As energy security and carbon neutrality have become important challenges globally, the demand for nuclear new builds and life extensions for operating units is rising. However, it has been more difficult to deliver nuclear power projects on time and within budget due to unexpected variables such as global uncertainties, post-pandemic supply chain disruptions and a stricter regulatory environment.
With growing uncertainties of external factors that hinder the success of the nuclear industry, concerns over Engineering, Procurement and Construction (EPC) contracts where one single supplier is responsible for all these elements are also increasing.
The risk management conflict
To minimise the risks caused by project uncertainties, owners and suppliers often establish their plans independently of each other, but their plans inevitably conflict since they are positioned at the opposite ends of their interest. Most owners prefer to share risks with suppliers as part of their risk management scheme. The risk allocation strategies that owners often adopt include: sharing risks associated with construction licensing delays with suppliers; requesting equity investment to enhance the supplier’s accountability for the project, and; pursuing fixed-price contracts to minimise the potential for increases in project costs.
Conversely, nuclear suppliers do not want to assume any of the licensing risks and prefer turn-key contracts without equity investment while preparing for unexpected cost overruns through variable price contracts. In fact, there have been cases where unresolved conflicts of interest between owners and suppliers at the negotiation table has led ultimately to the failure of contract signing and project cancellation or suspension.
Taking a new approach between fixed and variable prices owner and suppliers addressed conflicting interests that saw a recent project successfully move to contract signing. The project has meaningful implications for the nuclear sector.
Counting the costs of project over-runs
While suppliers tend to prefer variable-price contracts over conventional fixed price deals, the positions of owners typically differ. When it comes to large-scale and long-term projects such as building new nuclear power plants, variable price contracts can be burdensome from the owners’ perspective, as it is nearly impossible to determine the exact amount of budget required for factors such as government support and due to the fact that extreme cost overruns may occur in nuclear new-build projects.
For example, a fixed price contract was signed in 2003 for the development of Finland’s Olkiluoto unit 3. The project was estimated to cost €3.3bn and be completed in 2009. Several factors led to more than 14 years of delay in the construction and the final project cost was €11bn, triple the initial cost. The supplier, Areva, had to bear most of these budget overruns.
Hinkely Point C was based on a variable price contract. Although the goal was to complete the first unit by the end of 2025 it has now been delayed to 2030 as a result of multiple factors, including the COVID-19 pandemic. At the same time the project cost, which was estimated at £18bn (€21bn) is now expected to reach £34 bn (€40bn). The contract structure minimises the risk of cost increases for EDF, but the UK government is faced with budget management issues and electricity prices might increase as a result.
It is clear then that for large-scale and long-term projects with huge uncertainties like nuclear builds, the interests of suppliers and owners surrounding the fixed and variable price contracts are bound to be in conflict.
Seeking a solution at Cernavoda
The refurbishment project of Cernavoda unit 1 pursued by Romania’s Societatea Nationala Nuclearelectrica S.A. (SNN) serves as an alternative model that attempts to solve this potential conflict of interest. This project is based on a cooperative model which encompasses conflicting interests.
The project valued at €1.9 bn is a large-scale refurbishment project which includes engineering, procurement and construction. It also includes the construction of infrastructure such as a radioactive waste storage facility. The goal is to extend the unit’s operational life by 30 years.
The owner, SNN, negotiated with Candu Energy and Ansaldo Nucleare, the original suppliers of Cernavoda unit 1, based on a fixed price contract but these negotiations ultimately reached deadlock.
At this point Korea Hydro & Nuclear Power Co., Ltd. (KHNP) joined the project, proposing to execute the construction on a fixed price basis and making it possible to balance the proportions of fixed and variable prices. This led to mutual concessions by SNN and various suppliers and provided new momentum for contract negotiations.
As a fixed price construction contract was made possible, accounting for one-third of the entire EPC costs, both Candu Energy and Ansaldo Nucleare were able to reduce the risk of fixed prices on the total project cost. As a result, the two companies could secure SNN concessions in adopting a variable price contract for procurement (including project management) that includes high risks caused by external factors. At the same time, SNN accepted the fixed price contract for design/engineering where the suppliers have advantages, thus making risk management relatively easier. It was also a favourable outcome for SNN that engineering and construction would be based on fixed price contracts, considering the additional goal of signing contract in a timely manner.
Consequently, KHNP’s involvement enabled the balance of variable prices (for procurement and project management) and fixed prices (for engineering and construction) in the contract, providing both the owner and suppliers with justification and practical benefits.
KHNP was able to participate on a fixed price basis, as it is not just a supplier of nuclear power plants but also an operator. It thus has capabilities to estimate costs and the optimal construction period based on its experience gained from numerous nuclear power plant construction and refurbishment projects as well as the accumulated data for over 40 years of operation and maintenance from the same position as a utility owner. KHNP was also confident of responding to unexpected events during construction based on its certified supply chains and the refurbishment of the Wolsong unit 1, the same model as is found at Cernavoda.
With KHNP’s participation, it was possible to form a tripartite consortium which combined individual expertise with Candu Energy, the IP holder of Cernavoda nuclear power plant, and Ansaldo Nucleare, which supplied the balance of plant during Cernavoda’s construction.
The key takeaway from the Cernavoda unit 1 project is that suppliers able to establish a consortium that could effectively share project risks allowed them to reach a contract with a balance between fixed and variable prices. It created a solution which satisfied all the owners and suppliers.
As this project shows, when a nuclear project becomes large-scale and complex, a single company struggles to bear all the risks. Thus, a consortium or a joint venture model where each party takes responsibility for its own specialised area and works together can be an effective solution. The participation of a company that can bring together the capabilities of each partner and fill any gaps which may exists is essential in such a project model. In the example of the Cernavoda unit 1 project KHNP’s expertise provides a good solution for suppliers who have the original technology for specific reactor models but are looking for reliable partners in the field of project management and construction.
In this complicated environment, multiple parties of interest can reduce uncertainties and expand opportunities by leveraging their own strengths and working hand in hand. Furthermore, once this cooperative model takes hold by going beyond mere competition among suppliers and focusing on mutual growth, the perennial challenges of risk can be turned into new opportunities for the nuclear industry.
