An independent economic assessment of BNFL’s Sellafield MOX Plant (SMP) finds that the facility will yield a net economic benefit.
In 1999, the UK government provisionally announced that full operation of SMP would be justified, but that further consideration and consultation on the economic arguments would be required. The consultation took place in June 1999. However, in August 1999, BNFL confirmed that quality control data of MOX fuel manufactured in the MOX demonstration facility (MDF) had been falsified. In the light of this incident – together with the submission by BNFL of a revised business case in 2001 (see NEI February 2001, p12) – the government decided further consideration was needed.
The Department for Environment, Food & Rural Affairs (DEFRA) asked consultants Arthur D Little (ADL) to conduct an economic assessment of SMP before a decision on approval is made. ADL were asked to address the question: “Will SMP yield a net economic benefit?” The study looked into the “national economic interest case”.
ADL determined the net present value (NPV) of the national economic interest case for SMP from a combination of the following scenarios:
•ADL reference case. This is the best estimate NPV for the SMP business.
•Downside scenarios. The NPV after plausible downside scenarios are taken into account.
•Cancellation case. The NPV of not proceeding with SMP.
A detailed analysis of the wider economic impacts of not proceeding with SMP was outside the scope of the study, but the most likely of these were identified. The most direct impact, and the one with the likely largest effect, is the potential loss of future reprocessing contracts for THORP, and associated MOX contracts for SMP. A conservative estimate is that these losses could amount to several hundred million pounds. The cost of writing off SMP would worsen the BNFL balance sheet by approximately £470 million.
The ADL report conludes that there is an expected national economic interest case NPV of £216 million and a 97% probability of it being greater than zero. Overall the analysis, which included an extensive interview programme, concluded that there is a robust economic case for proceeding with SMP.
ADL reference case
The scope of the ADL reference case included only the potential MOX revenues associated with BNFL’s THORP baseload reprocessing contracts for PWR and BWR spent fuel for Japanese, German, Swiss and Swedish customers, and Japanese Magnox spent fuel. ADL produced their best estimate and ranges for the revenue drivers (volumes, prices, delivery schedules, capacity) and the cost drivers. ADL then used NPV and conventional risk analysis (Monte-Carlo analysis) to determine the NPV probability profile, which shows an expected NPV of £199 million.
ADL calculated the volume of MOX that SMP should achieve by independent interviews with customers, existing contracts and “heads of agreements”. During interviews, customers expressed a clear intent to convert all their plutonium arising from the baseload reprocessing contracts and Japanese Magnox contracts into MOX fuel.
There is no “free market” price for MOX, mainly because there are a relatively small number of target customers and suppliers. Prices therefore tend to vary significantly, driven by the following factors:
•Supply/demand situation. At present there is more demand for MOX fuel than there is the ability to produce it. In the longer term, as SMP and the planned Japanese MOX plant come on stream, the balance will gradually shift in favour of the customer.
•Time constraints set by reactor life. Because of lead times for loading and using fuel, this means there is pressure for some customers to complete their MOX programmes within a given time, which gives some negotiating power to the supplier.
•Competitor rivalry. Although there are so few competitors, customers will be aware of prices from each supplier.
•Price of alternatives. There is no evidence that customers are interested in pursuing alternatives to MOX fuel for baseload. This limits the price pressure from MOX alternatives.
•Price of uranium fuel assemblies. Although customers do not expect the MOX fuel assembly price to equate to the uranium price, they do think in terms of a MOX price multiplier over uranium, leading to some price bounding in the customer’s mind.
•Fuel type. BWR fuel assemblies tend to be more expensive than PWR assemblies due to their more complex design and because they are smaller (reducing economies of scale in production).
The delivery schedule is driven by the customer’s reactor loading preferences, available SMP capacity and – in the case of Japan – BNFL’s recovery from the data falsification incident. Generally, European deliveries will occur between 2002 and 2008, and Japanese deliveries between 2004/5 and 2012, with the first two orders under greatest threat if there are any delays to approval for commissioning SMP.
There is significant risk of a start-up delay, but SMP should achieve its target capacity within five years. Start-up, ramp-up, full operating capacity and plant life are the key phases of SMP operation. Start-up timetables appear challenging, although ramp-up, full capacity and plant life seem reasonable.
Downside and cancellation
ADL believes that the reference case is the most probable outcome of SMP processing the target volumes. In addition, six plausible downside scenarios were analysed.
Inclusion of downside scenarios gives an expected NPV of £159 million.
The cancellation case captures all financial items associated with SMP not receiving authorisation to proceed. The expected NPV is -£58 million. This case is driven primarily by the costs associated with not completing MDF supply contracts, which are currently due to be met by SMP under the reference case.
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