Back-End Governance and Liability Business PlanBack to table of contents
James P. Malone
The Background and the Issues
Nuclear power has several vulnerabilities in the forum of public opinion, but the “back-end” of the nuclear fuel cycle may be the most vexing: no nation has managed to deal with this issue without encountering well-organized public opposition (although Russia and France have not experienced public opposition to reprocessing). Further, none of the solutions put forth have won broad international acceptance.
The dual influence of politics and technology complicates the situation for nations with nuclear programs in the early stages of development. Rather than select a permanent used-fuel management solution, it is in the best interest of developing nuclear power programs to choose a back-end strategy that provides safe and cost-effective used-fuel management without requiring a commitment to either an open or closed fuel cycle.
Delaying the selection of an open or closed fuel cycle allows developing nuclear programs to make more informed choices later on: political issues related to used-fuel management can mature; nonproliferation issues can be addressed; and used-fuel management technology can continue to advance. However, in the interim it is prudent to offer nuclear states and states with nuclear ambitions a temporary solution that permits delaying the final decision on back-end technology.
Regionalized interim storage offers a potential buffer between the time that fuel is discharged from the reactor and such time that a permanent solution is selected by the state where the fuel was used. Establishing regionalized storage will require a combination of political, diplomatic, and technological prowess. Prerequisites include infrastructure, technology selection, regulatory oversight, International Atomic Energy Agency (IAEA) oversight, on-site management, effective communications, and commercial agreements ratified by all participants.
All of these requirements must be addressed in a business plan, which also functions as a project plan for the opening stages of the interim storage program. Once construction begins on facilities and infrastructure, the business plan splinters into strategies tailored for each individual site. Segmented and organized temporally, our business plan begins with the first organizational steps and proceeds along a timeline that culminates in commercial operation of a regional interim storage facility.
Financial support of the plan is required prior to when owners of used fuel held in storage at existing nuclear power plants, known as legacy fuel, enter into a regional storage agreement. The investment is needed both to form the regional entity that will provide storage and to begin marketing the concept to potential customers. The business plan calls for opening funding of $10 million to $20 million for this work. The proposed source of the funds is a nongovernmental organization (NGO) whose investments will be returned upon receipt of payment from the owners of the legacy fuel or by proceeds from a commercial fundraising effort.
Business Plan Phase One
The first steps of the business plan include creating interest in the project, establishing a commercial entity to legally operate the business, developing a service contract covering transportation and storage of the used fuel, and establishing a regional entity to manage political negotiations and interactions. Once these foundations are in place—or nearly so—it is then appropriate to solicit interest from countries who may consider serving as hosts to the interim storage facility. These conversations require that the business entity negotiate a package of benefits that the country will receive in return for its willingness to host the facility.
After a host country has accepted its role, the next step is to establish bilateral agreements between the host and each country that seeks to send fuel to the interim storage facility.
Establishing Initial Interest
The first customers will be the nuclear power plant operators who are storing used fuel at their reactor sites. This legacy fuel has been discharged from the power plant and cooled for at least five years and is thus available to be shipped to the regional interim storage facility. Establishing interest will require meeting with the owners of used fuel in order to introduce the regional storage concept to them. To attract their interest, the following advantages of central interim used-fuel storage should be stressed:
- The fuel is removed from their power plants at a cost that is competitive with the current cost of storage;
- The cost of security to safeguard the used fuel is no longer the responsibility of its owner;
- The regulatory oversight burden is shifted to the interim storage provider and the host country;
- The proliferation threat inherent to the fuel owner having access to potentially weaponizable material is eliminated; and
- In the case of permanent disposal in the host country or another country, the used fuel would not have to be returned to the country of origin.
The project will incur legal fees, regulatory fees, managerial fees, and travel and overhead expenses. There are also costs associated with convening meetings to discuss the concerns of potential participants. The cash to cover these fees is best provided by the owners of the legacy fuel via their initial payments as customers of the project.
The establishment of a business entity to manage the interim storage facility will also incur several expenses. Upfront cash will be needed to support:
- The establishment of a regulatory agency in the host country;
- The preparation and submission of a license application;
- Infrastructure (dock facilities, roads, rail, communication);
- The initial incentive payments to the host country; and
- The legal work to establish a standard service contract.
