Dec 17, 2019

Ep 247: Giorgio Locatelli - Economics and Strategy for SMRs, University of Leeds

Economics and Strategy for Small Modular Reactors
University of Leeds
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Show notes

An American Nuclear Internship (0:46)
0:46-15:00 (Giorgio Locatelli recounts his journey from Italy to the United States to learn about nuclear energy and how it became his career focus)

Q: How did you get started in the nuclear space to begin with?
A: In 2006, when Giorgio Locatelli was studying for his Master’s of Science in mechanical engineering at Politecnico di Milano, he started pursuing paid internships overseas to help him learn English. He initially didn’t care about the topic, leading him to the United States to study the economics of a new small modular reactor. At the time, Giorgio was 23 and didn’t speak any English, knew nothing about nuclear, knew very little about economics, and had never even been on an airplane before. He was the always adventurous growing up in rural Italy, but becoming the first in his family to go to university and taking this opportunity in the United States was the adventure of a lifetime. Giorgio spent six months in the U.S. working at Westinghouse, who has a long-standing relationship with Politecnico di Milano. At the time, Westinghouse was developing one of the first small modular reactors (SMR), IRIS (International Reactor Innovative and Secure).

The Westinghouse team in charge of IRIS design, led by Mario Carelli, collaborated greatly with universities, potential customers, and suppliers. Giorgio worked with a senior Westinghouse engineer to understand the economic analysis of the IRIS reactor. The goal was to design a reactor for a situation in which an AP-1000 would generate too much power. Giorgio’s job was to estimate the difference in capital costs between a small reactor and a large, traditional reactor. To compare a 1.3 GW reactor with a 200-300 MW reactor, economy of scale must be applied. The economy of scale works with two identical designs, but the SMR is not simply a scaled version of a large reactor. Some technical solutions are only available on the small scale and not on a large scale. For example, NuScale was designed so its components were small enough to be transported. There is no such thing as the “best” reactor, but there is a good match for a good market. When 1-2 large reactors are compared with 4-8 small reactors, there are economies of replication and industrial learning that come into play. There may be some differences due to the workforce, region, and other factors. But the French experience is that a lot is learned with multiple builds on the same site. In France and South Korea, there is not much learning at the country level, but a lot of learning at the site level, .

Economies of Scale in Nuclear Power (15:00)
15:00-26:55 (How economic climate and project funding choices affect the global development of nuclear reactors)

Q: If I were to plot your cost per megawatt-hour for a large plant versus a small plant and the x-axis were to be the number of units, what would be the crossover point at which I’d reach the same dollars per megawatt-hour in terms of how many small I have to build in order to get to the same efficiencies that used to come with building larger?
A: It would cost per megawatt-hour of building 5-6 small reactors is about equal to that of building one large reactor. However, the economy of scale may kick in if the small reactors are not big enough to make up the difference, depending on the site. If 6 GW are needed on the same site, 6 large reactors should be built because the economies of scale will kick in on the second reactor. Romania started to build reactors sequentially with the Cernavodă site and Japan has done this with modern designs, but the U.S. only has a maximum of two units on sites now. In France, Romania, and South Korea, the electrical utilities were under state control and the countries had a long term vision for an industrial plan with multiple units. In the United States, where the market is fragmented and private companies are involved, construction is very different. The French nuclear program came after the big oil shock, fueled by a desire to provide electricity to power their industries and their citizens. In the UK, the difficult industry to decarbonize is not electricity, but home heating. The cold season is very long and the traditional heaters used are gas boilers.

After Giorgio’s dissertation research at Westinghouse, he returned to Politecnico di Milano at a time in which Italy was returning to nuclear. After Chernobyl in 1986, Italy passed a referendum which shut down nuclear reactors that were operating and killed two nuclear power plants that were almost complete. The political climate was very divided at the time and nuclear was used to gain popularity by exploiting people for fear. The two nuclear plants near Rome that were closed, Latina and Garigliano, were turned into coal plants. The cost of the nuclear plants were covered in the Italian electrical bill, so current bills still show a line billing for the leftover cost of nuclear because the government didn’t accumulate enough money to cover the cost of the plants.

