Ep 86: Milton Caplan - Consultant, MZConsulting
1 - Introduction to CANDU Reactors
Bret Kugelmass: How did you get involved in the nuclear space?
Milton Caplan: Milton Caplan was born and raised in Montreal and attended Rensselaer Polytechnic Institute (RPI) in New York where he became a nuclear engineer. His first job was at Atomic Energy of Canada, Limited, which was the federally owned vendor for the CANDU type nuclear power plant. Canada was a very early player in nuclear and, when they were deciding which technology to go with, they chose a technology that would match the industrial development in the country at the time. Canada pursued an option that used natural uranium fuel because there was no enrichment capability in the country. The country wanted a very neutron efficient solution and the CANDU design has been very successful over the years. CANDU reactors have been sold to India, Pakistan, Argentina, Korea, China, and Romania. Milton Caplan started his nuclear career in the early 1980’s doing safety performance and attended night school to obtain his MBA, leading him to move into the marketing side of nuclear. He responded to new international bids for nuclear power plant and was involved with possible new projects domestically and abroad. In the early 1990’s, Caplan was the commercial lead for the negotiations for the Wolsong 3 & 4 reactors in South Korea, which was a turning point in his career. The Korean model is very logical, sensical, and deliverable-focused and was completely different than the Western construction model.
2 - Owner, Operator, and Vendor Relationships in Nuclear
Bret Kugelmass: What is it like to get a country to buy a pair of reactors?
Milton Caplan: South Korea was very well structured and it was not competitive; they had already decided they would build additional Canadian reactors. After receiving the Request for Proposal, the response must not take exception for the sake of taking exception and it must be very consistent. Milton Caplan was part of the Korean Wolsong 3 & 4 negotiations, which were a huge thing for the Candian industry. Caplan made it an important part of his career development that he wanted to lead the negotiations at a high level for the next two units in Korea. When this came about in 1998, Caplan did not lead the negotiations, which was devastating to him. Caplan took this as an opportunity to recognize the importance of the commercial side of the industry. The non-technical aspects are very important in structuring and making projects succeed. People in the industry get focused on the technical aspects, not the commercial aspects. Nuclear plants are not a research project; they are industrial facilities that produce electricity reliably and economically. When writing the requirements document, buyers should get away from being focused on the design aspects and instead understand that you are buying everything you need from the vendor to run the plant. The owner and operator of a plant also owns the risk. The owner should help and support the vendor if there are difficulties or issues, because it will always be less costly to help solve a problem than to fight over whose responsibility it is. If the vendor fails, the owner fails. There is not one nuclear design that operates better than another; it is all about operating equipment effectively and reliably.
3 - Bruce Power Plant Refurbishment
Bret Kugelmass: What kind of projects do you work on as a consultant and independent verifier?
Milton Caplan: From 2013 to 2015, Milton Caplan led the negotiations of the counterparty in Ontario, the independent electricity system operator, for the Bruce Power refurbishment and implementation agreement. The Bruce Nuclear Power Plant is on Lake Huron and is the largest operating plant in the world right now at 6,300 MW in total. In the late 1990’s, when Ontario Hydro was restructured, the decision was made to shut down the Pickering A station and the Bruce A station and focus on the newer stations. In 2002, British Energy came in and created Bruce Power; at the time, only Bruce B was operating. Bruce Power looked at the idle Bruce A station and determined units 3 & 4 could be restarted for not too much money and operate for a few years before they needed a refurbishment. Around 2005, the Ontario government wanted to get rid of coal. Bringing back Bruce units 1 & 2 would replace the coal power. Ontario and the owner agreed on a price of energy and decided to refurbish all the A units 1, 2, 3 & 4. Units 1 & 2 were refurbished, albeit over budget and over schedule, and so the owner thought of innovative ways to extend the life cycle of units 3 & 4 in order to postpone refurbishment. Milton Caplan got involved when the owner needed to refurbish the B units, which was wrapped into the refurbishment for A units 3 & 4.
4 - Risks of Long Term Nuclear Refurbishment
Bret Kugelmass: What lessons were carried forward from the initial refurbishment that went over schedule and over budget?
