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Navigating Nuclear Risks

New approaches to contracting in a post-turnkey world.

Fortnightly Magazine - July 2008

for the project. Managing the risks of cost and schedule performance, project execution, regulatory action (or inaction), access to capital and marketplace volatility requires thoughtful planning. In particular, providing a compelling risk-adjusted economic proposition—and exhibiting confidence in the ability to execute against that proposition—to those parties providing financing remains a challenge not yet fully addressed.

Addressing these complex challenges calls for expanded option exploration and focused decision-making by owners. Mitigating the risk inherent in nuclear new build will require owners to make progress on five paths: risk assessment; contracting approaches; project management models; regulatory strategies; and cross-owner collaboration.

Taking this five-path approach offers certain advantages to owners that individually or collectively advance their ability to minimize identified risks and enhance the likelihood of desired outcomes. However, such approaches may not be elective in the future; emerging project challenges may also turn these paths into requirements for owners.

Risk Assessment: Managing project risk successfully first requires a thorough understanding of the nature of risks that affect new nuclear build. Comprehensive identification of these relevant risks across political, regulatory, financial, technical, project and market dimensions is critical as a starting point. More important, however, is developing an open-minded understanding of their likelihood, their underlying drivers and the probabilistic range of occurrence. Development of a risk register to capture, catalogue, assess and, quantify relevant risks provides the owner a useful initial tool and ongoing mechanism to provide a reference point for development of management response and mitigating actions. Most important, the ability to link schedule and cost implications is paramount as many approaches concentrate on one or the other. The “art” is found in closely linking the two to achieve a more comprehensive and useful representation of potential outcomes. Using these identified risks in a scenario-based probability analysis provides the owner with the analytical capacity to determine potential outcomes and define preferred paths to mitigate the impact of foreseeable risks and preserve flexibility in light of uncertainty.

A comprehensive risk assessment is not just a project tool; rather it has applicability beyond project planning and execution and is necessary to support the fulfillment of financing criteria from the DOE, commercial lenders and rating agencies. Further, the risk assessment supports corporate and board of directors decision-making with respect to financial commitments and overall business impacts.

Contracting Approaches: Getting to a signed contract that is mutually agreeable between the owner and the EPC firm is among the most critical of current activities. Owners are, of course, trying to address several outcomes through their contracting process: predictability, accountability and equity. Finding the sweet spot between full accountability and risk apportionment is at the nexus of preserving the rights of the owner. To address the lack of clarity in project definition and the current seller’s market for services, owners can adopt several approaches to minimizing future risk while instituting life-of-project mechanisms for enhanced project management and control. In addition to component decomposition and time-phasing, owners can adopt target-based incentive provisions to address defined pieces of the work effort or overall performance, e.g. , man-hours. In addition, price