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National Energy Policy: Nuclear Energy
Subcommittee on Energy and Air Quality
Mr. John R. Longenecker
Mr. Chairman, thank you for this opportunity to address the Subcommittee on Energy and Air Quality on the issues involved with the US nuclear fuel cycle. I have been involved with nuclear energy and nuclear fuel cycle issues for more than 28 years, and previously managed DOE's uranium enrichment business as Deputy Assistant Secretary of DOE, and later as the first Transition Manager of USEC. Today, parts of the nation, including my home state of California, are experiencing electricity shortages, with rolling blackouts that disrupt business and productivity in some of the nation's key high-tech industrial regions. Nuclear power currently represents about 20% of electrical power consumed in the US, and any uncertainty regarding the reliable and economic supply of fuel to US nuclear power plants could pose a serious threat to our nation. My key conclusions regarding the US nuclear fuel cycle industry are as follows: 1. A reliable, economic supply of nuclear fuel is essential to the future energy security of the United States. That supply in endangered. 2. US nuclear fuel cycle companies are being challenged by a range of factors including the sale of Russian HEU, US HEU, and USEC's inventories of natural and enriched uranium. 3. A very severe situation exists in the uranium enrichment business, where the US is operating 50-year-old plants, has no proven technology to replace them, and relies on Russian HEU blending to meet more than half of all customer deliveries. Constructing new, cost competitive enrichment capacity in the United States as soon as possible is critical to the future of all parts of the US nuclear fuel cycle industry. 4. Maintaining political and financial stability for the Russian HEU Agreement is essential for the fulfillment of international policy objectives. However, the US government should carefully consider (a) the assignment of the role of Executive Agent on behalf of the US government, (b) how the billion dollar trading profits from brokering Russian enriched uranium should be allocated, and (c) whether it is in the best interests of the United States to allow USEC to broker additional supplies of enriched uranium from Russian commercial enrichment plants. 5. Government subsidies for non-competitive companies and trade sanctions against foreign competitors do not build a sustainable basis for the continued use of nuclear power in the United States. It is particularly alarming that the antidumping action brought by USEC against its European competitors could increase fuel costs to US ratepayers by $650 million to $1.2 billion per year, and has created uncertainty about assurance of supply under existing import contracts. 6. The United States must define a comprehensive strategy to maintain viable, competitive nuclear fuel supplies for this country for the decades ahead. The roles in implementing a long-term strategy to keep the US nuclear industry competitive must be clear, and must include substantial participation by both the government and private sector, with the private sector taking the lead. Background The nuclear fuel cycle market is restructuring and consolidating. This restructuring has had some painful effects, exacerbated by the sale of Russian Highly Enriched Uranium, US HEU, and USEC's inventories of natural and enriched uranium. Maintaining political and financial stability for the Russian HEU Agreement is essential for the fulfillment of international policy objectives. The US government's goal must be to assure that the Agreement's supply contract stabilizes delivery arrangements for the next 15 years. The viability of the Agreement must not be jeopardized if newly negotiated pricing terms or conditions in the contract fail to assure the continuity of deliveries. However, the Russian HEU contract is only one part of the equation. The United States must have an overarching objective to define a comprehensive strategy to maintain viable, competitive nuclear fuel supplies for this country for the decades ahead. Short term fixes and band-aid approaches must be avoided. Today's highly competitive market is no surprise to anyone who has followed the nuclear fuel markets over the past 20 years. We have known for more than a decade that due to the construction of fewer nuclear power plants than originally projected and HEU blending, nuclear fuel supply exceeds demand in every sector. We have also known for more than 25 years that US gaseous diffusion uranium enrichment technology would become economically obsolete and would need to be replaced. However, today the US lacks any plan to address the key nuclear fuel cycle issues both in the near term and in the long term. In the context of assuring reasonable nuclear fuel supply at competitive prices, I believe that the US must assure that it is not totally reliant on non-US sources for its fuel. However, in order to survive, US fuel supply companies themselves must be competitive. Government subsidies for non-competitive companies and trade sanctions against foreign competitors do not build a sustainable basis for the continued use