Nuclear energy: Candu or Can-don't?

In the international competition to sell nuclear reactors, Canada's AECL is at a size disadvantage.

July 27 was a good day for Atomic Energy of Canada Ltd. The Crown corporation announced it was negotiating with Argentina to build a new enhanced Candu 6 reactor, potentially marking the first sale of a Candu in over a decade. Just a few days later, AECL announced it would be conducting a feasibility study on an Advanced Candu Reactor in New Brunswick.

Fears over global warming and pressure on governments to reduce greenhouse-gas emissions have sparked renewed interest in nuclear energy. Vendors such as AECL are on the brink of a new era of nuclear plant construction, and opportunities abound. Countries like the United States and Britain are considering new reactors, and energy-hungry China could build one or two reactors a year until 2020, according to the World Nuclear Association. In Canada, the governments of Ontario and New Brunswick are looking at building new reactors, and AECL and privately owned Energy Alberta have teamed up to promote nuclear power for the Prairies.

That’s not to say nuclear is a sure thing. Some question the economics of nuclear, as well as the industry’s carbon-neutral claims. More pressing for AECL, however, is how large a role it can play in this nuclear resurgence. AECL has big hopes for its latest design, the ACR-1000. The ACR is a Generation III+ reactor, a classification of the International Atomic Energy Agency denoting the latest technological, safety and operational standards. But the eight-year-old design has yet to receive an order—a sale to the U.S. fell through in 2005—or even get licensing from the Canadian Nuclear Safety Commission. Meanwhile, French nuclear giant Areva is already building a Generation III+ reactor in Finland and has another one slated for France. Westinghouse has an order for four reactors in China, and General Electric is in a strong position to win orders for its latest reactor design in the U.S. For AECL, the New Brunswick study is a step forward but not yet a guarantee.

The nuclear field is getting crowded: Toshiba purchased Westinghouse last year, and GE and Hitachi have combined forces to market reactors. In response, AECL formed Team Candu, a consortium comprising partners such as SNC-Lavalin and GE Canada. “There has to be further consolidation,” says Steve Kidd, director of strategy and research at the World Nuclear Association in London. “There are too many vendors at the moment.”

With rumours swirling that the government is moving to privatize AECL, changes to its structure seem likely. Partnering with a powerful peer would relieve taxpayers of some of the financial risk of projects and give AECL greater ability to win contracts—assuming there is demand for its products.

That’s the big challenge. By far, most of the world’s 438 reactors are of a light-water design; Candu reactors use heavy water. AECL sees Candu as superior and simpler, but light-water reactors dominate in part because they were first to market and have lower upfront costs. Past AECL customers such as Argentina and Romania may buy more heavy-water reactors, but the market is not growing. After all, adding a Candu to a light-water fleet is costly; a country would still have to enrich uranium for its light-water reactors as well as get heavy water for the Candu. Staff would have to be retrained. As for countries yet to adopt nuclear, AECL faces stiff competition.

Although the company is hoping to refurbish 20 reactors over the next two decades—a process that will ensure steady cash flow—the real achievement for vendors is in new build. “The way to stay in this business is to keep on doing innovative things, to build faster, better and cheaper,” says Dan Meneley, past-president of the Canadian Nuclear Society, the professional society of nuclear scientists and engineers.

For AECL, the outlook is anything but clear, and the trouble starts at home.

Competition doesn’t faze Ken Petrunik, senior vice-president and chief operating officer of AECL. “We will hold our own against any competitors in Canada, or other markets we’re targeting,” he says.

The Crown corporation will need that confidence, as even its home turf is no longer secure. A reactor hasn’t been built in Canada since Darlington, in Ontario, was completed—five years late and $9 billion over budget—in 1993. What’s different about this round of nuclear construction is that Ontario, New Brunswick and Alberta are weighing submissions from Areva and GE, in addition to AECL. Canada is now an important battleground, one that will determine AECL’s ability to sell internationally. “What sign would it send to the Americans, the Brits, the Koreans, if Canada decided to choose a different design?” asks Duane Bratt, professor of political science at Mount Royal College and author of The Politics of Candu Exports. That’s not the only home advantage AECL has. The industry is familiar with Candu technology, and retraining workers to deal with foreign technology will be costly and time consuming.

Bratt suggests provincial governments’ open approach to reactors is just politicking. As owners of AECL, the feds might help finance construction of Candu plants to ensure business for AECL. “It’s really a game where they’re looking for subsidies that the feds can kick in,” Bratt says. “To go with a different system, it doesn’t make sense politically or economically.”