Milton Caplan: The most important lesson was about looking at the timing of refurbishment and trying to do things in steps, rather than doing it all at once. The strike price is very sensitive to when the refurbishment is done. It is impossible to get someone to provide a fixed price for six refurbishments, the last of which won’t start until 2030. Instead, the price of energy was adjusted each time they started a new refurbishment. If the price is above some threshold, the government has a right to halt the continuation of the work. This structure is incredibly transparent which allows the counterparty, the system operator, to see everything as it is developed going forward. Transparency incentivizes appropriate behavior. If unrealistic risks are put on one party, you pay for it and the risk isn’t manageable anyways. Building in flexibility made the relationship a win-win. The objective is not to drive the other to fail, but to support each other for success. The first Bruce unit is going down in 2020, which was only supposed to last until 2018. The Canadian regulatory structure allows for life year extensions of three or five years, compared to the U.S. 20 year extensions. Canada developed a structure which had a single vendor, a single utility, and single regulator. Caplan is currently performing independent oversight on the Darlington refurbishment project, which is currently on-time and on-budget. Ontario Power Generation (OPG) has stayed on top of their vendors and helped them when they needed help, and pushed them when they needed to make changes. Having strong, capable senior managers to lead this projects is key. Future leaders must continue to be developed through continual projects, like the refurbishment projects.
5 - World Nuclear University
Bret Kugelmass: What is the World Nuclear University and what do you teach there?
Milton Caplan: The World Nuclear University is a virtual organization that was established in 2003. It is partially owned by the nuclear industry, the World Nuclear Association and the World Association of Nuclear Operators (WANO), and partially owned by the government, the International Atomic Energy Agency (IAEA) and the Nuclear Energy Agency (NEA). The idea was to create a network of networks to bring some level of nuclear education across the world to get the community together to talk about the key issues. Their flagship program is a six-week summer institute which brings in 80-100 young future leaders to focus on the commercial side of nuclear and key issues affecting decision making. Milton Caplan teaches economics at the summer institute, but is more involved in teaching a short course that is taught in four to six countries every year. Over three days, the speakers cover topics like economics, law, transport, and fuel. This brings together people from government, industry, and students to network with each other. Milton Caplan lectures on nuclear economics and nuclear project structuring and financing. Economics is how competitive the price of energy from that plant compared to other alternatives. Financing is not an input, but instead an outcome. There is a lot of money in the world looking where to go if you have a good project.
6 - Nuclear Project Financing Structures
Bret Kugelmass: Is successful project financing creating a bridge between capital available and opportunity in the electricity market?
Milton Caplan: Projects must be economic, but the risks have to be manageable to attract money. Success is all about structuring and managing risk. Nuclear projects are difficult because they are relatively capital intensive and have long project schedules, leaving the capital at risk for a long period of time. Milton Caplan manages a blog on his website, www.mzconsultinginc.com, in which he focuses on something thoughtful centered around the industry, such as communications or thoughts about events in a certain area of the world. Caplan recently wrote about the cost of getting capital down. A tremendous amount of money can be saved on the cost of energy by bringing the cost of capital down. Structure must mitigate risk and keep the cost of capital down. The question is how to find a structure in which risks are shared more equitably; it may cost too much to put all the risk on one party. One model considered in the U.K. was a regulated asset-base model which would bring the cost down. There are a number of small modular reactor (SMR) initiatives in Canada. The federal government, through Natural Resources Canada, is creating an SMR roadmap which looks at how to implement SMR’s in the Canadian space while getting Canadian industry involved.
7 - Small Modular Reactor Markets in Canada
Bret Kugelmass: Is Canada looking at connecting small modular reactors to the grid?
Milton Caplan: One market segment for small modular reactors (SMR’s) is connected to the grid in which utilities buy small plants instead of large plants. A second market segment is heavy industry, which includes remote mining sites, the oil sands, and other extraction industries. A third market segment is remote communities in the far North, which includes indigenous communities. Canada has all three market segments and become a good test bed. Different SMR designs may be chosen for the different markets based on load requirements. The Chalk River Nuclear Laboratories has offered up their sites to developers to build a demonstration SMR on their licensed sites. A request for interest received many responses from vendors and others. The next step of the process was to ask vendors if they were interested in building a plant at their site, of which four have responded yes. Projecting the future is pretty much impossible since the world changes. China and Russia are now leading the most vibrant parts of the global nuclear industry. The future world cannot be powered without nuclear power. Electricity demand in the West is growing slowly, but the dependence on electricity is growing quickly. Economic, reliable, clean, and low-carbon energy is needed and the solution can’t be all renewables. In the history of energy, society has always moved forward with more energy dense sources. As the world urbanizes and living in higher density areas, lower density energy can’t be used to meet the energy needs. After access to clean water, getting access to energy is one of the important things that helps lift people out of poverty. To communicate to people about nuclear, there need to be reasons that people become interested in listening about the benefits of nuclear.