While negotiating contracts with prospective customers, the business entity will also negotiate supply contracts for establishing the storage facility. The supply contracts will include the storage facility, rail and road improvements, sea transportation arrangements, and harbor facility improvements. Construction of the storage facility is a substantial challenge, but before engineering work can commence, the local licensing authority must be established and must put regulations—covering all aspects of design and construction—in place.
Establishing a regulatory agency would be a substantial undertaking for a host country that does not have a nuclear power program already in place. A host country that does have a nuclear program may still lack the expertise to establish the regulatory regime for centralized used-fuel storage. Both time and money are required to establish this expertise. The initial focus of the regulatory regime should be site qualification. Qualification depends on satisfactory seismic data and sufficient drill cores to characterize the substrata beneath the proposed site for both the storage pad and any necessary heavy-load pathways. To avoid the potential for claims of conflict of interest related to the site’s characteristics and the data obtained by drilling, it is prudent to establish the criteria for acceptable site parameters prior to investigating the location. The cost of site characterization will be covered by phase two of the project.
Business Plan Phase Two
Phase two of the business plan is directed at the initial project financing. The opening stages of phase two will include refining the draft contracts for transportation and storage, as well as detailing the design of the regional interim storage facility. Drafting plans for the transportation of the fuel to the interim storage location is also part of this phase.
Finalizing the standard contracts for transportation and interim storage is a key step: they will supply the basis for the commercial arrangements that, in turn, will provide the financial community with the confidence it needs to support the concept. The transportation contract is a simpler arrangement than the storage contract since the technology required to provide the transportation service is well-known and has been used for many years. There are no insurmountable issues related to the transportation contract. But finalizing the storage contract is not so straightforward. One issue in particular requires resolution prior to the facility accepting any used fuel for interim storage: liability for an event that may occur in the future. A storage facility with a lifetime of more than one hundred years could very well outlive the corporations that entered into the agreement. Should an event occur that results in harm to individuals or the environment after a signatory corporation ceases to exist, there must be a way to determine liability for the event.
Establishing an insurance pool is one method to provide the financial means to protect against a future event. Conducting an analysis of possible event scenarios will help insurance experts assign probabilities to and make estimates of the liabilities associated with these events. The appropriate funding level for the insurance pool can be determined based on the results of such analysis. Resolution of the long-term liability issue is likely to be a precondition for current owners of used fuel to agree to store fuel at the regional facility.
Establishing the insurance pool requires a relatively complete facility design; and the facility design and operating procedures will provide the framework for insurance policies. In addition, the facility design and operating procedures will support advance contracting for the holders of legacy fuel, who—critically—will be the first to sign contracts for transportation and storage. The commercial storage contract for legacy-fuel owners will require advance payments totaling $100 million to $300 million in aggregate. The regional authority will use this income for completing the construction and licensing of the facility. The advance payments from legacy-fuel owners will also serve to provide confidence in the project for international financial institutions who may also invest in the facility.
The incentives package model for the host country must be in place before an agreement can be reached, and the details of the package can be negotiated with each country that expresses interest in hosting a facility. The incentives package can include infrastructure improvements such as rail and road facilities, harbor improvements, water purification systems, upgraded electrical distribution, and other needs for operation of the storage facility. The infrastructure improvements are anticipated to cost approximately $230 million. This amount can be amortized over the first ten years of operation. Based on the cost of the infrastructure improvements, the storage fee should be set at $0.0006 per kilowatt hour of electricity generated by the fuel.
However, the incentives should not be limited to the needs of the facility. If necessary, additional incentives can be offered to induce a country to host the facility. These incentives may include a personnel training center that provides a broad range of training subjects, many of which can be applied to other enterprises in the host country. A materials research facility could be established to support the used-fuel storage facility, a potential disposal facility, and other businesses. Conducting research on a disposal facility would not commit the host country to also hosting the disposal site, though it would not rule it out either. Partnerships with universities recognized for their excellence in research would also serve the facility and host country as a whole.
The incentives could also address needs that are particular to a certain country. For example, a water desalination facility could appeal to coastal countries. The possibilities are quite broad and should be the subject of detailed research, with the stated goal of providing facilities that will benefit the host country in a variety of ways over the long term. Because construction of these benefits facilities will require significant cash—which will ultimately come from income related to operation of the interim storage facility—the incentives must be carefully considered.
