U.S. NUCLEAR POWER FUTURE
CARNEGIE - That America's nuclear power plant construction industry is stagnating or even in decline is not news. Nuclear vendor firms in the United States currently fare no better than their counterparts in most countries with established nuclear power programs. But the pending bankruptcy of Westinghouse, announced five months ago, could have far-reaching strategic impact on U.S. exports and on the economic viability, safety, and security of nuclear power installations in the United States and beyond.
The United States generates one-fifth of its electricity using one hundred nuclear power reactors. That's more reactors than in any other country, but until 2013 the last construction start in the United States was in 1977. During the intervening years, nuclear power plant constructors were saddled with challenges: more demanding safety and regulatory requirements following nuclear accidents at Three Mile Island, Chernobyl, and Fukushima; rising input costs; lack of political support; power market deregulation; and competition from other sources, chiefly wind and natural gas.
During the two decades when nearly all nuclear power plants in the United States were built, a half-dozen U.S. vendors set up about five new reactors per year. After that, the industry contracted globally, and today there are only two established companies in the United States in this business: General Electric and Westinghouse. These firms do not primarily make money in the risky business of selling nuclear power plants. Their cash flow derives instead from providing engineering services and fuel to about two-thirds of the 450 nuclear power plants operating worldwide. GE and Westinghouse have a big market share because they, other companies they acquired, and their partners have developed the technology that was built into these installations since the 1950s.
In recent decades, cyclical expectations of a global nuclear power renaissance failed to materialize. Without growth in the international nuclear market, Westinghouse's future as a nuclear plant builder depended on China building reactors based on the U.S. firm's technology, as well as two new projects in the United States. GE remained joined at the hip with Hitachi, a leading nuclear engineering firm in Japan that has continued to build nuclear power plants there.
In the 2010s, the situation became perilous for both U.S. firms. Since the severe accident at Fukushima, the nuclear outlook for their Japanese partners is in jeopardy. Separately, Westinghouse ran into deep trouble in its new-build business in the United States. Shaw, an engineering firm that owned 20 percent of the company, struggled to deliver components according to specifications, thereby contributing to cost overruns for two projects estimated at $18 billion. In March 2017, majority owner Toshiba filed for Westinghouse's bankruptcy. Outside the United States, prospects for firms in Canada and France are equally troubling, if less spectacularly so.
ENTER CHINA AND RUSSIA
By contrast, the nuclear industries in China and Russia appear immune to and poised to capitalize on the problems that have beset Western firms. Both have made big plans to aggressively export nuclear power plants.
Rosatom, the flagship of Russia's nuclear power industry, as of 2015 claimed to have agreements in hand to build thirty-four nuclear power plants in thirteen countries, including firm contracts worth $110 billion. Russia aims to build nuclear power plants in Bangladesh, Egypt, Iran, Jordan, and Turkey. China's ambitions mirror Russia's. Beijing's leading champion, the China National Nuclear Corp., predicts that by 2030 China will build nearly one-third of the one-hundred power reactors that will be exported in the world, led off by projects in Algeria, Argentina, Ghana, Pakistan, Saudi Arabia, and the United Kingdom.
Perhaps only a fraction of these projects will come to pass. Already, Vietnam has canceled plans to build Russian—or anyone else's—nuclear power plants. Project management officials question the business case for the expensive nuclear power that Russian plants are supposed to generate in Turkey, and that Chinese plants are intended to produce in the UK. Lack of infrastructure, human resources, and experience with big, complex, and risk-laden engineering projects should raise red flags about nuclear power in numerous other countries on China's and Russia's client lists.
Even if only some of these Russian and Chinese projects bear fruit, there are four basic reasons why nuclear power plant exporters and their governments in the United States and other Western countries should be keenly concerned about China's and Russia's understandably ambitious forays into future nuclear power plant markets.