Indeed, New Brunswick shunned competitors in giving AECL the go-ahead to conduct a $2.5-million feasibility study (paid for by Team Candu) for an ACR. The proposed reactor is part of a plan to turn Saint John into an energy hub, and the provincial government will make a decision whether to proceed based partly on AECL’s assessment. New Brunswick is already grappling with the $1.4-billion refurbishment of its Point Lepreau reactor. The government had to ask the feds for financing help in 2005, and then-premier Bernard Lord was “shocked” when he was turned down. “Can they jump from there to taking on the risk of building an all-new plant?” asks Shawn-Patrick Stensil, nuclear analyst for Greenpeace Canada. AECL says should construction proceed, the goal is to have the reactor built with private-sector money. Team Candu will provide the bulk of it, and AECL is looking for more partners.

Building an ACR is important for AECL, since it would act as a floor model for future customers based on the ease of construction and performance. The ACR is a hybrid, and replaces about half its heavy-water needs with light water. As a result, it has lower costs than previous Candu designs, Petrunik says. The ACR is only at the pre-licensing stage, with an in-service date of 2016. The timing is crucial for Ontario, since it has pledged to shut down coal-fired power plants by 2014, around the same time four units at Bruce Power and four more in Pickering will be undergoing refurbishment, creating a huge need for new energy sources.

Stensil is skeptical about AECL’s ability to deliver an ACR within that time frame. “It hasn’t passed through licensing yet,” he says. “All the possibilities for delay are there.” AECL has also shelved reactor designs in the past, he points out, such as the Candu 9. AECL has never built an ACR before, unlike the Candu 6, which increases the chances of cost overruns and further delays. Petrunik counters that the ACR is not a huge technological leap, and is quite similar to the Candu 6. “It’s an evolutionary design,” he says.

Meanwhile, Areva has been making an aggressive push into Canada. The company has already been here for more than 40 years, employing 1,100 Canadians and operating the second-largest uranium mine in the country. It would really like to build reactors in Canada, however. In fact, allowing Areva to build its light-water reactors is necessary for Canada to remain competitive, says Areva Canada president Armand Laferrère. “For the Canadian industry to thrive, it should both keep its heavy-water skills and increase its mass by gaining more skills in light water,” he says.

After all, the market for heavy-water reactors is likely to remain small. Part of the reason has to do with first-mover advantage. While AECL was fostering a domestic nuclear program, GE, Westinghouse and the German Kraftwerk Union were establishing customers and supply chains, and developing marketing expertise. AECL lacked those marketing skills by the time it was ready to export reactors in the 1970s. The Canadian government also didn’t have the weight of the U.S. or European governments, which helps in nailing down customers. But Petrunik says AECL is gaining light-water experience through its ACR design. “We already have the best operating reactor in the world,” he claims, “and the ACR is an evolution of that reactor.”

Even so, it’s difficult to compete when you’re in the minority, Laferrère says. He envisions partnering with AECL on projects and facilitating an exchange of knowledge and skills. Areva has also expressed interest in acquiring AECL, but has so far been rebuffed. “We don’t want to impose,” Laferrère says. “We’re not aggressive, and we’re not invaders.” He is quick to cite Areva’s edge over GE, another potential AECL suitor; he points to his company’s expertise in waste management, and the III+ reactor being built in Finland. (Not that it’s been problem-free—construction is about 18 months behind schedule.) Still, observers say, Areva’s chances of building a reactor in Canada are slim. “I think the foreign vendors will have difficulty,” Kidd says. Candu is firmly established, and even if the utilities decide on a different reactor, GE has an edge as part of Team Candu.

While the Canadian market favours AECL, however, the international picture is less certain. China will be the main customer for reactors in coming decades, but just last December it purchased four reactors from Westinghouse over AECL, closing the door on future AECL sales for the time being. “They’re just following the world trend,” Kidd says of China’s decision. The Chinese have purchased reactors from a variety of vendors with the intention of developing a custom design to use domestically and to potentially export. The fact that the Chinese are developing a light-water design doesn’t bode well for future AECL sales, although Bratt says it’s not out of the question, given that China’s two Candu reactors have performed well and were built on budget and ahead of schedule.

