The following is a contributed article by William Riggins, President and CEO of Pegasus-Global Holdings, a management consulting firm specializing in megaprojects.
A major misconception about power plant retirements threatens to burn plant owners. It's the assumption that plant decommissioning and dismantling (D&D) is easier and less-risky than plant construction. Thinking that way is a mistake.
As economies around the world grew in the post-World War II era, power plant construction expanded in tandem. Until the recent cost competitiveness of wind, solar and energy storage technologies, that usually meant the construction of thermal power plants.
Coal, oil and gas capacity was relatively fast and easy to build, but many nations also added nuclear plants, which were more complex. Even accounting for the added safety considerations with nuclear technology, facility construction became less risky with volume and experience.
The hiatus in U.S. nuclear new builds has been one reason for recent construction cost overruns. A similar situation faces plant owners when it's time to decommission a nuclear plant: Utilities and independent power producers (IPPs) have even less recent experience decontaminating and dismantling these plants than they do constructing them.
Experience shows that lack of familiarity with a process can lead to cost and schedule overruns.
D&D is a growing business
As the energy sector transitions to cleaner and cheaper sources of electricity, hundreds of existing U.S. power plants and well over 100 gigawatts of capacity are facing D&D — sometimes before their anticipated retirement date. This can pose a challenge for utilities and IPPs, which are more experienced with the front end of a plant's lifecycle, regardless of its technology.
Given the complexity — and, in some cases, controversy — surrounding construction of any thermal power plant, that's natural. But final disposition of these mammoth facilities demands just as much attention and expertise as project initiation and construction.
The recent ramp-up in retirements has created big opportunities for firms in the D&D business. Although these companies provide valuable services, project owners — eager to focus on the future — can sometimes be too hasty in signing contracts for the disposition of retired assets.
The main reasons to exercise greater caution and diligence are that D&D can be costly and time-consuming.
Even though coal plant D&D is considerably less expensive than nuclear D&D, its risks are increasing. A study published in 2017 by Resources for the Future (RFF), Decommissioning US Power Plants (Table 1, p. 3) found that the mean cost per megawatt to retire a coal-fired plant was $117,000 (with a range of $21,000 to $466,000 per MW).
The report notes that recent regulations requiring the closing of wet ash impoundments add previously unanticipated costs for initial work (estimated in 2009 as $39 billion over 10 years) as well as for long-term remediation and monitoring. The report warns that, "Existing decommissioning savings funds may not be sufficient to manage these costs for some utilities."
D&D fund availability may be another risk factor, especially in locations with deregulated power markets, RFF found.
When we look at nuclear D&D, costs and time frames are much larger.
In April, an SNC-Lavalin joint venture won a contract worth over $1 billion to decommission the three-reactor Indian Point nuclear power site for work scheduled to begin in 2021.
On the other side of the country, the cost for "dismantlement and decontamination" of the two-unit San Onofre Generating Station in California as well as "restoration of the site and reduction of the residual radioactivity to levels that allow for future site use," was estimated at $4.4 billion in December 2016 at contract signing. Southern California Edison said the cost would be paid for by existing trust funds.
U.S. nuclear plant operators are required to pay into a trust fund over the life of a plant to provide for D&D and cleanup. The Nuclear Regulatory Commission (NRC) allows 60 years after closure to achieve that end.
Historically, the plan has been to push actual work out toward the end of that timeframe, allowing funds to increase and radioactivity to decrease. However, pushing D&D work out so far poses multiple risks, including the risk of a changed regulatory environment, as we've seen in the coal sector.
Nuclear D&D is funded in different ways around the world, but no country, it seems, has a perfectly operating plan for managing costs and the resulting waste. When we look at Europe, the financial risks surrounding nuclear D&D look even larger than in the U.S.
In 2016, Reuters reported that a draft European Commission report found Europe was more than 118 billion euros short of the funds needed to dismantle its nuclear plants and manage its waste storage.
The draft working paper found that, "Among EU member states still operating nuclear plants, only Britain's operators have enough dedicated assets to cover the expected costs, 63 billion euros." France had funded less than a third of its anticipated 74.1 billion euros in costs; Germany, which has undertaken a wholesale shutdown of its nuclear capacity, found its utilities had also made inadequate provisions.
Despite the requirement for a decommissioning trust fund, financing for nuclear D&D remains a potential challenge in the U.S. — even setting aside the unanswered question of how to handle long-term storage of spent nuclear fuel.
As a larger-than-expected number of U.S. nuclear plants are retiring early — six since 2013 — some have raised concerns about the adequacy of decommissioning funds.
The NRC notes that no reactor has failed to be decommissioned because of a funding shortfall; however, cost estimates have been well below actual costs.
For example, a 2012 Pacific Northwest National Laboratory draft report found that for four decommissioned plants, estimates for project management, decontamination and removal, insurance and regulatory costs ranged from 100% to 250% below actual costs. Other cost estimates fell short by 10% to 75%.