The Business Model
Chinese and Russian nuclear-power-plant-exporting companies are state-owned enterprises (SOEs). They serve the goals of their national governments' energy-fuel diplomacy; they benefit from close, even direct relationships between heads of government and top management (the Chinese Communist Party in fact must approve appointments of senior executives in Chinese nuclear firms); they also benefit from privileged access to money and information, in some cases without transparent oversight. They offer financing terms to potential clients that Western firms, bound by OECD export credit rules, cannot match. Western vendors for these reasons are at a competitive disadvantage.
Strategic Trade Penetration
During the heyday of American nuclear industry dominance, roughly from about 1960 through the 1980s, companies in the United States exported nuclear fuel, technology, expertise, and equipment under a U.S. government international program called Atoms for Peace. This was designed to expand U.S. influence during the Cold War, and it succeeded. Now, regardless of whether and when Russia and China will build power plants in the dozens of countries they are courting, memorandums of understanding and other bilateral agreements will provide Beijing and Moscow access to strategic decisionmaking in these countries concerning technology, energy, and foreign policy for decades to come.
Countries that import nuclear power plants commit to managing this technology over a project life cycle of a hundred years. They will be less inclined to buy turnkey wares from partners that do not inspire confidence that they will be using nuclear power for more than one or two decades. Siemens, Germany's leading nuclear power plant builder, withered and then left the nuclear sector after political support for nuclear power there evaporated after the Chernobyl accident. Areva, France's nuclear engineering champion, which gobbled up most of Siemens' nuclear business, now nervously waits for President Emmanuel Macron to re-commit France to nuclear power development. During the last two decades, when leading Western vendors virtually halted new domestic nuclear power plant construction, industry in China and Russia built scores of reactors at home. By comparison, Western firms' long-term loss of domestic expertise and political support will negatively ripple across their entire supply chain, and both the economics and the safety of installations operating in these countries may in coming years be threatened.
Finally, questions about international governance have been raised in the face of a future shift toward newcomers and away from the established nuclear-technology-owning countries that, beginning half a century ago, made the rules for nuclear exporting, nonproliferation, nuclear security, and business transparency. Consideration of possible Chinese nuclear investment in the UK led to a probe of possible security vulnerabilities that would have been dismissed outright in the case of, say, investment by an EU firm. Very recent concerns have been raised in the United States about alleged Russian cyberattacks against nuclear power targets. The U.S. Department of Justice in 2014 charged an officer in China's People's Liberation Army with economic espionage against Westinghouse related to the company's nuclear project work in China. Most members of the Nuclear Suppliers Group, the world's leading multilateral nuclear export arrangement, believe that both China and Russia have not strictly adhered to the group's guidelines concerning their exports to India and Pakistan, respectively. China's support for international efforts to rein in North Korea's dangerous nuclear weapons program has proved limited and conditioned upon other Chinese strategic interests.
HOW TO RESPOND?
The U.S. nuclear industry is a strategic industry, but Westinghouse and GE are privately owned companies, not SOEs. A federal government bailout of Westinghouse is neither likely nor desirable. The polarized political culture in Washington will prevent other, constructive partial solutions, such as the imposition of a carbon tax that would make nuclear power more cost competitive with other sources of energy.
There is also no apparent agreement about how the United States should respond to Chinese and Russian geostrategic nuclear exports. Some experts consider China's Belt and Road Initiative—which aims to export nuclear power plants that China won't need to build domestically—as a potential threat to U.S. national security, while others believe instead that the United States should embrace it.
For Western firms in the nuclear power business, aggressive behavior by and on behalf of nuclear firms in China and Russia poses a dilemma. They want their competitors to engage fairly, but they also don't want to sacrifice the real benefits that come from partnering with Chinese and Russian industry, led off by market access and opportunities to take advantage of non-Western firms' genuinely lower factor costs.
In the meantime, Donald Trump's administration should have a structured conversation with U.S. industry about what steps Washington could and should take to enhance U.S. nuclear exports and encourage a level international playing field for exporting nuclear equipment, material, and technology, especially to risk-bearing destinations. This might lead the White House to make better use of the U.S. Export-Import Bank and to establish bureaucratic lines of authority to favor a more coordinated and strategic view in the federal government about nuclear trade.
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