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Effect of Regulation on Nuclear Power Plant (NPP) Construction Risk Management
IAEA Technical Meeting on Risk Management in Nuclear Power Plant Construction
Vienna, 6-8 September 2016
Glenn R. George, PE, PhD
1
Key take-aways
Regulatory risk is a prime contributor to NPP construction cost overrun risk, which in turn affects the competitiveness and financeability of new nuclear power generation globally
This is especially the case in in newcomer countries, which tend to have less of a track record in nuclear regulation
Yet regulatory risk is amenable to analysis using many tools (e.g., probabilistic risk analysis) familiar to NPP designers and builders
It is possible to reduce both the probability of negative regulatory outcomes and their severity
NPP architect-engineer-constructors (and others) must think strategically about regulatory risk, drawing insights from game theory and information economics
Selecting the best tools to manage regulatory risk in a particular situation will tend to be very context-specific
Regulatory risk can and ought to be managed as actively as other sources of construction risk during NPP deployment
2
Motivation: Is NPP construction the only industry ever to experience negative learning-curve effects?
Answer: No! But what went on? The industry experienced round
after round of new and more stringent rules and regulations of various kinds during early NPP deployment
These “ratcheting standards” contributed to an average capital cost overrun of 207% for the first 75 NPPs built in the USA
This contributed to the cancellation of over 100 NPPs from 1974-1982 and over $17 billion in nuclear investments’ being written down from 1984-1993
But it was not due to ineptitude on the part of NPP constructors Managing regulatory risk would help control NPP construction
cost overrun risk, making nuclear power more competitive
Ove
rnig
ht C
apita
l Cos
t ($/
kWe)
US Nuclear Cost Projections vs. Realized Costs
Source: US DOE/ EIA-0485; NERA and Oliver Wyman Analysis
3
We consider any form of regulation with the potential to affect construction (and financing) of NPPs Siting and permitting (including construction permits and approvals) Nuclear safety regulations
National-level nuclear regulations governing design, operation, decontamination, and decommissioning of NPPs
Industry codes and standards
Other health and safety regulation (worker/occupational, public) Environmental regulation
Air and water emissions (including in accident scenarios) Carbon and other greenhouse gas emissions Spent fuel and waste disposal
Economic regulation Industry structure (regulated vs. liberalized; vertically integrated vs. not) Rates, tariffs, and subsidies (e.g., any “contract for differences,” as proposed
for the Hinkley Point C plant in the UK) Competition (antitrust) review EU state aid review
Not only must current regulations be considered, but potential future ones as well: especially challenging in
newcomer countries, which may lack a regulatory track record
4
What is regulatory risk?
Regulatory risk is the product of The likelihood of adverse outcomes during regulatory interactions, and The severity of those outcomes
Negative regulatory outcomes include Delay or denial of permits, licenses, and other required approvals Plant design or construction changes required by regulatory authorities Secondary effects, including construction delays and cost overruns
resulting from required changes in design or construction techniques
Regulatory risk is relevant to NPP designers and vendors NPP developers (future owners/operators) Lenders and financiers Architecture, Engineering, Construction contractors and
Engineering, Procurement, Construction (EPC) contractors Governments and agencies interested in fostering nuclear deployment
Regulatory risk is widespread in the construction industry, but is especially salient in the nuclear sector, where regulations are especially prescriptive and pervasive
5
Why should we care about regulatory risk in the context of NPP construction?
Regulatory risk is fully analogous to operating plant accident risk ( = probability of accident * consequences)
Regulatory risk is one element in overall project risk ( = probability that scope, cost, or schedule will exceed limits * consequences of such project management failures)
An adverse regulatory outcome can have devastating effect on NPP cost, scope, and schedule Impacts can be at least as large as other sources of construction risk (e.g.,
labor productivity, price and availability of key commodities) which are subject to intense analysis and scrutiny
Risks can be severe if the design is not finalized before construction begins
Regulatory risk is especially pronounced in nuclear newcomer countries Regulatory risk is amenable to being analyzed and managed, yet
Literature of regulatory risk, as distinct from broader area of project risk, is relatively sparse (e.g., in the Program Management Body of Knowledge)
Some owner/operators and builders may be insufficiently sensitive to the concept of regulatory risk management
Regulatory risk is a key contributor to construction cost
overrun risk, which in turn helps determine NPP financeability and profitability
6
Regulatory risk contributes to dispersion of projected Levelized Unit Energy Cost (LUEC) of NPPs versus alternatives
Nuclear LUECs exhibit a “fat” upper tail—reflecting upside risk in capital
cost
Projected LUEC Cumulative Distributions (Monte Carlo Simulation)
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
€/M
Wh
LUEC, €/MWh, IGCC LUEC, €/MWh, Coal LUEC, €/MWh, CCGT LUEC, €/MWh , NPP D LUEC, €/MWh, NPP A LUEC, €/MWh, NPP B LUEC, €/MWh, NPP C
Variance in construction cost contributes to the fat upper tail of NPP LUEC
All figures illustrative
7
What is regulatory risk management?