Finding the Right Size Reactor (26:55)
26:55-38:02 (A look at the feasibility of nuclear reactor design and construction, both small and large)

Q: What did you do when you came back to Italy?
A: Giorgio Locatelli continued to read books and educate himself on nuclear, since he was a mechanical engineer by trade. Politecnico di Milano made an offer to Giorgio for a PhD supervised by the business school and the Department of Nuclear Engineering, with the support of Westinghouse and the International Atomic Energy Agency (IAEA). His first supervisor was the professor of project management, leading Giorgio to build model to estimate the economic, financia, strategic parameters of a small modular reactor. Considerations included were capital cost, operations, commissioning, and strategic factors related to siting and jobs. The right size reactor for a large country might be around 1.2 gigawatts, while the right size for a smaller country might be around 300 megawatts, but not much smaller. Fixed prices include the initial design, licensing, and the number of people working in the reactor, even considering a control room without operators. There are some inefficiencies with fuel and some components, like the turbines, have strong economies of scale. There must be a distinction between price, cost, and value. The price is what is paid to have something and is market-driven and impacted by exogenous factors. The cost is what is necessary to produce something and is impacted by endogenous factors. The value is the value of what is being produced. For example, 1 MW of electricity in Leeds is not very valuable because there is a grid that can provide any electricity needed. However, on an island detached from the grid that runs on a diesel generator, 1 MW of electricity has much greater value. Just like there are different appropriate wardrobes for different weather or activities, there are different appropriate reactors for different applications. China and the UK have very different means of raising capital. The energy market reform in the UK was basically privatization. This capital may impact the speed and quantity of reactor construction.

Giorgio completed his PhD in 2010 and, in 2011, he defended his PhD in front of the panel. He explained that nuclear power is a good idea and small modular reactors were a brilliant choice, but one week later, the Fukushima accident happened. Following Fukushima, Italy held a previously scheduled vote on the nuclear power referendum. In order for the referendum to be valid, there must be 50% plus one turnout in the vote, so many people like Giorgio attempted to invalidate the referendum by abstaining from voting. Still, more than 50% of Italians voted and approximately 95% of the votes were anti-nuclear, ending Italy’s nuclear power program and leading Giorgio to leave his home country. Coming from a working class family, Giorgio got most of his education paid for by taxpayer money, but had to leave the country after receiving his PhD to pursue nuclear in the UK, where they benefit from his education and training.

Financing Small Nuclear in the UK (38:02)
38:02-54:34 (Giorgio provides a summary of the UK’s investigation into SMR financing methods and how regulations affect cost)

Q: Tell me about your work with the UK Government.
A: For a number of years, the UK Government has been investigating the idea to develop a small modular reactor (SMR) in the UK. First, they looked at the major cost drivers, in which Giorgio Locatelli completed some economic analysis as part of the supporting working group. About one year ago, the UK set up a working group of 7-8 people, including Giorgio, to look at possible ways to finance an SMR in the UK. A publicly available document called “Market framework for financing small nuclear” was created to compare different options for project financing, including different strategies used in France and Finland. This comparison considers factors such as economic balance, types of risks, and the debt-to-equity ratio. These options include both government-supported and privately-supported models, including a mix of the two. The government can help in different ways, such as paying some of the construction cost, lending the money, guarantee debt, provide a contract for difference, or set up an asset-based model.

There needs to be a distinction between first-of-a-kind units and “nth-of-a-kind” units. Giorgio would like to see important support of the government and of the public in the first-of-a-kind unit, which has a lot of unknowns during design and construction. The nature of the nuclear business makes this process complicated due to the number of iterations required for the regulators to prove and optimize a level of safety. Some parts of the design can be proven through simulation, but others need to be proven through experimentation. NuScale is the first SMR that comes in with the integral design solution, of which the regulator was not familiar. NuScale had to explain their process and make their case to the Nuclear Regulatory Commission (NRC) to show compliance. Every day, people die because of environmental pollution. Most of these deaths can be avoided with nuclear power and there is no reason for oil anymore, including heating homes and transportation. Nuclear power has embedded a lot of political and irrational elements over time. People are afraid of radiation, but the general public cannot explain what radiation is. People are afraid of what they don’t understand.

In fifteen years, Giorgio Locatelli sees a world that is building nuclear reactors, learning to integrate renewables, nuclear and large energy storage, and is stopping the use of oil for power, heat, and transportation. This future world is fighting climate change and where people don’t get cancer from toxins in the air. Nuclear power can be used for electricity, but also desalination to provide fresh drinking water to millions of people. Nuclear power can also provide district heating and power large boats. This future is void of wars that stem from conflicts over access to oil, but technology investments in molten salt and fusion are thriving. This world is educating themselves that electricity and energy are valuable and can be produced in a clean way. The right price can be given to nuclear energy, which is the best gift of our life.

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