The nuclear industry Unexpected reaction
The handful of firms that build nuclear reactors face new competition Feb 4th 2010 | NEW YORK, PARIS AND TOKYO | From The Economist print edition THE nuclear industry got an unexpected boost from Barack Obama in his State of the Union address last month. The president pledged to build a “new generation of safe, clean nuclear power plants”. On February 1st he followed that up in his proposed budget for 2011 by tripling to $54 billion the value of loans for new nuclear plants the government is offering to guarantee. Elsewhere, too, prospects for the business look good: the United Arab Emirates (UAE) completed a tender for four nuclear plants in December, Vietnam is planning a similar deal this year and many other countries, from Italy to Indonesia, are hoping to build new reactors soon. Yet the $40 billion contract in the UAE, won by a consortium led by Korean Electric Power Corporation (KEPCO), South Korea’s largely state-owned electricity monopoly, has caused consternation among the six big firms that have dominated the industry for decades: GE and Westinghouse of America, Areva of France, and Toshiba, Hitachi and Mitsubishi Heavy Industries of Japan. Russian and Chinese firms hope to follow the Koreans’ lead. Suddenly the incumbents are confronted by emerging-market “national champions” with the full backing of their governments—an invaluable asset in a high-liability business like nuclear power. “If you find out how they won, let me know,” quips Hirotada Nagashima, a senior executive in the nuclear division of Hitachi, whose joint venture with GE lost out to Kepco, as did a consortium of Areva and other French industrial behemoths, including Electricité de France (EDF), Total and GDF-Suez. But there is little mystery. The South Korean consortium, which includes the heavy-industry arms of Doosan, Hyundai and Samsung, three of the country’s biggest conglomerates, and uses some of Westinghouse’s technology, has worked together for decades, building and operating most of South Korea’s 20 reactors. It offered not just to build the plants, but also to run them and even to find the fuel they will need—at a fixed price, for the most part. “It was very easy to bring them together and offer the UAE a complete package,” says Mark Yoon of CLSA, a financial-research firm. The South Korean government also played its part. The president, Lee Myung-bak, flew off to Abu Dhabi on the eve of the decision to gladhand the locals, promising to help the barren statelet recreate South Korea’s economic miracle. Hiroki Mitsumata, director of nuclear energy at Japan’s Ministry of Economy, Trade and Industry (METI), believes that support from the South Korean government may also have allowed Kepco to offer the lowest price, because the state can backstop cost overruns and accident liability. Nicolas Sarkozy, France’s president, lobbied enthusiastically on behalf of the French consortium, whose leading members are also largely state-owned. It too could offer full service, in that Areva supplies fuel and manages waste in addition to designing reactors, while EDF runs more nuclear plants than any other firm. But the partners originally wanted to sign separate contracts rather than offer an all-in deal. Worse, their bid was 50% more expensive, thanks both to the strong euro and a more steel- and concrete-laden design, which Areva says makes its reactors safer—an idea the authorities in the UAE dispute. EDF has also suffered numerous operational glitches of late, while Areva’s flagship new reactor, under construction in Finland, is woefully over budget and behind schedule. The Koreans, in contrast, have a sterling record in both construction and operation. EDF has responded to the loss by attempting to unify the French nuclear industry under its control. Last November Henri Proglio, its incoming boss, said the French nuclear industry was dysfunctional and that combining a nuclear-fuel business with reactor design in Areva had been a mistake. Instead he suggested linking design and generation. But Areva argues that adding its reactor unit to EDF would make it extremely difficult for France to export nuclear plants to the utility’s foreign competitors, such as Germany’s E.ON, which is currently a customer of Areva. In December the French government appointed François Roussely, a former boss of EDF and a friend of Mr Proglio’s, to produce a report on the nuclear industry, which is due in April. Mr Proglio’s ideas have provoked open war between the two firms: in January Areva briefly stopped collecting waste fuel from EDF’s plants following a long-running dispute over prices, until the government intervened. The Japanese and American nuclear firms, for their part, say they cannot compete with state-backed bids. Danny Roderick of GE’s and Hitachi’s nuclear joint venture thinks the South Korean bid may prove “too good to be true” and wonders whether it will be able to stick to its budget and schedule. Big American utilities have little interest in teaming up with nuclear vendors to mount joint bids abroad; Japanese ones have a distressing record of falsified inspection reports and frequent outages. And the governments in both countries would find it difficult to favour one local nuclear firm over another. But not all the problems facing the Japanese and Americans are of others’ making. The firms form a noodle soup of alliances and tangled technologies. Despite their joint venture, Hitachi and GE are pushing two competing reactors. They recently developed a third design with Toshiba, but after Toshiba bought Westinghouse in 2006, it also began to promote the latter’s technology. Areva and Mistubishi Heavy have rival designs of their own, but have also set up a joint venture to promote yet another type of reactor. “It’s chaos at the vendor level,” says an analyst in Japan. The next test of the nuclear vendors’ mettle will be the bidding this year to build four nuclear reactors in Vietnam. Mr Mitsumata of METI thinks the government-run Japan Bank for International Co-operation, an export-credit and project-finance provider, and state-backed trade insurance could be used to boost the Japanese entrants. There is talk of a joint bid with a big utility such as Tokyo Electric Power. The government “is trying to increase the level of industrial support for the Vietnam project and the utility companies have been talking more seriously about that,” he says. But Kepco has hinted that it, too, is eyeing Vietnam—as well as other middle-income countries such as Turkey, Jordan, Indonesia, Thailand and South Africa. American and Japanese nuclear firms’ chances of maintaining an edge may depend on how far their governments are willing to push nuclear power at home. Mr Obama’s sudden enthusiasm has given the American firms hope. But the Department of Energy has yet to hand out any of the previous batch of loan guarantees approved in 2005. Regulators in Florida have squelched local utilities’ plans to build new reactors. Recriminations about rising costs have held up another project in Texas. It is a far cry from South Korea, where six reactors are under construction and another 14 are on the drawing board. http://www.economist.com/businessfinance/displaystory.cfm?story_id=15457220&fsrc=rss
