The Canadian Institute’s 3rd Annual Nuclear Symposium

Toronto, OntarioMay 1, 2012

Nuclear Power Competitiveness in a Post Fukushima World

The Great Tohoku Earthquake (followed by Tsunami)

• Magnitude: 9.0 on the Richter scale • A tsunami of approximately 15 meters in height

struck less than one hour later • These are natural disasters of historic proportions

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Occurred 2:46 PM March 11, 2011

Impact of Earthquake and Tsunami

• Huge devastation• About 20,000 people dead• Entire communities wiped off the

map• At least 332,400 buildings; 2,100

roads; 56 bridges; and 26 railways were destroyed or damaged.

• Electricity, gas and water supplies, telecommunications, and railway service were disrupted.

• The total economic loss in Japan is estimated to be about $500 billion

• Accident at Fukushima Daiichi Nuclear Power Station

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Is this the Future?

• In liberalised energy markets, building nuclear power plants is no longer a commercially feasible option: they are simply too expensive.

• Existing reactors can be run very profitably; their capacity can be upgraded and their lives extended.

• But forecast reductions in the capital costs of new reactors in America and Europe have failed to materialise and construction periods have lengthened.

• Nobody will now build one without some form of subsidy to finance it or a promise of a favourable deal for selling the electricity.

• And at the same time as the cost of new nuclear plants has become prohibitive in much of the world

• Nuclear is getting more expensive whereas renewables are getting cheaper

• Nuclear power will continue to be a creature of politics not economics, with any growth a function of political will or a side-effect of protecting electrical utilities from open competition. This will limit the overall size of the industry.

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Measuring Success

• For global success, new build nuclear must demonstrate that it is competitive in an economic sense.

• Nuclear is capital intensive with long project schedules

• Nuclear has low operating costs due to low cost of fuel

• In many markets, the belief is that nuclear is not economic, is too expensive and needs subsidies

• In reality nuclear has been and continues to be economic relative to the alternatives in most jurisdictions

• Economics will improve as climate change concerns continue to increase (adding a cost for carbon)

• Economics are being challenged by low gas prices and high nuclear plant costs (primarily in the west)

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Economics of New Build Nuclear

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Current Operating ReactorsEconomic performance• Low production (marginal) costs

– Fuel and O&M typically around 2 US cents per kWh– Best plants achieving 1.3 to 1.6 US cents per kWh in Europe and US

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Production Costs = Operations and Maintenance Costs + Fuel Costs. Production costs do not include indirect costs and are based on FERC Form 1 filings submitted by regulated utilities. Production costs are modeled for utilities that are not regulated.

Source: Ventyx Velocity SuiteUpdated: 5/11

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Coal - 3.06Gas - 4.86Nuclear - 2.14Petroleum - 15.18

$/M

Wh

2010

Economics of new nuclear plants

• Nuclear has high investment costs, takes long time to come into operation, then has low and stable operating costs

• Gas plants have low investment costs, are built quickly and have high and variable operating costs

• Coal plants have moderate investment costs, are built relatively quickly and have moderate variable operating costs

• Which is the most economic depends heavily on:– (1) fossil fuel price and price for carbon, if any

– (2) interest/discount rate used

– (3) nuclear investment cost

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(1) Fuel Price

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Fuel as a Percentage of Electric Power Production Costs 2010

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Coal Gas Nuclear

O&M23%

O&M, 10%

O&M70%

Fuel77% Fuel

90%

Fuel30%

42%

31%

15%

8%4% Conversion

Fabrication

Waste Fund

Enrichment

Uranium

Source: Ventyx Velocity Suite; Energy Resources International, Inc.Updated: 5/11

Coal

Nuclear Fuel Cost Components

Gas Nuclear

The New Gas Age

0

2

4

6

8

10

12

14

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

7.8 (IEA NEA 2010)