The customization route is one South Korea, a large Candu customer in the past, has already taken. The country has its own commercial light-water design, so any further reactors will likely be constructed domestically. South Korea can also export its reactors to countries such as Malaysia and Indonesia, should they choose to adopt nuclear, making it more difficult for AECL to enter those markets.

Elsewhere, Britain is considering new reactors, and AECL feels it’s in a strong position to win contracts. Kidd says not to underestimate Areva, however. Électricité de France is the electricity supplier for London and would have considerable sway in the decision over reactors. Westinghouse is also well-positioned, given that China ordered four of its Generation III+ reactors. Neither GE nor AECL has sold a III+ reactor, and if AECL doesn’t sell an ACR somewhere first, the chances the Brits will buy one are reduced, says Stensil.

Petrunik is hesitant to reveal potential customers, but says other countries have approached AECL, including some in the Middle East. One country that is almost a sure bet is Romania. AECL struck a deal to build five reactors there in the 1970s, but the project was delayed due to political instability. The second of the reactors is coming online this year, and Romania would like to build at least two more.

The Candu still has advantages. Aside from its ability to use natural uranium, it doesn’t have to shut down when refuelling and is supposed to be cheaper to operate over its life than light-water reactors, despite higher upfront costs. Petrunik says the difference between light- and heavy-water reactors could spell another opportunity for AECL: the Candu can process light-water reactor waste as fuel.

The Korea Atomic Energy Research Institute has been studying the process since the 1990s, and Petrunik is flying to China in November to facilitate research with Chinese institutions. Scientists have yet to find a way to reprocess the waste economically, though the potential is enormous, given that it addresses the problem of rising uranium prices and reduces nuclear waste. And the potential is greatestin countries such as China and Korea, which have both light- and heavy-water reactors. If the process is commercialized, countries with light-water reactors may consider adding a Candu, Petrunik says.

Market opportunities aren’t the only concern for AECL—its ownership structure is also an issue. In 2003, the federal government commissioned a study on the viability of privatizing AECL. The study showed that all or at least part of the corporation could be sold at some point, and the main reason not to sell was timing: the government could ensure top dollar if it waited. That puts more pressure on utilities in Canada to choose Candu reactors over the competition, as the value of AECL would take a significant plunge otherwise. As recently as last month, the Toronto Star reported AECL was in late-stage sale talks with GE. That came as a surprise to Patrick Lamarre, head of the nuclear division at SNC-Lavalin. “We hope it’s not true,” he says. “We would hope to be involved in the process of evaluating AECL, and to be part of it as a Canadian company.”

Privatizing AECL’s commercial operations wouldn’t necessarily mean an end to government support of the industry. R&D would likely stay with the government, as would the legacy costs for management of nuclear waste, which AECL calls its liability management unit. That cost AECL $1.8 billion between 2004 and 2006.

AECL’s history with privatization hasn’t been a good one, says Tom Adams, executive director of Energy Probe in Toronto. AECL privatized its medical isotopes division in the early 1990s, which has since fallen under MDS Nordion. AECL is building two specialized reactors for MDS Nordion, but parent company MDS Inc. expressed disappointment in its 2005annual report over AECL’s ability to complete the project, which was five years behind schedule and nearly 200% over budget at the time. (It now has a completion date of 2008–2009.) The two companies came to an agreement in February 2006 in which AECL paid MDS $25 million to assume complete ownership of the project and absorb all future capital and operating costs. “Far from being sold, we renationalized a bunch of these liabilities,” Adams says. “It’s not a sign of success.”

Relevant or no, the history with MDS Nordion raises questions about how the government will ensure long-term profits through a sale. “You don’t want to have it so the government is spending money on research and development, and the private sector is getting the profits,” says Bratt.

Meneley has another concern: privatization could lead to neglected Candu development. “The 50-year investment GE already has in its reactor technology would be predominant,” he says. “I would do the same if I were them.” Bratt sees it another way: “This would not be a winding down of Candu. It’s designed to enhance Candu.” The deep pockets and international expertise of potential buyers would help with future sales—unless, Bratt adds, the initial buyers of AECL decide to flip it to someone else a few years later.

Either way, the future of AECL depends on Canada and whether the provinces purchase a Candu, particularly an ACR. “The key thing for them is to get new orders in Canada,” Kidd says. “Then show the rest of the world what they can do.”

Petrunik is more than willing to get started. “Several countries are knocking at our door asking for us to engage in serious discussion,” he says. “We’re going to be really busy.”