Supply Chain Reaction Localisation Issues for Nuclear New Build

Contents

Executive summary ......................................................................................... 3 Localisation Localisation Requirements .......................................................................... 4 Options .................................................................................... 5

Current Capacity ............................................................................................. 7 Key Challenges ............................................................................................... 8 Way Forward ................................................................................................... 9 Our experience in the nuclear sector ........................................................... 11 Contacts ........................................................................................................ 12

2012 Deloitte Touche Tohmatsu Limited

Executive Summary

Background
South Africa has recently faced a reality of power supply struggling to meet rising demand driven by strong economic growth, a low cost of electricity, rapid industrialisation and a mass electrification programme without any significant increase in generation capacity. As a result the Integrated Resource Plan (IRP) 2010 has been designed to guide the countrys energy mix and planning for the next 20 years. The IRP 2010 has allocated 9600 MW for nuclear, to be completed by 2030, of which the first 1600 MW is due to come online in 2023. If each plant is assumed to be 1600 MW, as does the IRP 2010, it would entail a fleet of 6 reactors which will cost approximately ZAR 400 bn. According to the US Utility Requirement Documents (URD) approximately half of the nuclear power plant costs are for nuclear island equipment whilst the rest of the costs are split between the conventional island (~30%) and balance of plant (~20 %). The benefits of localisation include job creation, possible reduction in costs, scientific and industrial development, autonomy, shortening of the supply chain as well as the establishment of centres of excellence which will benefit other industries. With the national and global economy facing numerous challenges and constraints, it is important that a localisation programme for nuclear power plants is effective both in terms of enabling the primary goal of delivering electricity on schedule but also in terms of achieving secondary objectives such as job creation and a sustainable supply chain.

Key Questions.
Some of the issues which need to be addressed are the following What is the optimum degree of localisation for South Africa? How should the localisation strategy be rolled out? What are some of the risks/ considerations for nuclear build?

2012 Deloitte Touche Tohmatsu Limited

Localisation Requirements

Without local jobs, nuclear will lose the vital support of our people at large. Benefits generated from nuclear must be maximised we must localise. This might be a tall order, but South Africa has the capacity to deliver and compete internationally
Dipuo Peters
Minister of Energy .

Government Requirements
The Department of Energy has stressed that for the nuclear build programme to proceed, localisation is critical to create industries that support the programme and to ensure its long-term sustainability. In addition, government support of nuclear will be influenced by its ability to create local jobs. The onus to invest in the local supply chain and manage the local content percentage will rest with the vendor and thus it is important for the vendor to commit to a maximum local supply consistent with government requirements as well as a high level of technology transfer. Localization will, however, most likely be carried out by the primary contractor of the plant.

Quality Requirements
Quality requirements will have an impact on the extent of localisation which can be effected, due to the strict quality requirements that nuclear build requires. With many of the vendors opting for modular construction, risk is transferred to the supplier and thus the onus for safety falls on the supply chain. If the nuclear build contract is awarded in 2012 it is expected that manufacturing will start in 2015. Safety is a key pillar of the nuclear industry, leading to numerous quality requirements which are applicable to manufacturing depending on the safety classification of the component. Some of the quality requirements which apply to nuclear related safety are the US NRC document 10CFR50 App. B, 10CFR21, NQA-1, IAEA-50-C-QA and ISO-9001 and compliance with these is not only important for the South African nuclear build but also if South Africa is to become part of the global nuclear supply chain.

The Fukushima disaster will definitely result in a call for enhanced safety standards.
Deloitte
Empowering Ideas 2011

2012 Deloitte Touche Tohmatsu Limited

Localisation Options

Any localisation strategy for nuclear new build needs to have a goal of being economically viable and achieving long term sustainability by adding value to other local industries and becoming cost competing in the global nuclear marketplace after the completion of South Africas nuclear new build. The localisation of nuclear safety related components will likely follow a phased, iterative approach with the first plant having a low, non-nuclear component localisation with cooperation between international and local companies leading to technology transfer and potentially resulting in a high percentage of localisation for the last plant. Many capable companies exist in the South African industry but they lack nuclear experience, where specifications are often different from usual industry standards In terms of the manufacture of the largest components such as pressure vessels, steam generators and steam turbines, vendors of Generation III plants prefer large forging presses with a minimum capacity of 15 000 tonnes. Single, integral forgings are desired due to embrittlement and material stress concerns during the plant lifetime. It is possible to employ smaller forges and use split forgings which are welded together. These welds require checking through the life of the plant which may not be the preferred option in a post-Fukushima landscape. Three high-level strategy options exist for localisation, each of which requires a detailed roadmap for implementation.

Ultimately, at the end of the build programme the objective is to have in place deep localisation
Rob Adam
CEO NECSA .

Shallow Localisation
Shallow localisation relates to localisation mainly focused on construction activities. The United Arab Emirates has opted for shallow localisation, signing a USD 20 billion contract in 2010 with South Koreas state-owned KEPCO to provide four reactors on a turnkey basis including engineering, procurement, construction, nuclear fuel, operations, and maintenance support.

