Decontamination & decommissioning
UK market opportunities5 June 2007
Despite increased funding in the 2007/8 budget for the UK’s Nuclear Decommissioning Authority, why are some private sector companies in the nuclear supply chain experiencing a business slowdown? By Ian Jackson and Shehnaz Jackson
The size of the nuclear cleanup market in Britain is mostly controlled by the Nuclear Decommissioning Authority’s (NDA’s) annual spending budget set by the UK government. The 2007/8 budget increased by 12.6% to £2.47 billion ($4.90 billion), over the previous year’s budget of £2.19 billion ($4.34 billion) in 2006/7. This represents a net spending increase in real terms of between around 9.6% to 10.6 % after taking into account the effects of inflation, expected to be between 2% and 3% in the UK during the year 2007/8.
The NDA’s strategy to accelerate early decommissioning spending seems to be financially effective. Over the next 30 years, as progress is made decommissioning nuclear sites in the UK, the underlying nuclear cleanup market is likely to steadily shrink from the present £2.47 billion per year, slowing down by between 3.7% and 5.6% (in real terms) each year, before levelling off at around £0.4 billion by 2035. Moreover, the possible early closure of the Thermal Oxide Reprocessing Plant (Thorp) at Sellafield might trigger a ‘cliff edge’ effect in which NDA spending drops much sooner than expected. Thorp has been shutdown following the discovery in April 2005 of a leak from a pipe that supplied highly radioactive liquor to an accountancy tank. The reprocessing plant is expected to restart soon.
Winners and losers
The Springfields Site Licence Company (SLC) and the LLWR SLC (the low-level waste repository near Drigg) benefit from the greatest spending increases whose budgets have more than doubled in 2007/8, increasing by 126.8% and 122.1%, respectively. The Magnox North SLC and Dounreay SLC also show spending increases well above inflation of 17.5% and 15.8%, respectively.
However, Sellafield SLC shows only a very modest spending increase of 0.5% (effectively a budget cut in real terms), while the Research Sites SLC has had its annual budget cut by 6.4% and Magnox South SLC cut by 20.5%. Nevertheless, the largest spending NDA management contractor remains Sellafield SLC (£1268.6 million), followed by Magnox North SLC (£321.3 million), Springfields SLC (£267.0 million), Magnox South SLC (£201.6 million), Dounreay SLC (£157.6 million), Research Sites SLC (£89.6 million) and the Drigg LLWR SLC (£38.2 million).
Although the NDA’s total headline spending has increased, much of the rise is taken up in higher running costs for nuclear sites rather than investment in better facilities. For example, the costs of running decommissioning facilities (mostly labour resource costs) have increased by 18.5%, but capital expenditure (capex) in building new facilities such as radioactive waste treatment plants and waste stores has reduced by 4.1%. Similarly, the costs of running the NDA’s commercial facilities (mainly the Thorp plant, the Sellafield MOX Plant, the Oxide Fuel Complex, and the Oldbury and Wylfa nuclear power stations) have increased by 16.4%, but the corresponding capital investment in maintaining these commercial facilities has fallen by 14.3%.
The overall rise in NDA spending is not evenly spread out amongst the NDA’s 20 nuclear sites. About half of the NDA’s individual site spending programmes have been cut. Some 23 out of the 43 capital and labour resource programmes costed in the NDA Annual Plan 2007/8 have been slimmed down, with most of the cuts falling in capital investment programmes where 11 out of 17 of the NDA’s capital programmes have been cut back. Capital expenditure has fallen 10.5% from £373.5 million in 2006/7 to £334.4 million in 2007/8.
While total expenditure on site running costs has generally increased by 17.3% from £1822.3 million ($3611 million) in 2006/7 to £2137.9 million ($4236 million) in 2007/8, running costs have themselves been cut back at just under half of the NDA’s sites, where 12 out of 26 labour resource programmes have fallen.
In large government projects containing many different and complex work streams, reductions in headline spending are usually caused by two major factors: either the introduction of better, more streamlined management processes; or deliberate systematic cost cutting.
Because the majority of the NDA’s different nuclear sites, each at slightly different stages of their lifecycle, seem to have experienced some reductions in capital spending, this probably implies that capital spending has been deliberately trimmed down rather than improved. Moreover, labour (resource) costs have generally risen at many nuclear sites, implying that better management processes for managing capital investment projects are probably unlikely to have been responsible for the planned reductions in NDA capital spending in 2007/8.
The overall picture is one in which short-term capital spending on investments in better nuclear facilities has probably been delayed or deferred by the NDA.
The current downturn in the NDA’s planned capital investment programmes – a 4.1% reduction in decommissioning capital and a 14.3% reduction in commercial capital – is likely to signal a wider cut in NDA spending with the supply chain at Tier 2 and Tier 3 during 2007/8.
In oral evidence to the House of Lords Science & Technology Select Committee in January 2007, the NDA pointed towards the large capital investment programmes planned by the NDA for new waste stores over the next 25 years. Approximately 10 stores are required throughout the UK with a capital expenditure somewhere between £600 million to £900 million, to be supplied and constructed as needed by decommissioning programmes on a just-in-time basis.
