Felix Wilde, Energy Consultant, Germany
|The Korean company Kepco signs a nuclear deal with authorities in the UAE|
Considering their annual economic growth rate of more than 5 per cent and their limited availability of non-fossil resources, GCC countries have few possibilities for breaking their dependence on fossil fuels.
Despite huge investments in renewable resources, these are currently not sufficiently available to cover the pending energy shortfall. The ambitious aim to generate 30 per cent of electricity through nuclear power in 2030 is prompting governments to start as early as possible with implementing nuclear power. This new development in the energy sector covers a broad range of challenges and opportunities not only for consultancies.
Regarding the energy market, the fastest growing economy on the Arabian Peninsula is Saudi Arabia, with an increase in power generation capacity from 25 790 MW in 2000 to 39 242 MW in 2008, amounting to 52 per cent.
The rise in electricity demand has also spurred a 34 per cent expansion of the distribution network. This reflects the country’s sharp economic upturn. The Kingdom’s business environment is increasingly liberal and attractive for investments by foreign companies.
Economic growth is also corroborated by the number of electricity customers, with an increase of 50 per cent from 3 6 million to 5.4 million. The Saudi Electric Company (SEC) predicts an annual growth rate in national demand for electricity of about 10 per cent over upcoming years.
The energy sector and electricity generation currently depend heavily on fossil fuels such as crude oil and natural gas. Extensive reserves on the entire peninsula will secure electricity generation for many years, but these are ultimately finite resources. There is also great potential for renewables but these currently contribute only a minor share in the energy mix. An increasing global trend towards nuclear power reflects its perception as a reliable and competitive power technology.
For a couple of years, states on the Arabian Peninsula have been competing with each other, with the UAE seeking to be the first to set up a civilian nuclear power programme. The UAE is one of many countries in the Middle East with a serious interest in nuclear energy. Others include Kuwait, Egypt, Jordan and Saudi Arabia.
The UAE government’s ambitious aim is to prepare detailed plans for acquiring skills and technology and for overcoming regulatory challenges. By 2020, the UAE government intends to have several nuclear reactors in operation that should meet almost one-third of the country’s electricity demand.
A consortium of Korean companies won the bidding procedure for the first nuclear power plant in the UAE, comprising four similar reactors of type APR 1400 with an electrical capacity of 1400 MW to 1600 MW each. The first reactor is scheduled to come on stream in 2017 with the other three to follow at 18-to-24 month intervals.
The Korean consortium competed with two others: one French, comprised of Areva, GDF Suez and Total; and the other a US/Japanese consortium featuring GE and Hitachi as its main partners.
For consultancy companies it has become increasingly attractive to engage in nuclear development in order to benefit from the hosting nations’ lack of expertize. But this new market’s interest in the technology is associated with hurdles that have to be examined in detail.
First steps for success
A company’s first step has to be the assessment of its own status in strategic deployment and a prioritizing of its activities to enter a new business sector in a foreign market. These strategic considerations could also be of relevance for policymakers, investors, suppliers as well as nuclear and governmental agencies to identify their need for external advisers to safely operate a nuclear power programme.
|The sequence of steps to follow in determinating a target market|
Potential business opportunities are manifold within the entire nuclear value chain, from the mining of new uranium to the reprocessing of used nuclear fuel rods and the final storage of waste.
Nevertheless, this huge market has continually changing constraints and conditions could throw up a lot more obstacles than detected in a first evaluation. All relevant external factors have to be considered to minimize the chance of failure in the new market. An assessment of the internal organization of each individual process is crucial for a potential success or an expensive failure.
Internal assessment in conjunction with market analysis is essential for obtaining relevant information for further management decisions based on, for example, a SWOT (strengths, weaknesses, opportunities and threats) analysis. The general goal of a SWOT analysis is to identify internal and external factors, with strengths and weaknesses belonging to internal company factors, and opportunities and threats depending on external conditions.
The relationship of strengths to weaknesses fixes competitive interactions, so these two attributes are directly related to the company’s own preparation and to the characteristics of its competitors. A competitor’s strength might be a weakness in another company and vice versa.
Opportunities and threats are external conditions due to the actual market demand. Inadequate preparation or unpredictable events in a market are two determinants for threats that could jeopardize a project. A prudent analysis to identify potential threats will enable countermeasures to be taken to reduce their intensity and frequency.