Medium Localisation
Medium localisation includes, in addition to civil works, the manufacture of non-nuclear components such as pumps, valves, transformers and filters. Argentina has followed this example where heavy components for the existing two reactors were manufactured outside the country. The same principle will apply to a future third reactor.

2012 Deloitte Touche Tohmatsu Limited

Deep Localisation
Deep localisation involves the localisation of the greater part or the full nuclear fuel cycle from uranium mining through to fuel disposal including the manufacture of heavy reactor components. For South Africa it may possibly include uranium conversion, enrichment and fuel manufacture, motivated by the fact that South Africa has 8% of world uranium deposits. Both China and South Korea have deep localisation of their nuclear industries which grew from an initially low base. The first Chinese Pressurised Reactor had less than 10% local content (mainly non nuclear content) in 1987 progressing to 75% for the Ling Ao reactor in 2005 and targeting 95% local design and manufacture for future reactors.

South Koreas first three nuclear power plants were all built on a turnkey basis from 1978 as a result of domestic industries not being capable of meeting the quality requirements for nuclear power plant construction.The South Koren government believed the risk of economic losses due to construction delays, low performance, and safety problems for a non-turnkey project at that stage was too large. In their view, starting off with turnkey projects would guarantee succesful localisation and the development of the required capability and experience for non-turnkey construction, which requires long periods, could run in parallel. From the commencement of the fourth plant domestic companies were allowed to act as sub-contractors to foreign main contractors which allowed on the job training and participation. Local companies were established for design, engineering, and component manufacture but had to operate initially under the quality plans and control of foreign suppliers who were contracted to ensure a certain level of localisation. By the mid 1990s South Korea had achieved 95 % localisation.

2012 Deloitte Touche Tohmatsu Limited

Current Capacity

With the scarcity of any large capex power projects between the completion of Koeberg until the start of Medupi it can be assumed that large gaps exist with respect to manufacturing skills and capabilities and adherence to nuclear standards.

It is essential that facilities for the localized manufacture of equipment and supply of material be operational early in the project schedule
International Atomic Energy Agency
IAEA-TECDOC-1513 Basic infrastructure for a nuclear power project

Government is leading studies to look at the feasibility of establishing a heavy component industry for nuclear program. Only a couple companies in South Africa currently have ASME III accreditation and the largest forging press has only a maximum capacity of 1000 tonnes. In addition, the Nuclear Industry Association of South Africa (NIASA) aim is to advance nuclear manufacturing knowledge and to support the establishment and growth of nuclear manufacturing capability and capacity in South Africa. Any localisation study needs to look at the capacity of domestic manufacturing companies, assess their capabilities and potentials and feed into a localisation strategy. The localisation study will include the identification of equipment or products which could be manufactured by these companies and identify technology upgrading required of local manufacturers and monitoring its progress as well as a socio-economic analysis.

2012 Deloitte Touche Tohmatsu Limited

Key Challenges

Long lead times associated with many major nuclear plant components necessitates procurement well in advance of the plants licensing; the high volume, global sourcing challenge may not be immediately evident to utility supply chain organizations. Successful utilities will minimize schedule delay risks, manage project costs, and realize the often significant supply chain benefits associated with large capital projects.
Deloitte
Nuclear Renaissance and the Global Supply Chain .

Localisation poses significant challenges due to the fact that established international nuclear supply chain players already exist, South Africa is geographically remote from sites of new nuclear expansion in the world, new manufacturing industry would require financial backing from government and nuclear component manufacturing requires facilities and high levels of skills are presently not available in South Africa.

If the local manufacturing industry is unable to meet capacity requirements or comply with the required quality it is possible that they will only be able to compete for the balance of plant share of the build programme which will have a significant effect on any localisation targets. The very heavy forging capacity in operation today is located in Japan, China and Russia with India, the UK, France and the Czech Republic having plants in the pipeline. The cost benefits of investing in a heavy component manufacturing facility in South Africa need to be analysed as large presses have an average throughput of only about four pressure vessels per year. The growth in nuclear power is, at present, uncertain and it could result in a large investment to compete for a small market share or an opportunity to become a global player in a growing market. The ability to localise the manufacture of nuclear and conventional island components depends also on the ability to meet quality requirements. International accreditation is needed for design and fabrication of nuclear grade components, showing compliance with nuclear mechanical and pressure vessel codes and standards. Steel supply constraints and energy price increases also pose a challenge with a single nuclear power plant needing approximately 60 000 tonnes of steel.