2.2

“Nuclear is a business, not a religion ...... there must be a shortage of natural gas and stable high prices to make the economics right. This condition cannot be met due to the influx of shale gas into the market. Shale is good for the country, bad for new nuclear development.”John Rowe, Chairman and CEO of Exelon (August 15, 2011)

Henry Hub natural Gas spot price, 2007-2012 ($/MMBtu)

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• Access to shale gas in North America has been a game changer

• Technically recoverable reserves in the USA increased by 240% from 2010 to 2011

• Price to remain below $5 /MMBTU for the next decade

• Long term price to be 20% lower than last year’s forecast

• Is shale gas coming to other parts of the world?

US Prices do not Reflect the World

Gas and oil prices developments, 2008-present

$/M

MBt

u

12 Source: IEA Didier Houssin Presentation WNFC 2012

Changing Assumptions TVA

13 Source: TVA President’s Report to the Board 2012 February

Gas becomes the Coal Replacement

14 Source: TVA President’s Report to the Board 2012 February

Coal Plant Retirements (USA)

15 Source: TVA President’s Report to the Board 2012 February

Addressing Green House Gases

• Climate change remains the environmental issues of most concern globally

• Placing a cost on carbon would discourage use and promote alternatives

• Greenhouse gas abatement can be helped by (1) carbon taxes, (2) carbon emission trading schemes or (3) incentives to non-carbon emitting technologies

• All would benefit new nuclear build

• Carbon prices impact the LCOE

– Coal ~ $1 / tonne = $1 / MWh – Gas ~ $1 / tonne = $0.50 / MWh

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Sources: IEA "World Energy Outlook 2011”

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

Hydro Nuclear Wind Biomass PV Geoth CSP Marine2009 2015

Low carbon Electricity Generation, World, 2009 and 2015 (TWh)

(2) Discount Rate

• Discount rate depends on interest rates, view of the future, project risk

• Public sector – low (3-5%) and private sector higher (5-15%)

• Low discount rates reflect lower perception of risk - favours projects with high investment costs, longer schedules and low marginal costs i.e. hydro and nuclear plants

• High discount rates reflect higher perception of risk - favours projects with low investment costs, shorter schedules and high marginal costs ie gas plants

• However, the perception is that gas plants are low risk and nuclear plants are higher risk

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(3) Nuclear Investment Cost

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Current Costs in the USA

19Source: The Cost of New Generating Capacity in Perspective, NEI January 2012

Two projects in the US have received their COLs this year, the first in almost 40 years

• Vogtle in Alabama

• Summer in South Carolina

Costs are continuing to diverge between East and West

• US EIA assuming a cost of $5,339/kW for its AEO 2011 (an increase of 37% from 2010)

• China announced its first 4 AP1000 reactors will cost $2,600 /kW with the next units expected to be $2,000 /kW

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Sustaining the Nuclear Renaissance

• Recent studies show that nuclear generation can be an economic option in most jurisdictions

• Nuclear costs in the west have increased over the past decade– Increased costs coupled with lower gas prices is challenging nuclear

competitiveness in North America

• Asian activity is revitalizing the industry– Recent new builds costs in China and Korea are benefiting from standardization

• Nuclear capital cost and risk reduction can be achieved by maximizing use of recent experience in Asia– Use of global supply chain to lower both cost and risk. – Share its lessons learned with the world

• Economics continue to be the driving force in those markets where nuclear power is expanding and will be essential for the future of the industry globally

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Our Nuclear Future

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“We don’t get a chance to do that many things, and every one should be really excellent. Because this is our life. Life is brief, and then you die, you know? And we’ve all chosen to do this with our lives. So it better be damn good. It better be worth it.” (Steve Jobs)

“That’s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But its worth it in the end because once you get there, you can move mountains.” (Steve Jobs)

Thank You

Milton Caplan

MZConsulting Inc. - Presidentmilt.caplan@mzconsultinginc.com

www.mzconsultinginc.com+1.647.271.4442