This SWOT analysis enables companies to identify further investments and to work out a deployment strategy. Pending threats are more predictable and easier to avoid or take into account.
A market analysis must possess the following attributes: impartial, trackable and with reliable sources.
The company’s own appraisals should be highlighted so that they are not confused with official and reliable data. The presence in the market of direct and indirect competitors must be considered to avoiding misrepresenting market conditions and underestimating the company’s own weaknesses. Barriers to market entry must be clearly defined, either with the intent to gain a bridgehead in a new market or to protect a company’s existing share in a market against competitors.
|Figure 1: Project phases from ‘Milestones in the Development of a National Infrastructure for Nuclear Power’, IAEA Nuclear Energy Series No. NG-G-3.1, IAEA, Vienna (2007)|
Such an analysis must consider the following aspects firstly with direct regard to the market:
- market size: volume, potential, trends, development, and trends in parallel markets;
- market quality: profitability, risks and barriers, price development, innovation and technology potential;
- market occupation: structure, behaviour, goals, relationships, potentials of customers and competitors.
Secondly, the analysis must turn its focus to external conditions:
- restrictions established by law and statutes;
- technological development and the current state-of-the-art;
- business cycle: growing, maturity, declining;
- regional and national specialties
These results are summarized in Figure 2. Finally the analysis must concentrate on the company itself and its business segment:
- company’s market share;
- offered products and activities;
- technological status;
- status of marketing and sales department;
- financial standing.
Figure 2: Classification of countries according to their attractiveness
These aspects are likewise the components of a SWOT analysis, which will consider the following aspects.
A strength is a core advantage of a company and its ranking in this aspect vis-à-vis its competitors. Internal factors depend on the company philosophy and the management’s code of conduct, i.e. its vision and mission.
Contributory factors are the qualifications and experience of managers as well as employees’ flexibility and motivation. Determined and consistent strategic management will provide a guideline and pave the way for higher efficiency and productivity. In Europe, experience in power plant construction goes back to industrialization. Thanks to many decades of broad-based experience coupled with continuous research and development, German companies possess a high degree of expertize and knowledge.
Universities and extensive practical education among the workforce ensure an adequate supply of staff to meet the industrial sector’s demands. Despite high labour costs compared to other countries, European engineering and consultancy firms are respected and profitable.
The nuclear sector offers fewer synergies than other conventional business fields and significant economies of scale are not directly attainable. Such projects are too large to be handled by a single consultancy enterprise, so joint ventures have to be set up to share the work and, predominantly, the liability. The separation of responsibilities will increase the degree of interface management within the involved parties.
A further weakness is the human factor. Nuclear energy is a polarizing issue and not every employee is prepared to work in this technology. Motivation measures and incentives are needed to gain loyalty and attract employees.
One of the main challenges for the nuclear power sector globally is the shortage of staff with specialist education and training. This means that companies have to compete to recruit qualified staff, and some employees will not match the profile of requirements.
The rate of retirement in 2010 was crucial; almost 60 per cent of specialist staff will retire over the coming years, coinciding with renewed interest in nuclear power. Because of the ageing workforce, knowledge will not be properly passed on and retiring staff will take critical knowledge with them. A huge gap has arisen in recent decades between the older workforce and new graduates.
The global availability of qualified employees for this business segment is very restricted. This issue is well known, so efforts are needed to ensure recruitment and retention of the existing resources in order to prevent an explosion in estimated project budgets. The total volume of work for planned nuclear plant construction will far exceed the available manpower capacity as well as that of engineering and consultancy enterprises worldwide.
Opportunities for consultancies will arise through the external business environment, i.e. greater demand for nuclear power. Requirements in reorganization, and research and development will grow in importance so that contracted services can be provided by consultancies. The outlook for higher energy consumption will result in greater project development in the region, heightening the increase in opportunities.
Threats also arise due to external conditions in the market, such as existing competitors, suppliers, costs, government policy and regulatory agencies as well as the entry of new competitors. In the nuclear business, imminent threats are different due to the involvement of a large number of stakeholders and different interests.
There is increasing interest and consequently higher competition arising between nuclear newcomers. This hype is because each country wants to be the first to bring its nuclear plant on line. To consider this as serious demand in a market analysis could be very dangerous.
