive marketplace across a fleet of nuclear plant assets. Two key issues underlie that direction:
• The drivers of nuclear asset value.
• The process of managing nuclear assets for maximum value, including some EPRI observations from experience working with the US nuclear market.
The central theme is that managing nuclear assets as assets is becoming the key to success as a competitive nuclear production business.
Asset value drivers
What drives the value of nuclear assets in the marketplace? As regulated utility companies, we "valued" these assets on our books and in our rate cases on the basis of their capital costs. But costs and value are not the same thing. In everything from power plants to houses in California's Silicon Valley, the "value" or market price of an asset is governed not by its costs to build, but by what someone is willing to pay for it. In the case of power plants, the value of the asset itself is influenced by more than just the immediate income stream from the generation it produces.
As we've seen in the USA, the price different buyers are willing to pay for the same power plant varies widely from buyer to buyer. In the course of our work on valuing plant assets and on managing and increasing the value of those assets, EPRI has come to think of the value of nuclear plant as being driven by both traditional and by non-traditional sources of value.
The Figure below illustrates various sources and determinants of nuclear asset value. The value components of a nuclear asset are in many ways similar to other generating plant, but have some strengths and weaknesses that are unique to nuclear plants. As a simple example, things that increase the value of a nuclear plant include the derivative value of environmental offsets, both as they are set in the marketplace now, or as options in the future. Potential weaknesses might include a discount for the risks created by uncertainty in the ability to collect future decommissioning costs — or even by uncertainty in the magnitude of those costs.
The more traditional drivers of value include the obvious: the present worth of the power that can be produced and sold on the marketplace by the plant in its present condition and with its current licensing restrictions; also, the value of the revenue stream that could be produced from the plant if its operating performance were improved, or if its licence conditions were modified in some favourable manner.
There are other, less traditional sources of value. These include:
• Synergies. The ability to leverage operating skills or characteristics across a broader number of plants; operations that can be shared and leveraged with multiple plants.
• Option or arbitrage value. Ability to arbitrage power between regional markets served by multiple plants; ability to access or trade between multiple price points across time (for example, "forward markets") or across markets.
• Strategic value. Potential future value of an asset if it can be sold into an international market, or can be leveraged with other plants internationally in the future; potential future value in the event of substantial change in future market conditions; retaining presence in nuclear business as a point of leverage in growing the value of the company in future consolidation or restructuring choices.
Most of the value derived from asset management decisions come from some combination of three value drivers:
• Base operating value. The net from power production and sales.
• Potential operating improvements. The improvement to net from operating efficiency improvement of any sort, or from added production developed through plant performance improvement of any sort.
• Synergies. The ability to leverage operations and asset management capability across multiple assets.
The "bottom line", from an asset management perspective, is that the nuclear asset manager has two major "levers" that can be pulled in enhancing asset value: knowledge of the specific set of actions that can be taken that exert the most cost-effective improvement in plant value, and the leverage that can be gained in extending that knowledge across a larger and larger portfolio of plants.
The centrepiece of that "knowledge" is a really clear focus — a "clear line of sight" — on the actions that create the greatest value, and the ability to exercise that knowledge. And the single most powerful theme in focusing asset management attention is a very simple attribute of power markets as they respond to the forces of market restructuring or "liberalisation": All hours are not created equal.
And there is a corollary of equal importance: Not all prices are created equal. The experience of the power markets in Europe and the USA, as the markets have been "unbundled", has been similar: there has been a sharp increase in the variability of actual prices seen on the wholesale prices, and a dramatic increase in the volatility — the peaks to averages — in prices overall.
From experience in working on asset management projects with a number of nuclear assets, there are many hours during the year when prices are at or even below the costs of nuclear production. These prices are well below capital recovery (profitable) prices. On the other hand, there are some hours when prices are well above, and even far above, profitability.
By focusing asset management decisions on those decisions that capture marketplace value, and understanding how various choices actually shape value, asset managers can focus the attention of their organisations on the "right places" — on doing those things that add the most to the value of their nuclear assets.
As simple as that concept might sound, it is not routinely carried out in practice. The basis of the asset management programme that EPRI has been developing over the past several years has been to add real analytical power to the arsenal of nuclear management — analytical power that can help focus management attention on the places that create the greatest value. With that "clear line of sight" in place, it is possible to significantly enhance the value of assets — and grow the ability to leverage skill sets across an ever-more valuable fleet of generating plant resources. That "clear line of sight" leads staff and management to focus attention on the basic decisions and uses of resources — investment or operating — that maximise value.
