Increasing the Accuracy of Decommissioning Cost Estimates
Category: Thought Leadership
I recently participated in a panel discussion on Managing Financial Risk for Accelerated Decommissioning Projects at the NEI Annual Decommissioning Strategy Forum. Two other speakers shared the panel: David Emerson, senior VP of LCG Associates, spoke to the management and monitoring of nuclear decommissioning funds; Richard Turtil of the Nuclear Regulatory Commission focused on the NRC’s funding and oversight requirements.
I spoke to why improving the accuracy of decommissioning cost estimates (DCEs) is important and how it can be done. DCEs are used to determine how much funding needs to be set aside in trust funds for decommissioning projects.
Recently, the UK determined the project cost of decommissioning its advanced gas-cooled reactor (AGR) fleet has doubled since 2004. The resulting shortfall will have to be made up with public funds.
Using this example, imagine establishing a retirement fund in 2004 based on your estimate of retirement costs at the time, only to discover nearly two decades later that retiring would cost twice as much as you originally thought.
These estimates are critical to making sure decommissioning and dismantlement programs are appropriately funded and prudent decisions are made, but they face a number of obstacles. Inaccurate and outdated DCEs carry potential costs and risks to the public and investors, and the lack of certainty in executing decommissioning undermines confidence in the nuclear industry.
The cost of nuclear decommissioning – like all other forms of construction – is highly uncertain. Along with increased cost, the current trend of speeding up the pace of decommissioning creates additional pressure on the trust funds, which depend on interest accruing over time.
At the same time, the methods used to understand the accuracy of these estimates are not fit for this purpose. Industry benchmarks often used to estimate decommissioning cost rely on data that is largely outdated. Also, the regulatory structure and industry guidance for decommissioning cost estimates is at best confusing and often conflicting. All of these factors make coming up with accurate numbers extremely challenging.
What are the consequences of inaccurate decommissioning cost estimates? If utilities do not understand the uncertainty around decommissioning and dismantling existing plants, the trust funds could be over-funded, creating the potential for economic waste.
Worse, the funds could be under-funded, meaning the public would have to accept paying for the liability of an environmental hazard. Decommissioning a plant often affects the local community in significant, even devasting ways. The worry of leaving behind an obligation without enough funding to pay for its remediation is one of the most difficult problems facing decommissioning projects.
The practice of utilities seeking to transfer site licenses to specialized decommissioning companies has also increased regulatory scrutiny of the trust funds. These transactions are usually based on the remaining funds in the decommissioning trust funds, rendering the DCEs even more important.
And finally, an inaccurate estimate could drive poor decisions regarding the pace of decommissioning, the reusability of the site, the removal of waste from the site and other critical components.
In my presentation, I focused on a project management-based approach to estimating decommissioning projects with three critical elements:
1. Develop a phase gate process for the decommissioning program specific to the station, program and company needs.
Effective gate strategies detail how the scope progresses over time which, in turn, progressively narrows the sources of uncertainty, reduces the need for contingency and adds confidence to cost estimates. Each gate should represent a major decision point along the timeline for decommissioning. It should require the estimates and foundational documents to meet certain levels of quality and definition.
A well-developed phase gate process creates appropriate expectations for how the project should mature over time. It also lays out the key factors that are still unknown and how these will be defined as the scope matures. A phase gate roadmap gives external stakeholders, regulators and other interested parties the transparency they need to understand how the plans for decommissioning are progressing.
2. Ensure the risk management process is robust.
A process should be in place to identify and analyze discrete risks for determining the “known unknowns” that are typical for nuclear decommissioning. Part of this is a physical plant assessment known as characterization, during which detailed threat assessments for decommissioning and demolition are made and recorded.
Characterization also influences the means and methods needed for demolition and assesses the risk from the waste product the process generates. Characterization is typically performed close to demolition work so that the most current risks, such as radiological dose levels, can be assessed as accurately as possible.
An effective risk management program allows companies to study and assess potential mitigation so they can understand the potential cost for remediation. This should include rethinking characterization so that the risks that impact the cost of decommissioning are better known and managed from an early stage.
3. Ensure the cost estimating process is focused on reducing uncertainty in a principled manner.
This includes analyzing benchmarked cost estimates carefully to make sure they apply to site, design, conditions, commercial aspects and other factors that could create uncertainty. For aspects of the project not readily captured in benchmarks, companies should develop bottoms-up estimates to assess unique risks, plant design aspects, site conditions and other factors that would drive high levels of uncertainty.
Conducting a stochastic analysis on discrete risks and uncertainties could identify probabilities associated with the cost estimate and serve as a roadmap for project management.
Earning the public’s trust in nuclear power will require increasing confidence in the decommissioning process. Changing the approach to decommissioning cost estimates should go a long way to ensuring the nuclear industry meets its obligation to decommission these plants safely and economically after they have achieved their end of life.