Countries that appear to be highly ambitious could abruptly halt their nuclear plans and cancel planning arrangements. Potential governmental risks over a project lead time of between 10 and 15 years are elections and changes of economic and environmental policy.
Business sectors most affected are mainly those that involve plant engineering and construction with a high proportion of advance payments for construction materials and so forth. Cancellation of long-term contracts puts companies at risk of incurring heavy financial losses. Investors, construction companies and governments are increasingly unwilling to lend money for such large projects, due to the following financial, technical, public, and political factors.
- The high liability sums and warranties that construction companies need for a project. Banks have imposed greater restrictions on approving such guarantees, and the spirit of trust has diminished since the global economic crisis;
- The current financial situation regarding the credit crunch and market stability. Failure to pay back loans and insolvencies of reputable institutions mean that greater care is taken before granting credit;
- Joint ventures between major companies, like public utilities and construction companies to share risk and the high required investment capital. Examples include E.ON and RWE, who set up Horizon Nuclear Power in 2009 in the UK, and the Korean consortium led by Kepco.
- The low capacity of high voltage transmission lines. Nuclear units of more than 1 GW could become obsolete with a trend towards small modular reactors for more even voltage distribution throughout the country. This obvious threat could actually be also considered as an opportunity for consultancies in the development of transmission lines.
A more public threat is public rejection. Nuclear energy became a highly polarizing issue following the accidents in Three Mile Island and Chernobyl. A similar hazardous incident could immediately jeopardize the entire development, and withdrawal from the nuclear sector by democratic countries is conceivable.
Further issues that stoke the negative attitude to nuclear energy is the still unresolved final storage of the radioactive waste as well as trade in and transport of nuclear fuel rods. Controls to prevent diversion of fissile material for military use to construct of weapons of mass destruction is also a concern that must be urgently resolved.
Political threats and uncertainties
The award of the contract by Abu Dhabi to a Korean consortium in 2009 also provides an example of the political sensitivity of such projects. Bilateral agreements between several countries on all levels of the project increasingly hinge on political issues and interests. During a delay of three months for the contract award, politics played a prominent role in the tendering and decision-making processes.
The most competitive bid submitted to ENEC in July 2009 of the three vying syndicates was made by the group led by Kepco. The French consortium of Areva, GDF Suez and Total ranked second, and the US/Japanese team of GE and Hitachi was the most costly.
Based on the quotations, ENEC intended to award the contract directly to the Kepco-led team as this was the best with respect to technical capability and price. Nevertheless, this nuclear cooperation came under significant pressure from the government, which urged ENEC to give the US and the French consortia the chance to improve their initial quotation. ENEC requested the US and French bidders to revise their proposals three times between September and December 2009 mainly due to government pressure.
Indeed, the French government and consortium had already pitched the UAE for a nuclear programme in January 2008. Areva, GDF Suez and Total proposed even at that time construction of two 1600 MW reactors in the UAE, and the government signed a bilateral co-operation deal with France. However, despite the best endeavours of the French and US governments to support their domestic companies, the Korean conglomerate finally won the competition to undertake the programme.
Despite all prevailing threats at least 13 countries throughout the greater Middle East have recently announced new plans to explore civilian nuclear energy programmes. Experts expect a couple of new power plants to be built in the Middle East/North Africa region with planned investments of billions of dollars.
The GCC countries have the readiness and the intention to realize nuclear projects driven by the increasing demand for energy. The availability of capital derived from mineral resources puts them in the position to purchase expertize abroad. Participation in this new global and potentially booming market is essential to maintaining economic success and to maintaining expertise in re-emerging nuclear technology.
About the author
Felix Wilde graduated in civil engineering before joining global energy consultants Fichtner GmbH & Co. KG, Germany, for which he has been involved in several large-scale power projects. This article is based on his recently completed MBA at the University of Augsburg in cooperation with the University in Pittsburgh, USA, on ‘Worldwide Development of Nuclear Energy, and the Strategic Deployment of German Consultancies on the Arabian Peninsula’. The entire thesis is available at www.diplom.de (ISBN 978-3-8428-0744-0)
NB: This article was written prior to the recent nuclear incident in Japan.