of nuclear power in the United States. For example, the antidumping action brought by USEC against its European competitors in late 2000, has created significant market uncertainties, and could increase fuel costs to US ratepayers by $650 million to $1.2 billion per year. In the final analysis, US citizens end up paying the bill for such actions, either though higher taxes or higher electricity rates. The US nuclear fuel businesses must be able to compete head-to-head in the world nuclear fuel market. To develop a comprehensive nuclear fuel cycle strategy will require collaboration among the Congress, the Administration, industry, labor, state governments, and other constituencies. The ultimate goal must be to have a competitive, stable, viable nuclear fuel supply for this country. Reliability of supply and price are crucial elements in this plan. More specifically, we must assure that nuclear fuel prices do not suffer a shock similar to that experienced with natural gas prices recently. Fuel prices must be stable and predictable if the nation is to rely on nuclear power as part of its supply mix for the future. The roles in implementing a long-term strategy to keep the US nuclear industry competitive must be clear, and must include substantial participation by both the government and private sector. The nuclear power industry must not and will not rely on the government to implement a solution. The private sector should take the lead. However, the government also has a key role to play. This role should be defined after the private sector plan is defined. A key policy debate revolves around the Russian HEU Agreement. At present the Russian HEU contract is under re-negotiation and will expire on December 31, 2001. The contract has already generated substantial profits for the exclusive US Executive Agent, USEC. Under USEC's proposed "market based" revision to the supply contract with Tenex, the Russian Executive Agent, trading profits are estimated to be $1 billion or more over the next 10 years. USEC has also sought Administration approval to import and resell an additional one million SWU per year from Russian commercial enrichment facilities. Since this is a government-to-government agreement, and the Executive Agent is selected by the US government, there needs to be an open dialogue regarding whether and how profits generated by this government created franchise are allocated to promote the long-term viability of the nuclear fuel cycle industry. More specifically, should this billion-dollar benefit accrue solely to USEC, for use at its discretion, or should the US government have some say in how the trading profits from this government-to-government agreement are utilized?
As part of this dialogue, consideration should be given to establishing a second Executive Agent that would purchase a portion of the low enriched uranium derived from HEU now being blended in Russia. Such action could increase the assurance of continuity of the Russian HEU Agreement, allow USEC to take advantage of its low marginal costs by increasing production at Paducah and thereby enhance its near term profits and viability by lowering its average GDP production costs.
Uranium Enrichment Today, USEC is the only North American supplier of uranium enrichment services, and the long-term future of this business is highly uncertain. USEC is the high cost supplier in the market, and enrichment operations at the GDPs in the future will operate at a loss. USEC utilized only about 29% of its nameplate GDP capacity in 2000 (see Table 1), and over the next year will supply a majority of its customers needs from Russian and US HEU blending. This situation led to the decision to close the Portsmouth GDP in 2001, and at some point in the future will lead to the closure of the Paducah GDP. Trading profits from the Russian HEU agreement and sale of natural and enriched uranium inventories provide essentially all of USEC's cash ($150-200 million per year) that is used to pay for dividends, capital upgrades, R&D, and sales, general and administrative costs. USEC is finding it more profitable to operate as a trader of blended HEU rather than as a primary producer. This approach appears to lead inevitably to USEC exiting the market as a primary producer. As a result, constructing replacement enrichment capacity in the US should be the key focus for the next few years.
* 5.5 million SWU supplied by Russian HEU
Table 1 Worldwide capacity, sales and production of separative work A reality of the uranium enrichment industry is that prices have been declining since 1985. This decline was driven by the deployment and gradual improvement of centrifuge technology, primarily in Europe. The continuing decrease in prices should have been no surprise to anyone, since the Department of Energy (see Figure 1) Office of Uranium Enrichment, the predecessor to USEC, predicted this trend in 1984. DOE committed to Congress and to its customers in 1985 to deploy AVLIS technology to meet this challenge. As shown in Figure 1, DOE was reasonably accurate in its price projections. Also as predicted by DOE, Urenco added new enrichment capacity to the market with production costs well below those of the US gaseous diffusion plants.