The examples shown on the Figure above include changes in plant that reduce the chances of an on-peak forced outage, recapture a peak-period derate (a thermal restriction on cooling, for example), investment in plant equipment that permits broad uprates available not just at peak-price times but over many hours (improvements in thermal performance, for example). And clearly they include those operating or process changes that reduce costs across the year. This kind of clarity can be captured in "rules of thumb" that keep staff and management focused on doing those few things that are of higher rather than lower value.
Finally, operating skills and process improvements across all of the elements of the nuclear operating environment are the places that offer the generic opportunities to reduce operating costs, improve efficiencies, add value and create leverage. Organisations that have learned to capture not only the high-value opportunities for value creation, but also learned to continuously improve operating and management performance across the value chain are in a position to leverage these skills across, first of all, a fleet of nuclear plants; and then, through acquisition or consolidation, across a growing part of the national or global nuclear production enterprise.
The role of asset management decisions cannot be understated in this new environment. It is the real opportunity to shape asset value proactively. It leverages all three of the focus areas of asset management:
• Base operations value.
• The value that can be derived by plant operations improvement and improvements in operating margins.
• The value that can be gained out of leveraging synergies between and among assets.
But all of these asset management points of leverage must also rest on the foundation of excellence in basic operating management and process management. In the USA, EPRI, together with the national nuclear organisations, has worked with the industry over recent years to provide the knowledge, information, and technology to improve operating and process performance along the nuclear value chain.
The full range of nuclear asset management opportunities includes nuclear fuel, operations, maintenance, licence renewal, decommissioning, and technical and business support services.
The ability to "run better" - operate more effectively, manage processes more efficiently - ultimately becomes part of the "synergies" that can be leveraged by a smart asset management organisation across a fleet of assets. Much of the success that the US industry has had in the last few years in driving down nuclear operating costs has come either from improving utilisation rates or from the process improvements that have been driven into this value chain by these efforts. An asset management organisation that has managed these skills is in a position to harvest unrealised value currently owned by other plant owner/operators — either domestically or globally.
The asset management process, analytics and technology that EPRI has been developing and supporting in the US industry have been building a technical foundation that lets a nuclear operating company leverage this skill set and these management capabilities across a portfolio of plants to achieve corporate strategic objectives. It is that "line of sight" that translates operating practice, resource allocation decisions, plant investments and even asset acquisition into an effective nuclear enterprise.
What do these lessons mean for investment in existing nuclear assets?
First, the reshaping of the wholesale energy marketplace means that plant investments are driven by their contribution to bottom line value — to the value that the investment creates in the asset. Much of that value is shaped by the power market value, driven by the "price duration curve" illustrated earlier. Not all investment opportunities are created equal, because not all operating hours are of equal value. Driving investment to those aspects of plant operation that have the greatest operating value is the goal of asset management. Understanding the drivers of value is the key to success in making those decisions.
Based on EPRI's work to date, the highest value investments tend to be grouped into reasonably logical and even obvious sets. Defining these sets and classes of investments or key process improvements (creating "rules of thumb") and clearly communicating them throughout plant management and staff gives an organisation the ability to focus attention and financial resources on the highest value actions and investments. The "rules of thumb" that emerge in our plant work tend to be one of the most useful results from these efforts.
The ability to understand the "rules" and the drivers — combined with the ability to operate effectively and to implement efficiently — create the opportunities to harvest operational improvements and synergies, and therefore to substantially grow and leverage asset value.
What do these insights mean for the industry going forward?
We would argue that they are likely to mean that those companies or organisations with the ability to focus their attention and resources on optimal asset management processes and investments can improve the value of undervalued assets. This means that those companies with that ability are in a position to acquire and manage a relatively large fleet of assets, leveraging those skills, creating an enormous opportunity to enhance the value of the existing fleet of nuclear plants. That capability also creates the ability to create new value in the marketplace, creating substantial opportunities for growth and success for those organisations.
But this potential value can only be realised through operational excellence, spread across that nuclear value chain — harvesting that set of skills and knowledge that EPRI and other nuclear institutions have been supporting for the industry. Management excellence is the key to harvesting that knowledge and harvesting the value of the leverage that excellence in asset management creates.
Finally, the evolution of a liberalised electric power industry globally creates wholesale energy markets that create the kind of price differentials illustrated earlier. It also creates the opportunity for those asset managers who have the skills to acquire and leverage assets to enhance their value in the marketplace. The pricing we've seen creates the incentive to acquire these assets; the management capability we've described creates the ability to do so successfully. Fundamentally it creates the ability to drive new value into these plants.
From the evidence to date, the incentive is large enough to be likely to move the industry towards the development of larger and more efficient "nuclear power corporations" — and explains some of the movement that has already begun within the industry.