In principle, capital investment in the construction of new nuclear waste retrieval facilities, waste treatment plants and interim waste stores should provide a major opportunity for private sector companies in the nuclear supply chain. Today the NDA’s resident SLC workforce generally lacks modern experience of major construction projects and must buy in the necessary expertise from outside. Although not an exact science, capital expenditure can therefore be a useful general indicator of the level of NDA spending outsourced from the supply chain; it is a tracking marker that can provide early warning of expected rises or falls in spending.
Fluctuations in capital expenditure directly affect Tier 2 and Tier 3 engineering suppliers and they probably also have a wider knock-on effect on other Tier 2 and Tier 3 companies. For example, cutbacks or delays in the construction of nuclear stores will also reduce the immediate need for expert safety cases and environmental assessments. When capital expenditure goes up, supply chain spending will likely increase. On the other hand, if capital expenditure goes down, this will probably mean some contraction of external spending as now seems likely from the NDA’s planned cuts in capital expenditure during 2007/8.
Supply chain opportunity
The government’s decision in October 2006 to privatise relatively few staff from the former BNFL group of companies (69 staff from Magnox Electric, 730 from BNG Project Services and 657 from Nexia Solutions – about 11 % of BNFL’s 13,373 UK employees) means that that the resident site workforce employed inside the SLC site management companies remains rather large. Around 89% of the nuclear workforce will effectively remain protected inside SLC companies under GOCO (government-owned, contractor-operated) public sector control, and this implies that the SLCs will probably continue to do most of the decommissioning work for themselves rather than employ specialist Tier 2 or Tier 3 subcontractors from the supply chain.
On the other hand, because around 40% of the nuclear sector workforce in the UK is expected to retire within the next 10 years this may create some gaps in the market for nuclear services that can be commercially exploited by Tier 2 and Tier 3 companies. But the basic problem with this market outlook is that NDA spending is itself forecast to show a corresponding decline closely matching the pattern of industry retirements. This is not surprising because nuclear labour costs typically make up 70% to 80% of the NDA’s expenditure on site running costs. So although 40% of the nuclear workforce might retire by 2017, NDA spending is expected to drop correspondingly to around 50% by 2019. Unfortunately this implies the present imbalance between many public sector SLC employees and fewer private sector contractors may remain relatively unchanged in the future.
Making a loss
The NDA spends the majority of its programme budget on commercial activities for nuclear energy utility customers rather than decommissioning nuclear installations. Some 55.3% of the NDA’s annual programme budget is spent on commercially based operations for UK utility clients, Europe and Japan. The situation is particularly acute at Sellafield SLC – the NDA’s largest spending contractor – where 68.3% of its £1268.6 million ($2514 million) annual expenditure is commercially orientated, with decommissioning still a relatively minor player at only 31.7% of total spending at Sellafield SLC.
According to the annual plan, this commercial work at Sellafield SLC is not currently profitable and will make a net loss of 10.5%-29.0% in 2007/8. The work will generate annual income of £615.2 million (or £775.2 million with waste substitution) but the cost of operating these commercial facilities is £866.2 million, implying losses of £91.0 million to £251.0 million. Perhaps to help compensate for these losses, the NDA appears to have accelerated its waste substitution programme to raise an extra £160 million income. (Waste substitution is the exchange of intermediate-level radioactive waste from reprocessing, owned by overseas customers, for a radiologically equivalent but smaller volume of high-level waste.) The Department of Trade and Industry previously forecast waste substitution would generate £650 million over a 14- to 24-year period (in 2003 prices) but the £160 million fee expected from waste substitution in 2007/8 implies nearly a quarter of the waste substitution programme (24.6%) will be paid for by utilities in a single year.
The Drigg Low Level Waste Repository (LLWR) with Sellafield in the background. The LLWR is the first of NDA’s sites to be competed and the contract is expected to be awarded in October 2007 Drigg In February 2007 the NDA announced the formation of seven Site Licence Companies (SLCs) that in future will manage the NDA’s portfolio of 20 nuclear sites under commercial nuclear site management contracts. GOCO (government-owned, contractor-operated) SLCSite Licence Companies NDA site spending NDA site spending NDA spending over the next 30 years NDA spending over the next 30 years Author Info:
Based on the Research Report “Decommissioning Spending: What’s Changing, By How Much and Why? A Brief Analysis of the Government’s Nuclear Site Spending Plan 2007/8” by Ian Jackson and Shehnaz Jackson,Jackson Consulting , PO Box 142, Newton le Willows, Cheshire WA3 2WB, UKRelated ArticlesFrom end to beginning NDA launches LLW tender NDA budget announced UK's NDA announces Sellafield bidders NDA launches PBO competitionFilesNDA site spending NDA spending over the next 30 yearsExternal weblinksNuclear Engineering International is not responsible for the content of external internet sites.Jackson Consulting