Figure 1 1984 DOE Projections Of Future SWU Prices However, after an investment of about $1.5 billion, DOE did not deploy AVLIS, instead transferring all rights to the technology to USEC. In 1994, USEC announced plans to deploy AVLIS, and proceeded to price aggressively in the market, only to cancel those plans in 1999 when it faced financial problems. USEC's credit rating was downgraded to below investment grade (junk bond status) within 18 months of privatization. USEC's continued reliance on GDP technology in 2001 is not driven by the competitiveness of GDP technology, but rather by its lack of a proven technology to replace the GDPs. The high costs of GDP operation have been recognized for years. In fact, the US Atomic Energy Commission announced in the mid-1970s that its three GDPs were soon to be economically obsolete. Thus, 25 years later we should not be surprised that the Portsmouth GDP is closing, and that the closure and replacement of the Paducah GDP is a reality that must be planned for. What is surprising, and in fact astounding to many in the world, is that despite the expenditure of more than $7 billion dollars of US government funds on centrifuge and AVLIS technology development and deployment over the past 40 years, the United States today is still operating economically obsolete 50-year old gaseous diffusion plants. In 1994, USEC announced its plans to have an AVLIS plant operating by 2002. If USEC had succeeded in this plan, it would have very different future prospects than it has today. The solution to the future competitiveness of the US uranium enrichment industry was and still is the deployment of new, cost competitive enrichment capacity. Low cost technologies have been developed and deployed by non-US enrichment companies over the past three decades, while the US has failed to follow through on past commitments to deploy new low cost enrichment technologies. It is ironic that the same companies who followed through with the investment in advanced technologies and new enrichment capacity over the past decades, now face trade sanctions in the US. In addition, US utilities face supply uncertainties due to these possible sanctions. However, even with proven technologies, there are risks inherent in building any new enrichment capacity in the US. These include market risks, regulatory risks, and actions by governments such as trade restrictions. Assuming that these risks can be managed, Urenco and Russian centrifuge technologies are the low cost proven production options, and absent trade restrictions, are poised to dominate the market for the foreseeable future. The question is whether the US will cede this business to foreign suppliers.
The US DOE has proposed a revival of its centrifuge technology program, but after being out of the centrifuge R&D arena for the last 15 years, the US has no proven advanced gas centrifuge (AGC) design, limited design infrastructure, and no production infrastructure. Although the US has a strong history in AGC development, the time, costs and risks involved with developing a competitive design, proving it, and deploying may be much less financially attractive than simply relying on proven designs and equipment. One path forward could be a private sector initiative to construct an enrichment plant using proven technology, while the US government pursues advanced technologies for the long term, either centrifuge or laser, in an attempt to define an option that is substantially cheaper than today's centrifuge plants. However, if the government decides to pursue such an option, it must be soundly based to assure that the end result will be a substantial economic advantage. If there is not a high probability of such an advantage, government funds should not be spent. The workers in the uranium enrichment industry have done a great job keeping the US competitive for decades. However, with 50 year-old GDP technology, they can only do so much. Furthermore, workers know that there is no long-term future in working at economically obsolete facilities. They need to know the path forward, or they will soon be forced to move to other industries with the obvious loss of technical expertise and skills. Although it sometimes gets masked by rhetoric, the uranium enrichment business is all about producing SWUs cheaper than you sell them. If the US keeps this focus, it will have an economically viable production base at the end of the decade. Uranium Natural uranium is a critical element of the nuclear fuel cycle. For the past several years, world production of uranium has been substantially less than world demand. The difference between production and consumption was made up from HEU blending, enrichment of depleted uranium tails and inventory sales. The largest single inventory seller was USEC, who sold about $100 million worth of inventories that it obtained from DOE prior to privatization, in its fiscal year 2000 to raise cash for its operations. The countries with rich ore deposits today dominate the world uranium market. Providing a measure of supply security to US utilities, Canada, with its vast low cost reserves, is the world's largest producer of uranium. As shown in Table 2, Australia was second, and former Soviet Union countries were the third largest producer of uranium in 1999. US production was a small portion of world requirements, a situation that is unlikely to change substantially even as prices recover, due to relatively low uranium ore grades and high mining costs.
