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Supply Chain Reaction
Localisation Issues for Nuclear New Build
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© 2012 Deloitte Touche Tohmatsu Limited 2
Contents
Executive summary ......................................................................................... 3 Localisation Requirements .......................................................................... 4 Localisation Options .................................................................................... 5 Current Capacity ............................................................................................. 7 Key Challenges ............................................................................................... 8 Way Forward ................................................................................................... 9 Our experience in the nuclear sector ........................................................... 11 Contacts ........................................................................................................ 12
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© 2012 Deloitte Touche Tohmatsu Limited 3
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 country’s 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 dueto 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 supplychain 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?
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© 2012 Deloitte Touche Tohmatsu Limited 4
Localisation Requirements
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.
“Without local jobs,nuclear will lose thevital support of our people at large.Benefits generatedfrom nuclear must bemaximised − we must
localise. This might bea tall order, but SouthAfrica has the capacityto deliver and competeinternationally”
Dipuo Peters
Minister of Energy
.
“The Fukushimadisaster will definitelyresult in a call for enhanced safetystandards.”
Deloitte
Empowering Ideas 2011
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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 Africa ’s 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.
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 Korea’s 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.
“Ultimately, at the endof the build programme theobjective is to have in place „deeplocalisation‟”
Rob Adam
CEO NECSA
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© 2012 Deloitte Touche Tohmatsu Limited 6
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 grewfrom 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 Korea’s 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 toforeign 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.
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© 2012 Deloitte Touche Tohmatsu Limited 7
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.
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 isto 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.
“It is essential thatfacilities for thelocalized manufactureof equipment andsupply of material beoperational early in the project schedule”
International Atomic Energy AgencyIAEA-TECDOC-1513 Basic infrastructure for a
nuclear power project
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© 2012 Deloitte Touche Tohmatsu Limited 8
Key Challenges
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.
“Long lead timesassociated with manymajor nuclear plantcomponentsnecessitates procurement well inadvance of the plant‟s
licensing; the highvolume, global sourcingchallenge may not beimmediately evident toutility supply chainorganizations.Successful utilities willminimize scheduledelay risks, manage project costs, andrealize the oftensignificant supply chain benefits associated withlarge capital projects.”
Deloitte
Nuclear Renaissance and the Global Supply
Chain
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© 2012 Deloitte Touche Tohmatsu Limited 9
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 capitaloutlay 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 widelyaccepted cross-industry based assessment of supply chain functionscan help identifyenhancements tosourcing processes that balance cost drivers,
construction delay risk,and procurementefficiency.”
Deloitte
Nuclear Renaissance and the Global Supply
Chain
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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 dependson 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.
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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.
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Contacts
Shamal Sivasanker Director: Power Solutions
Jacek GuzekAssociate Director: Capital Projects
Mobile :+27 (0) 82 855 0318
Email :ssivasanker@deloitte.co.za Email : jguzek@deloitte.co.za
Anton Torlutter Executive Lead: Capital Projects &Operations
Alastair RamlakanSenior Consultant: Power Solutions
Email :atorlutter@deloitte.co.za Email :aramlakan@deloitte.co.za
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