Regulatory risk is amenable to being managed using generic tools and techniques commonly applied to other aspects of NPP design, development, licensing, and construction
These tools include Program Evaluation and Review Technique (PERT) and Critical Path
Method (CPM) approaches (for construction planning and execution) Probabilistic risk analysis (PRA)
PERT/CPM charts should explicitly account for regulatory interactions Including contingencies Reflecting not just the expected (mean) time to receive a required
regulatory approval, but the standard deviation around that mean (in terms of time) in addition to the probability of regulatory disapproval
PRA techniques applied to regulatory risk can reveal ways to Reduce the probability of negative outcomes Reduce the severity of negative outcomes
We further explore the PRA framework in the following 5 slides Regulatory risk should be conceptualized as one of
many discrete yet interrelated sources of risk which must be managed during NPP construction
8
Reducing the probability of negative outcomes
This is primarily a process of “risk identification” Understanding key sources of risk across the many forms of regulation
(health, safety, environmental, economic) governing NPP deployment Knowing what regulators care about, possibly in multiple jurisdictions, and
possibly where there is little history of regulatory interactions (as in newcomer countries)
Anticipating those issues in the design process and regulatory interactions
Plant designers and builders need to construct appropriate decision trees (or fault trees or equivalents) to analyze and plan activities, including Decision nodes, reflecting choices made by designers and operators (e.g.,
plant design parameters and licensing approach) Chance nodes, reflecting events which are, from the standpoint of the
designer or operator, probabilistic (e.g., whether competent regulatory authorities will or will not judge certain NPP features or construction approaches satisfactory)
Although every regulatory interaction is in some sense unique, it is possible to distil lessons-learned from one’s own experience or that of others
There may be a tendency among NPP developers and builders to underestimate
the likelihood of really bad regulatory outcomes
9
Decision tree (fault tree) analysis (slide 1 of 2)
As is the case with PRA, a dominant regulatory failure path can oftentimes be identified and minimized For example, a particular site permitting approach can, relative to other
factors, overwhelmingly increase the likelihood of failed regulatory outcome
Common-cause failures can be identified and, where possible, eliminated For example, one plant design feature or proposed construction technique
can increase the likelihood of regulatory failure at multiple points in the licensing process or in multiple jurisdictions
Sources of uncertainty regarding data and modeling assumptions can be targeted for reduction For example, additional discussions with a regulator can help reduce
uncertainty in the projected timing or estimated likelihood of success of a particular regulatory interaction
NPP developers and builders should conceptualize the probability
of adverse regulatory outcomes the way they think about, e.g., the likelihood of plant accidents or of commodity price spikes
10
Decision tree (fault tree) analysis (slide 2 of 2)
One can construct a regulatory decision tree, assigning a probability (p) to each regulatory outcome or scenario (designated S)
Each node can be considered a regulatory milestone, with probability p, which results in a new set of possible scenarios
S
S1
S2
S3
S4
S5
p1
p2
p
1-p
p3
p4
p5 Even highly negative—if unlikely—regulatory
outcomes must be included in the model
11
Reducing the severity of negative outcomes
Despite measures taken to reduce the likelihood of negative outcomes, they may still occur and the regulatory process must be planned and managed so as to ensure consequences are limited to a level that is acceptable for all stakeholders involved
Just as “defense-in-depth” of an NPP (from a nuclear safety perspective) relies heavily on maintaining containment by means of successive barriers, so too does regulatory defense-in-depth rely on multiple elements of sound program management to ensure that a negative regulatory outcome does not endanger the whole construction project
A key concept here is risk mitigation through hedging: securing against loss from a contingent outcome through compensating transactions on the other side of the event
Just as an individual can hedge one’s bets or hedge against losses in an investment portfolio, so can an NPP builder hedge its approaches to various regulatory interactions
Regulatory risk can and ought to be managed as actively as other sources of construction risk during NPP deployment
12
Regulatory hedging
Potentially problematic regulatory interactions should begin as early as possible, maintaining flexibility for subsequent corrective action If, for example, it is possible that a regulator could request, late in the licensing
process, lengthy component or system testing to confirm the adequacy of the design, then such testing could be undertaken sooner rather than later; no amount of wishful thinking or work avoidance can substitute for the opportunity to retain project flexibility and margin by front-loading the regulatory interaction
To the degree practicable, regulatory activities should be managed in parallel For example, licensing interactions can be undertaken in multiple jurisdictions at
