MOX – how commercial a business is it?31 March 1998
Last year, the UK’s Environment Agency decided that before it could authorise commissioning and operation of BNFL’s new Sellafield MOX Fuel Plant (SMP), an independent assessment of the company’s business case had to be undertaken. This was to ensure that it met the “justification” criteria, that is, its economic benefits outweigh the radiological risk and other detriments. The conclusion was that the business case was “decidedly positive” and, looking beyond BNFL’s conservative assumptions, there is a much greater market potential out there.
The addition of a MOX manufacturing capability is an important element in the commercial strategy of BNFL. The 120 tHM/y SMP enables the company to provide a comprehensive and fully integrated reprocessing and recycling facility for its customers. The components of this are: spent fuel transport; interim storage; reprocessing; MOX fabrication; MOX transport.
While the case for recycling has lost some of its main economic justification due to the continuing low prices for uranium and the cutting back of fast reactor programmes world-wide, there is a growing LWR MOX market in which Cogema is already quite active (see NEI, July 1997, pp 24-27).
It is critical, therefore, for BNFL to obtain authorisation to operate its completed plant, which requires it to demonstrate that the economic benefits outweigh the radiological and other risks, including non-proliferation, transport and safety.
To test BNFL’s business case, the Environment Agency brought in PA Consulting Group which not only examined BNFL’s economic case, but also prepared its own by building a model which uses at several levels of detail the key business drivers – revenue (volume and price of sales), production capacity, and costs (capital, fixed and variable). It carried out a scenario planning exercise to identify the situations that might affect the economics of the proposed MOX business. It then modelled over 2000 options – sets of changes in the elements of these key drivers – to measure the impact on the NPV of different assumptions (at varying levels of probability) in respect of each of the key drivers.
The BNFL case was limited to considering the economic benefits that would derive from recycling plutonium from some of its existing spent fuel reprocessing contracts into MOX fuel for existing customers, thus focusing only on part of the potential commercial opportunities that might be available.
In its assessment, PA considered the MOX plant as a stand-alone business, separate from MOX fuel transport which it considers an independent and profitable business. And, as the costs of building the plant are already sunk, the assessment only examined the further costs and revenue streams that would arise from commissioning and operating the SMP or withdrawing from the MOX fuel fabrication business.
PA evaluated BNFL’s potential MOX business performance under likely ranges of market conditions and manufacturing performance. For example, as the MOX market increases in size then sales volumes will increase, but as utility companies come under pressure to reduce electricity prices and if MOX production capacities exceed demand, then a progressive decline in MOX sales price is likely. Similarly, the high fixed costs of the business cause a strong link where higher production volumes will reduce production costs.
PA developed a financial model which can handle a wide range of options. The results of this modelling were interpreted and compared not only with the BNFL economic case but also with longer term opportunities to serve a wider range of customers. In this regard, it looked beyond the restrictive assumptions of BNFL’s reference case (eg in terms of volumes and duration of production), to consider a wider (but plausible) range of commercial opportunities. It identified the possibilities of developing much larger sales volumes, possibly several times the size of the reference case.
PA concluded that the SMP, even under the very conservative conditions defined by BNFL, will produce a strongly positive operational profit, measured as Net Present Value (NVP), which is very unlikely to be less than £100 million, and exceeds £300 million in many options, and on average amounts to £230 million.
PA estimated the potential market based on data from the IAEA and the OECD Nuclear Energy Agency. The market study considered nuclear power generation capacities; spent fuel arisings, back-end strategy for dealing with spent fuels; reprocessing capacity and the capacity and capability to fabricate and use (in licensed reactors) MOX fuels. PA concluded that BNFL has the potential to secure at least a proportional market share of the reprocessing and recycle of plutonium equivalent to 90-120 tHM/y of MOX fuels. By 2020 this could amount to in excess of a cumulative sales volume of MOX fuel of about 1200 tHM, up to a plausible maximum of about 2400 tHM, assuming customer countries maintain or enhance their existing back-end reprocessing strategies.
• Spent fuel arisings. Total annual worldwide spent fuel arisings amount to about 10 500 tHM for all types of reactors. By 2010 this is estimated at 300 000 tHM, of which about 200 000 tHM are planned to be stored and the remaining to be reprocessed. The plutonium content of this 100 000 tHM could make in excess of 10 000 tHM MOX fuel. The average annual rate of MOX fuel production required from 2000 to recycle this plutonium is about 500 tHM/y.
• Reprocessing. If BNFL is able to secure a share of the MOX market proportional to its reprocessing capacity for AGR and LWR, then it should be seeking an annual MOX fabrication and sales volume of around 25% market share. This is equivalent to about 90 tHM/y by 2000 rising to 120 tHM/y by 2005.
• MOX fuel usage. PA estimates that by 2000 the annual MOX fuel requirements in the main market (Belgium, France, Germany, Japan, Switzerland, and the UK) is more that 205 tHM with the number of reactors licensed for MOX use rising from about 32 in 1995 to 50-60. By 2005 as more reactors are licensed, this will go up to near 300 tHM, and could rise even further. However, the amount begins to drop at some point after this as the nuclear plants are decommissioned and the total capacity starts falling.
The UK, Japan, Germany and Switzerland are the current major customers for BNFL for spent fuel reprocessing and are potential customers for MOX recycle. Germany currently reprocesses about 30% of its spent fuel, divided between BNFL and Cogema, and Switzerland some 40%. France reprocesses nearly 100% of its spent fuel arisings, all of which is handled by Cogema.
In future, the EU may force France to open its national market.