Though the NRC has found a handful of individual decommissioning fund shortfalls to be "temporary lapses," expected to be remedied over time, one response to potential future shortfalls and long-term liability has been the development of new business models that incentivize plant owners and contractors to pursue swifter D&D action.
For example, Duke Energy's Crystal River site is scheduled to be fully decommissioned by 2027, 50 years ahead of the NRC-allowed due date. The plan, subject to NRC and state regulatory approval, has Accelerated Decommissioning Partners (one of multiple D&D firms or joint ventures) handling project execution.
If successfully completed to plan, the utility would be able to return excess trust funds to customers, and the property would be available for use by the utility much sooner than originally anticipated.
New, untested solutions sometimes hide a whole new set of problems, however. For example, financial incentives to speed up activities can by themselves add risk to any project — and to nuclear projects in particular.
Exactly what sorts of risks might the accelerated plans include? Though it's too soon to tell for sure, there's one sure way to mitigate unfamiliar risks: well-written and carefully reviewed contracts.
In fact, the best way to manage all D&D project risk is by giving contracts the same degree of attention as you would if you were initiating new construction. That includes having an independent contract risk review.
Contract risk reviews are relevant at project initiation and closure
Most megaprojects aren't considered shovel-ready until a pre-project contract risk review is completed by an independent third party.
Without such reviews, megaprojects — over $1 billion in value and often including first-of-a-kind technologies or processes — are much more likely to face cost and schedule overruns. That's because the terms laid out in the initial engineering/procurement/construction (EPC) contract can make or break project plans when something goes awry, which is common in these complex endeavors.
However, when it comes time to retire megaprojects like power plants, owners may tend to be less rigorous in their approach to contracts.
That's human nature. When a plant is no longer generating income, everyone wants to forget about it as soon as possible and move on to new, more-lucrative holdings.
But that attitude can lead to unanticipated problems that drag business leaders back to the past when they'd rather be moving forward.
Unlike the familiar fixed-price EPC construction contract, decommissioning contracts can be far more variable because the prime contractor can never be certain what it will encounter. A coal plant site may have previously unrecognized problems with ash ponds, for example, which can lead to huge liabilities.
Even though the procedures for nuclear plant decommissioning are ostensibly well-defined, surprises can create unexpected challenges for that process as well.
Whatever the nature of the D&D surprises, they'll likely entail change orders and process adjustments with schedule and budget implications. How the plant owner handles everything from requests for additional data to more money needs to be considered in a pre-decommissioning contract risk review.
Without such a review, owners will be tempted to sign and say, "Good riddance." Such wishful thinking frequently leads to unpleasant, protracted back and forth with the contractor and, in the worst case, litigation.
A contract risk review can identify project specific risks and enable them to be addressed before the contracts are signed and the project begins.
Examples, not unlike construction EPC contracts, include:
- Are there inconsistencies among the agreements, including such items as terms and definitions, scheduling and progress metrics, and governing laws and differing jurisdictions for dispute resolution?
- Are the requirements for the contractor to manage, control and report on work progress adequate?
- Do the agreements provide adequate direction as to how the contractor will recover delay and convey to the owner how recovery efforts will be undertaken?
- Do the agreements adequately prescribe the manner in which progress information is conveyed to the owner and the timing of that information?
- Is it clear what progress is expected prior to making payments?
In addition, issues common to all D&D projects should be kept in mind while drafting the relevant agreements. Examples include:
- How labor force availability (especially for specialized crafts) may affect schedule and budget.
- How availability of specialized equipment — from cranes to robots — may affect schedule and budget.
- How extreme weather events may delay work progress.
- How the bankruptcy of a prime or sub-contractor may affect project completion.
- How changes in state or federal regulations may affect site environmental remediation plans.
These risks are similar to those faced by construction projects. Nevertheless, too many project owners pay too little attention to these common challenges at the end of a project's life.
Additional risks are shaped by the plant's technology, age, location and operating history. The financial health of the project owner is another potential risk, especially if bankruptcy or merger is a possibility.
In addition to complications involving the contracting parties, area residents may also raise objections to a D&D project. Although generation owners are usually proactive in addressing such issues as public opposition to construction of a new plant, end-of-life activities also pose challenges.
Citizen groups may oppose the transportation of potentially toxic materials along local roadways, noise from D&D activities, and waste disposition plans. Public opposition may seem to be outside the purview of a prime D&D contract, but it, too, can affect schedule, process and budget.
Consequently, contracts should specify who bears responsibility for addressing local concerns, should they arise.
End as you began
As generators transition to building new types of facilities, they are simultaneously responsible for managing the disposition of retired plants. Both project types require foresight and due diligence.
Unexpected issues can arise with any D&D project, but when project owners apply the same contract safeguards as they would in a construction EPC contract, they are more likely to have a clear path forward that minimizes their risk.