A summary of 1999 uranium production follows:
Table 2 1999 Uranium Production
World uranium prices in the spot market hit an historic low in real terms in 2000, at about $7/lb before recovering to the current level of about $8.20/lb. Prices have been strongly impacted by Russian HEU blending and inventory sales. At present, about one third of world uranium requirements are met from inventory sales and HEU blending. Although most uranium is delivered to utilities under long-term contracts at prices higher than spot market prices, inventory sales have lowered even long-term prices. Shown below in Table 3 are the spot prices for uranium over the past decade. At present, spot uranium prices in the US market are about $8.20/lb, with long-term prices at about $9.75/lb. Outside the US market, which restricts the importation of Russian uranium, spot prices are substantially less at about $6.75/lb.
Overall, the uranium market is expected to be challenging over the next five years as USEC and other inventory sales and Russian HEU blending continues. As these inventories are depleted, primary producer sales will increase and prices should recover.
Table 3 Spot U3O8 Price Trends 1990-2000 - In Restricted Market
Conversion
The conversion of uranium concentrates into uranium hexafluoride (UF6) for enrichment by GDP or centrifuge is commonly called conversion. Although conversion represents a small portion of total nuclear fuel cycle costs, it is an essential component. Worldwide consumption in 2000 was about 52 M kg/year, as compared to installed production of 63.2 M kg/year.
The principal suppliers of conversion services now include ConverDyn in the US, Cameco in Canada, BNFL in the UK, Cogema in France, and Minatom in Russia. Over the past decade, the worldwide conversion capacity decreased with the closing of the Sequoyah Fuels facility in Oklahoma, reducing the number of conversion suppliers in North America from three to two. In addition, BNFL announced recently that it would withdraw from the business in 2006, with Cameco assuming ownership of its operations. Capacities of these plants are shown below.
Table 5 Worldwide Uranium Conversion Capacity
Due to excess supplies and aggressive selling of inventories by entities including USEC, conversion prices decreased to about $5.75/kg in 1996, and to about $2.50/kg in 2000. However, recently conversion prices have recovered, and now stand at about $4/kg for spot sales and $4.50/kg for long-term contracts.
In the future, as inventories are depleted, the conversion industry should stabilize. However, even though US customers can take some comfort from having two North American suppliers, further industry consolidation is possible.
Disposal of Used Fuel As part of its overall nuclear fuel cycle strategy, the government must place top priority on assuring that a permanent disposal mechanism for used fuel is implemented as soon as possible. Later this year, DOE will issue its site recommendation for the Yucca Mountain Project. This recommendation must be acted on promptly, and a path forward defined and funded as quickly as possible. Without some certainty on the disposal mechanism for used fuel, no additional nuclear power plants will be built in the United States. Summary
In summary, now is the time for action to address the critical issues in the supply of nuclear fuel cycle to US power plants in a manner that is technically and financially sound. Due to a range of factors, the future of US nuclear fuel supply is in doubt. The situation is somewhat more secure for uranium and conversion services due to the existence of competitive supply sources in Canada, but the long-term prospects of USEC, the only North American supplier of enrichment services, are highly uncertain. The current US situation results from market factors, resource limitations, and in some instances from management misjudgments. However, the reasons why we arrived at this dysfunctional state are not as important as where we go from here to address the problems. If the government and private sector evaluate the nuclear fuel supply situation and decide that reliance on non-US sources is acceptable due to the high costs and risks involved in developing or maintaining a competitive US industry, that's okay. However, an immediate public policy debate is warranted on how best to assure the flow of competitively priced nuclear fuel to provide reliable low cost electricity to our nation. Thank you for your attention.
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