2012 Deloitte Touche Tohmatsu Limited

Way Forward

In order to formulate a localisation strategy, including deciding on the degree of localisation, it is crucial to balance the needs of job creation with those of cost, schedule and sustainability. Deep localisation is desirable but this can potentially be a difficult process and needs to take into account both the capability of local industry as well as the global supply chain. Other regions such as the UK, the Middle East and Eastern Europe have plans to build nuclear plants at same time as South Africa which may result in supply chain constraints and a potential unwillingness for vendors to invest too much across a wide global region. A shortage of skills may be a further issue limiting localisation. How the localisation strategy will be rolled out is as important as the degree of localisation chosen. A roadmap with milestones needs be developed which should include regular reviews and feedback from both local and international experts. A minimum percentage of local content for the first plant needs to be set, perhaps a figure of 10 - 30% as a starting point for SA based on the Chinese example. In addition to manufacturing reaching desired levels, parallel programmes need to be implemented for skills development and technology transfer. It is important that all elements are synchronised as time is money, especially in the nuclear industry, which is capital intensive. Any delay will widen the gap between the heavy capital outlay and the point at which money starts to flow back in, resulting in significant effects on the projected cost per kilowatt hour. Prior to the nuclear programme being confirmed it would be advantageous for potential SA suppliers to work towards being pre-qualified and to focus on understanding the codes and standards that vendor companies are going to apply to their new build projects in order to benefit from potential government investment in manufacturing and technology and skills development. Potential SA suppliers need to be pre-qualified when nuclear supplier tenders are issued. Nuclear power plants require large capital and financial risks are inherent due to the long construction times.Thus, the support of Government in helping to achieve a localisation target is central and their role is to provide a supportive and realistic planning framework, confidence to the market that this is a fleet approach which will be funded, a mature regulatory framework and incentives to invest and transfer technology. The Internation Atomic Energy Agency (IAEA) states that any support by the government to maximize the local scope of supply should be in place well in advance of the start of construction. Government also needs to play a strong leadership role in maintaining close collaborations with national and international organisations and to define the programme structure assigning clear roles and responsibility for each organization involved.

Performing a widely accepted cross-industry based assessment of supply chain functions can help identify enhancements to sourcing processes that balance cost drivers, construction delay risk, and procurement efficiency.
Deloitte
Nuclear Renaissance and the Global Supply Chain

2012 Deloitte Touche Tohmatsu Limited

An overlooked element in the discussion of localisation is the need to introduce resilience and flexibility to adapt to a changing and volatile global environment. In this sense thinking rigorously about the future and analysing trends allows the nuclear programme to build in the ability to respond to future events. The formation of information networks through international collaboration allows the response to be both timeous but also informed and best-practice. Any feasibility study on the capacity of local industry should also focus on relevant knowledge, skills and experience both within and outside the nuclear industry in South Africa and the integration and coordination of these resources. The IAEA recommends the establishment of a Nuclear Energy Programme Implementing Organization (NEPIO) which coordinates across stakeholders including government ministries, regulatory bodies, utilities, grid operator, industry and educational and research institutions and assists government in planning and preparing decisions. The South Korean programme showed that a wide range of expertise including economists, lawyers, educators and psychologists is needed in such an organisation in addition to engineers and scientists. In addition to aligning itself with the IRP 2010 it is critical that the nuclear power programme is closely aligned with national economic development plans. It needs to be shown that the nuclear programme will create jobs and that the additional electricity supply will accelerate economic development leading to the generation of capital for a self-sustaining industry. In terms of ensuring that quality requirements are met throughout the new build process it is vital that, as part of the plan for localisation, subcontractor networks are formed and focused on. Quality of supplier companies depends on the quality of their subcontractors. Recent nuclear industry supply-chain failures have included cost overruns and delays on new-build power stations in Finland and France have occurred due to suppliers inability to comply with regulations.

2012 Deloitte Touche Tohmatsu Limited

10

Our experience in the nuclear sector

Deloitte has a long and established history within the nuclear sector with deep industry knowledge to help clients at all stages of their business development; from business planning for new build to procurement of contracts to deliver nuclear decommissioning. Deloitte has worked closely with the nuclear industry internationally and thus has particular knowledge of key policy and regulatory issues connected to the industry. Our team has worked with most significant participants across the full spectrum of the industry and has developed an excellent understanding of the issues faced from all sides. Consequently, we believe we are ideally placed to help participants in this sector manage and address the many opportunities and risks they currently face in the light of the nuclear renaissance. Our team has worked extensively with Governments, international bodies, utilities, contractors and regulators enabling us to deliver industry tailored solutions to our clients.

2012 Deloitte Touche Tohmatsu Limited

11

Contacts

Shamal Sivasanker
Director: Power Solutions
Mobile :+27 (0) 82 855 0318 Email :ssivasanker@deloitte.co.za

Jacek Guzek
Associate Director: Capital Projects

Email :jguzek@deloitte.co.za

Anton Torlutter
Executive Lead: Capital Projects & Operations

Alastair Ramlakan
Senior Consultant: Power Solutions

Email :atorlutter@deloitte.co.za

Email :aramlakan@deloitte.co.za

2012 Deloitte Touche Tohmatsu Limited

12

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Deloitte is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannot obligate each other. DTTL and each DTTL member firm are liable only for their own acts or omissions and not those of each other. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in its territory through subsidiaries, affiliates, and/or other entities.

2012 Deloitte & Touche. All rights reserved. Member of Deloitte Touche Tohmatsu Limited