Smart procurement is vital to nuclear new build, says chartered civil engineer and Burges Salmon LLP partner Will Gard
The UK nuclear new build programme is gathering momentum. There are reports of major civils packages (totalling c.£600M) being let by the end of this year. 2017 is targeted for operation of the first plant.
This timescale leaves developers with many challenges. The two competing plant designs are not expected to pass the Nuclear Installations Inspectorate’s Generic Design Assessment before 2011. Specific site licences are not expected to be granted before 2013. That only leaves four years to construct and commission the first plant.
The level of scrutiny by the regulators on nuclear plants is far greater than on other projects because of the potential consequences of a malfunction. The current review will not deal with all design issues, as much will be dependent upon site-specific information.
“The level of scrutiny on nuclear plants is far greater because of the potential consequences of a malfunction.”
Some residual design risk will therefore remain during the construction phase. The regulators will also have to be satisfied that the safety case that underpins the design is being properly implemented on site.
Quality assurance issues have already disrupted construction of the two nuclear plants currently being built in Europe. One of the keys to success will therefore be the quality and robustness of the supply chain.
Another critical decision will be the choice of procurement strategy. The method selected will depend on many factors including the experience of the developer; funding strategy; the balance between cost-certainty and programme (achieving the highest standards of quality and a safety being immutable requirements); and the willingness of the supply chain to embrace innovative risk-sharing models.
We have already seen two contrasting strategies deployed in Europe. EDF adopted a “multi-contracting” approach for its Flamanville project in France while a joint venture between Siemens and Areva signed up to a turnkey arrangement for the delivery of the Olkiluoto project in Finland.
Perceived advantages of the “multicontracting” strategy are:
- the avoidance of a risk premium which a turnkey contractor would require to assume “whole project” risk;
- the potential for truncating the construction programme by making an earlier start on site (whilst later packages are being finalised) and avoiding the float that a turnkey contractor would build into his programme; and
- maintaining the flexibility to respond innovatively to delay events.
The price of retaining this level of control and flexibility is the retention of more risk in relation to price, programme, quality and performance, risks that are unattractive to potential providers of project finance who rely upon the revenue generated by the plant to repay their loans.
A turnkey arrangement does theoretically provide the developer with greater certainty in terms of time and cost and therefore is more appealing from a project funder’s perspective. It does however require the developer to relinquish a significant amount of control and attracts a hefty time and cost premium.
EDF may seek to deploy its existing procurement strategy on its UK new build programme.
However, an alternative strategy may be to take a more cautious approach favouring a “turnkey” or hybrid model as a hedge against the major risks involved in nuclear new build. The attitude of funders and the supply chain will play a significant role in shaping these key decisions.
- Will Gard is a chartered civil engineer and a partner at law firm Burges Salmon LLP