Preparing an incentives package that also highlights the safety and soundness of the business and nonproliferation guidelines will bring comfort to potential lenders. A compelling presentation illustrating the cash-flow model will help convince the financial community that the project will be self-sustaining over the long run and will increase the likelihood that investors will front the money for the host country’s infrastructure improvements. The business entity should strive to pay back any loans as quickly as possible. This will inspire further confidence in the financial community and perhaps assist in future financing negotiations.
Business Plan Phase Three
Phase three of the plan primarily concerns implementation. Infrastructure and relationships from prior phases must be in place before the implementation phase can begin. Not least among these is the regulatory agency for the host country, which must be up and running and have already approved construction of the facility. The composition of the regulatory body should also be a subject of discussion. There may be a temptation to employ a regional regulatory body; however, this concept is not workable. The host country must have an independent regulatory authority.
The construction for the used-fuel storage facility will provide storage for 10,000 MTU (metric tons of uranium). According to the World Nuclear Association’s 2013 market report, about 11,000 MTU are discharged annually from the world’s nuclear power reactors.1 There are economies of scale related to the size of the facility and advantages related to being able to store approximately two hundred and fifty reloads. Currently licensed technology is capable of storing thirty-seven pressurized water reactor or eighty-seven boiling water reactor used-fuel assemblies.2 The thirty-seven pressurized water reactor fuel assemblies have a uranium mass of about 17 MTU; the eighty-seven boiling water reactor fuel assemblies have a uranium mass of about 15 MTU.
The IAEA has reported that the Republic of Korea in 2006 held a used-fuel inventory of 7,286 MTU. This inventory has since grown, and South Korea may now be considered a legacy-fuel holder candidate. In the same period, Japan held 13,000 MTU of used fuel.3 Due to the disaster at Fukushima Daiichi, Japan may have an additional incentive to store legacy fuel at an alternative regional facility.
There are practical limits to the amount of used fuel that can be held at a regional storage facility. The shipping capacity is a significant limiting factor. The ability to unload the used-fuel canisters from the ship and transfer them to a rail car is another limitation. Likewise there is a limit to the quantity of used fuel that can be delivered to the regional facility and processed for long-term storage. These limits are related to the availability of qualified personnel as well as to the availability of the necessary equipment (such as transfer casks).
Due to the large quantity of legacy fuel available to be transferred to the regional facility, the initial 10,000 MTU capacity can be reached relatively quickly. Once capacity is met, expansion of the facility is not difficult; the expansion may take place while the initial 10,000 MTU storage facility is operating. And once the legacy fuel is accounted for and has been transferred to storage, there would be continuous used-fuel input to the regional storage facility as plants are refueled. The flow of material to the facility needed to reach equilibrium of operation is expected to be 40 MTU per reload. The number of reactors participating in the interim storage program will determine the speed at which the facility must be expanded.
Growth of the storage facility is an important parameter for the business since it determines the income stream that will contribute to the ongoing obligations of the host country’s incentive package. Income is based on the number of MTU in storage; based on the estimated income of $25,000 per year per storage cask, the estimated annual storage fee is $1,600 per MTU. Basing the storage fee on MTU rather than the number of casks will enable equitable pricing into the future: storage cask technology continues to improve and it would not be equitable for the newer higher-capacity casks to command the same fee as the earlier-generation casks.
Cash Flow Parameters and Analysis
The underlying premise behind cash flow calculations for the interim storage facility is that the business receives income from two fees. The first fee is referred to as the used-fuel acceptance fee: $0.0006 per kilowatt hour electric generated by the fuel. The price was selected to be less than the fee charged to U.S. utilities by the U.S. Department of Energy (DOE); it is 60 percent of the fee charged by the DOE in the standard contract. The major difference is that the DOE standard contract includes disposal of the used fuel in a geologic repository. The regional interim storage contract does not include disposal: if permanent disposal becomes possible, a separate contract with appropriate costs will be written.
The second fee is the annual storage fee, which is based on the total number of MTU in storage. This fee would be reviewed periodically to assure that the business can meet its financial obligations to the host country. The financial model data can be used to conduct sensitivity analyses on the fees for transportation and interim storage in the proposed contracts.
The financial analysis begins with the transportation services. Transportation of used fuel requires a dedicated ship approved for high-level radioactive waste. The analysis assumes that a five-thousand dead-weight-ton vessel can transport up to forty used-fuel packages. The operating cost for the transportation vessel is estimated at $1,832,000. This value assumes that the fuel is transported ten thousand miles from the point of origin to the destination port.
