The nuclear power industry will spend at least £60bn over the next 30 years, and a lot more if, as seems increasingly likely, it starts building new reactors. So how can contractors join the new atomic age?
The nuclear industry has suffered a bad press. Cold War memories, military threats and the Chernobyl disaster are what people have typically associated with nuclear power and this has overshadowed the business opportunities that it can provide. But perceptions are changing, with the market set to offer contractors and subbies at least £2.3bn a year in the foreseeable future. Costain, for example, has just hired a nuclear director, and many consultants have done the same.
There are three areas of potential work:
- As of today, the Nuclear Decommissioning Authority is operational. It is a quango set up to own and decontaminate 19 sites across the country, including more than 200 facilities at Sellafield in Cumbria. The contracts it will issue include the demolition or redevelopment of the buildings holding the nuclear waste.
- The sites are managed by the British Nuclear Group, a newly formed subsidiary of British Nuclear Fuels and the UK Atomic Energy Authority. It is, in effect, the main contractor – known as the tier-one contractor – but it subcontracts specific projects to construction companies and consultants. This market is to open up in the future, as the government is likely to allow private firms to bid for tier-one work. No date has been set, but most industry sources expect that it will happen from 2008.
- Fossil fuels have two disadvantages that nuclear power does not: they release greenhouse gases and they will shortly begin to run out. It seems inevitable therefore that more nuclear facilities will be built to replace the ones decommissioned. Rumour has it that at least one major company has started working up designs for 21st-century reactors. If the government pushes through with these proposals, they could prove to offer the meatiest contracts of all.
The NDA will take strategic responsibility for the clean up of all public sector civil nuclear sites, having swallowed up the assets
and liabilities of BNFL. This has allowed BNFL to concentrate on its role as a contractor. As one nuclear director at a leading consultant puts it: “BNFL has moved mountains to position itself as a lean and mean fighting machine and they’re looking the part.”
BNFL’s subsidiary BNG then lets demolition and construction work to so-called tier-two contractors. There will be between 100 and 200 contractors and consultants that will cover about 60 core areas of supply, such as design, storage, health and safety, and engineering solutions. About 700 tier-three contractors and a couple of thousand other subcontractors will also be involved.
This is a complete change from the previous system in which the BNFL acted as the lone contractor and dealt directly with up to 9000 suppliers. The NDA forecasts an increase of 30% in workload for the supply chain and 50% on the amount spent on decommissioning in the next three years alone. Construction work, including the design of storage facilities and refurbishment, will reach an estimated £285m a year. Added to the capital expenditures of new storage facilities are the running costs of the existing sites until they are completely decommissioned.
The new system should speed up the decommissioning process. This is motivated by money – the quicker contractors can carry out the work, the more money is saved in the long run. The United Kingdom Atomic Energy Authority, the body responsible
for the decommissioning programme, says it is trying to complete its work in half the time originally scheduled. “These plans are estimated to reduce the total cost of decommissioning the sites from the previous figure of £6.3bn to £4.8bn,” says a UKAEA spokesperson.
Mark Howard, industrial partner at consultant EC Harris, says that what this programme will provide is a steady stream of work: “Other markets such as property and rail are up and down, but this has the potential to be more predictable.”
Where there is some concern is over the margins available. Howard thinks that the 4.4% that is generally expected represents a reasonable return, particularly in an industry where rates of less than 2% are typical. But in the USA contractors can get several times that. That leaves some in the UK construction industry unimpressed, says one nuclear industry source: “Some companies have been looking at these figures and comparing them with the US. Their reaction has been, ‘We won’t get out of bed for less than a 23% margin, like they do in the US’.”
Nevertheless, plenty of contractors will want a taste. Ian Donnelly, who previously worked on international projects at Foster Wheeler Energy, has just been appointed nuclear director for Costain. “It will be part of my role to ensure that Costain engages with key clients and other bidders in the nuclear sector to provide a full service offering,” he says.
Donnelly adds that Costain is well positioned among the second tier of contractors and has collaboration frameworks in place. “Tough targets will be imposed by the NDA to come up with innovative schedule improvement and cost reductions.”
Opening up the market
Unfortunately for British contractors, recent reports suggest that BNFL has chosen two American companies, Fluor and Jacobs, as its initial tier-two partners. David Baird, nuclear director of Jacobs’ UK subsidiary Babtie, says this is unsurprising: “The Americans are clearly ahead of us in the decommissioning field. It would be a good idea to try and draw on their example to create best practice value.”
The US could provide an even greater threat when the tier-one market is opened up. A spokesperson for BNFL will not be drawn on when the group is likely to be forced to compete for the right to manage nuclear estates, but most think it will be 2008. Bechtel, which has advised the government on setting up the NDA, and another US firm Montgomery Watson are known to be keen.
The NIA’s Buckley says that it will be difficult for smaller
UK companies with little or no nuclear experience to enter the competition for tier-one jobs. Oil and gas companies that have been working on the decommissioning of the North Sea facilities have almost come to the end of their contracts and they’ll be looking for new markets, he says. Buckley says the best move for British contractors is to try to team up with these types of firms and their US counterparts on tier-two work: “If companies are seeking larger contracts, they should acquire experience in the nuclear field through collaboration with companies that have already developed that experience. There are enough transferable skills within the construction industry to make sure that contracts are accessible.”
A similar concern is the shortage of qualified personnel, such as project managers and safety case officers. This is the real challenge for the nuclear industry, according to Babtie’s Baird. “We need to employ people with the right experience. At the moment we are training people and recruiting graduates to meet that shortfall,” he says. The DTI has forecast that the nuclear industry would be 10,000 staff short over the next 10 years. Baird thinks that they “need to make the nuclear industry an exciting place to work in”. Its selling point: a spend profile of about £60bn over the next 30-40 years.
A nuclear future
Where real money could be made is in the development of new nuclear power stations. Tony Blair has hinted at this, and the energy white paper did not rule out their construction. The Institution of Civil Engineers has warned that, given the UK’s dependence on gas and the imminent exhaustion of North Sea reserves, the country could face blackouts unless it adopts another nuclear programme. Colin Clinton, president of the ICE, says: “We shouldn’t lose our ability and the skill base required to develop nuclear – especially if we wish to avoid becoming reliant on insecure or unreliable energy sources.”
One leading consultant has noticed the government’s changing tone: “There has been government spinning and leaking in the last year or so to suggest that nuclear is actually okay. They are trying to change the atmosphere and public opinion; trying to sell nuclear as reliable and safe.”
However, building more nuclear power plants is unlikely to feature on Labour’s election manifesto. Jean McSorley, Greenpeace senior adviser on nuclear issues, says: “There are a huge amount of institutional hurdles and it is very unlikely anyone would put money in the industry to build new plants, even if people in the industry push for it. If I were a big company, I would certainly not be holding my breath for new-build contracts,” she says.
But once Blair has secured that third term, it could be that UK contractors will have a juicy new nuclear market worth billions of pounds open to them.