once, increasing the likelihood (if the processes are independent) that delays or problems in one jurisdiction do not endanger successful completion of the regulatory review in the other
Design diversity is perhaps the most effective mechanism for mitigating the severity of adverse regulatory outcomes During the construction phase of an NPP, design diversity means maintaining
as long as possible the option of selecting any of the competing design elements or construction techniques, until that phase of construction begins
Defense-in-depth from the standpoint of regulatory risk management means reducing the severity of negative
outcomes (in project scope, cost, and schedule) by hedging one’s programmatic and technological bets
13
Strategic aspects of regulatory interactions
“Strategic aspects” in this context means those aspects of regulatory risk management which reflect One’s position relative to competitors (because regulators don’t make
decisions in a vacuum) Likelihood of success in future interactions (because regulation is a
“repeat-play game,” using the terminology of game theory): each side (regulator and regulated entity) learns from each and every iteration of the game
Because there are political and legal overtones to many regulatory interactions, regulatory strategy must be integrated with one’s overarching political/legal strategy to gain support for the NPP construction project
Information economics can provide significant insight into issues of regulatory risk management because regulatory interactions tend to be marked by Asymmetric information Asymmetric incentives
Regulatory strategy requires as much analysis, planning, and execution as corporate, financial, or technology strategy
14
Insights from game theory and information economics
A key strategic element in the regulatory process involves the revelation of information pertaining to the design or construction of an NPP For example, designers and builders whose NPP most exceeds regulatory
requirements have an incentive to reveal the most information, and regulators may draw the opposite inference from those who are less forthcoming
Knowledge of competing NPP designs and construction approaches is important For example, even where regulatory requirements prescribe an absolute
rather than a relative standard, NPP designers and builders should manage their regulatory interactions with an eye toward their position relative to competing designs, and emphasize their strengths
Learning from one regulatory interaction to another, over time and from one jurisdiction to the next, is another key strategic element If, for example, a design can be improved over time in a transparent way,
perhaps through increased margins or more extensive testing, then regulatory risk should decrease over time
NPP engineer-architect-constructors need to develop
a long-range strategic plan before they begin their regulatory interactions, not after
15
Selecting among competing risk-management tools
Reducing the likelihood of adverse regulatory outcomes is more easily accomplished in familiar jurisdictions, where regulatory hot buttons are well-known from long experience (this may be impossible in newcomer countries)
Reducing the consequences of negative outcomes tends to become less effective over time, as plant features and construction approaches are finalized and as the regulatory interaction proceeds toward its conclusion
Strategic considerations are most salient early in the regulatory process; as the process moves forward, and more information becomes available from all stakeholders, there is less scope for strategic interaction
Strategic approaches are likely to be most effective when there at least one other competing project going through the regulatory process, but not too many
A combination of tools and techniques—frequently and critically re-evaluated—is almost surely
the most effective way to reduce regulatory risk
16
Case studies
Olkiluoto NPP unit 3 (EPR, western Finland) Flamanville NPP unit 3 (EPR, Normandy, France) Plant Vogtle units 3 & 4 (2 x AP1000, Georgia, USA) Virgil C. Summer units 2 & 3 (2 x AP1000, South Carolina, USA) Ōma (ABWR, Aomori prefecture, Japan) Shimane unit 3 (ABWR, Shimane prefecture, Japan) Hinkley Point C (2 x EPR, Somerset, England)
In each instance, regulatory risk has been a major contributor to overall project risk
17
Conclusions and caveats
Managing NPP regulatory risk is among the most important elements in mitigating construction cost overrun risk
All the tools in one’s project management armamentarium—including techniques of PERT/CPM and PRA—must be brought to bear in a coordinated fashion
The regulatory process cannot be managed haphazardly, nor should the likelihood of negative outcomes be underestimated
This presentation is intended to offer an alternate lens through which to view the management of regulatory interactions
Nothing in this presentation should be taken as a suggestion that the regulatory process is something to be circumvented or subverted
On the contrary, managing regulatory risk increases the chances that regulatory interactions will be deliberate and transparent, thereby increasing the likelihood that NPP construction will proceed smoothly
The regulatory process should be viewed as
something to be actively and strategically managed rather than as a series of passive, one-off interactions
© Copyright 2016 National Economic Research Associates, Inc. All rights reserved.
Glenn R. George, PE, PhD Senior Vice President / Managing Director
NERA Economic Consulting
1255 23rd Street, NW, Suite 600
Washington, DC 20037 USA
Tel. +1.215.620.0355