Transportation overpacks are estimated to cost $4 million per unit. The overpacks are reusable, and the maintenance cost is included in the total cost of the overpacks. Once the fuel arrives at the interim storage location it is transferred from the transportation overpacks to the storage overpacks. The canisters containing the fuel are sealed at the point of origin and do not require being reopened. The combined cost of one canister and one storage overpack is estimated at $1 million. The storage overpacks are made of concrete and will be manufactured at the interim storage location.
There is a series of one-time expenses accounted for in the budget. These expenses include the transfer system used to move the used-fuel canister from the transportation overpack to the storage overpack ($5 million), the associated equipment to operate the transfer system ($5 million), facility design ($1 million), administration and laboratory building design and construction ($10 million), and construction of the first storage pad ($10 million per acre). A one-acre storage pad can hold 193 storage modules or about 3,280 MTU. Reaching the goal of storing 10,000 MTU will require about three acres of storage-pad space. The significant one-time cost for twenty transportation overpacks is $80 million.
The estimated total cost of the operational storage facility is $111 million. The annual cost of supporting facility operations is estimated at $63,663,000. Based on a fee of $0.0006 per kilowatt hour electric—and using the fuel burnup and a thermal efficiency of 33 percent—the estimated income for the first year of operation of the interim facility is $130,560,000. (The fee calculation may be adjusted as more accurate information becomes available.)
Critical to those who will provide financial backing for the business, the cash flow is positive from the first year of operations. First year net cash flow is estimated to be $30 million, and net cash flow through the first fourteen years of operation is estimated at $754 million. While that amount appears quite large, the cash flow analysis does not address the cost of the negotiated incentives package for the host country.
There is ample opportunity to improve the business plan as the project evolves. Because different approaches may be needed in the future, it is most important now to create a flexible financial model that can be relied on or modified as needed to evaluate alternative approaches. The values in the current budget are based on relevant U.S. industry experience with used-fuel storage; we believe they are reliable.
As is the case with any large-scale project, the cost-estimating process is less than perfect. This uncertainty may be better understood by conducting a sensitivity analysis of the relevant parameters. The parameters that can have the most significant effect on the project’s financial performance are predominantly those that require large financial investments at the project’s onset.
The infrastructure improvements related to the harbor and rail lines are estimated to cost $230 million. If this estimate is within plus or minus 50 percent of the actual cost, the impact is a gain or loss of about $23 million in year one. Since the infrastructure improvement cost is amortized over the first ten years, the financial impact is concentrated in that time frame: the net cash flow of year five changes by plus or minus $69 million if the cost impact is plus or minus 50 percent.
Perhaps the most important sensitivity is the fee for the service. Iteration of the formula finds the fee value at which the revenue and expenses are approximately equal over time to be $0.000126 per megawatt hour thermal. Converting to megawatt hour electric yields a value of $0.000378. This value is about 40 percent of the DOE fee in the standard contract. The sensitivity shows that there is adequate margin in the proposed fee structure to support the program. The proposed fee for the service is $0.0006 per kilowatt hour electric provided by the fuel. This higher-than-break-even fee will fund a portion of the insurance pool.
There is an open question regarding the expenses associated with the return of the fuel to the country of origin after the storage contract has expired (anywhere from twenty to one hundred years after it is signed). Rather than attempting to predict the exact cost of transportation and handling for an indeterminate future, we propose that there be a separate fee for return of the fuel.
The preliminary balances for the model case show a large surplus after twenty years of operation. Some customers may view the projected surplus as excessive and thus feel that the fee should be reduced. However, the surplus should be considered not as profit but as an insurance pool to cover expenses in the unlikely case of an event resulting in damage where clear liability cannot be established.
Much work remains to be completed prior to actually moving fuel. The important conversations with potential host countries, funders, politicians, and nuclear agencies must take place; efforts to date have laid the groundwork to make this possible. Obtaining feedback from the stakeholders is the next step.
1 World Nuclear Association, The Global Nuclear Fuel Market: Supply and Demand 2013–2030 (London: World Nuclear Association, 2013).
3 The International Atomic Energy Agency, “Estimation of Global Inventories of Radioactive Waste and Other Radioactive Materials,” IAEA-TECDOC-1591, June 2007.