It is impossible to eliminate all risks in human enterprises. Risks can only be mitigated or exchanged. Three major aspects characterize risk analysis in industrial projects:
— The type of adverse event;
— The probability of the adverse event;
— The severity of the consequences incurred from this adverse event.
Probability and severity are two statistically indefinite variables that require a large amount of data for a quantitative risk assessment. The popular definition of risk as the product of the probability of an event times its consequence is insufficient in the risk management of large projects. Even in single case scenarios, equating risk with a single number, namely ‘probability × consequence’, is ambiguous, since it would lead to the conclusion, for example, that a low probability–high damage scenario equals a high probability–low damage one. It is more appropriate to think of risk as a curve and even more comprehensively, as a family of curves, in multiple case scenarios, and even as a family of surfaces for different categories of damages, such as cosmetic damage versus structural damage or loss of life. In addition, any list of scenarios in risk analysis can be criticized as being incomplete. This is because the number of scenarios is infinite. It is therefore imperative to make allowances for unknown combinations of events and contingencies and assign them a probability distribution.
Risk in relation to investments in energy projects, including LTO projects, is conservatively described by the negative impact which uncertain future events may have on the financial burden of the project. It is important to note that risk is not the same as uncertainty. Uncertainty about the evolution of the financial burden of a project can be both positive and negative. Risk, on the other hand, relates exclusively to events that lower the expected financial value. Uncertainty about future events that increase the expected value is referred to as the ‘upward potential’. Although both risk and upward potential are related to future events, risk usually plays a more dominant role in investment decisions, since investors are in most cases highly risk averse.
The level of detail involved in assessing project risks depends on the importance, the size and the complexity of the project. The methods and the models used to assess risk are as adequate as the results are sufficiently detailed to allow an informed decision.
Risks are not all equally important. To decide which need to be formally analysed will depend on whether the uncertain variable has a significant effect on the decision to be made. The data collected should be proven.
Subjective data can only be used in interim estimates or in defining trends to guide first level planning or exploratory investments. They should also be relevant to the LTO project and to the alternatives at hand. The more relevant and proven the data, the lower the uncertainty of the outcome. The data should also be relevant to project objectives, such as the NPP improvement plans and their expected effects on the project; they should be compatible with the creation of opportunities and with possible mitigation measures. The collected data should also include enough information to define the probable future degraded condition of the plant, if mitigation measures were not applied.
There are specific ways to deal with different kinds of uncertainty. Some uncertainties may exist because of a lack of information or of skill. These can be reduced by obtaining knowledge through education, training or by seeking expert guidance on the job. Some uncertainties may also be removed or reduced through more research and/
or more development time. Some knowledge gaps may include events that appear random and hence unpredictable;
some may be hidden or unknown. Others may just be beyond the current knowledge or state of the art. They should be acknowledged and treated as contingencies. Risks in industrial projects can be grouped as follows.
Project risks
These risks relate to the project development phase, which in the case of an LTO project refers to the development and implementation phases, including:
— Project planning and scheduling;
— Conceptual design of safety, reliability and performance improvements;
— Major equipment replacements, power uprates (if any) and modernization projects;
— Licensing submissions;
— Detail engineering;
— Bid information specification;
— Equipment procurement (manufacturing, transportation);
— Planned and unplanned detail installation gap engineering, field changes;
— Demolition of old and installation of new sections;
— Risks related to protecting the environment from the effects of radiation;
— Waste disposal;
— Security enhancements;
— Risks related to the ability of the refurbished plant to operate at the required performance levels;
— Project management and integration issues;
— Issues related to scope creep;
— Cash crunches;
— Hardware and software issues;
— Human resource issues, such as attrition, training;
— Supply chain issues, possibly leading to cost overruns;
— Schedule delays caused by cascading effects.
Technical and safety risks
NPPs have a number of independent backup systems designed to intervene if normal operation of the plant is disrupted:
— The accident at Three Mile Island proved that serious events could indeed occur and produce enormous loss of property, even without causing off-site damage.
— The Chernobyl accident also caused loss of life, in addition to large scale property damage, both on-site and off-site. Increasing concerns about reliability and safety have led to ever more built-in safety systems and precautionary redundancies.
— Risks involving nuclear safety are normally split among the government, the insurance industry, the owner/
operator and other major stakeholders, as spelled out in national nuclear legislation and in formal agreements among the parties.
Business and market risks
The fate of an LTO project is strongly affected by the energy market structure. Market risks relate broadly to unexpected adverse changes in the national economy. The data projections and assumptions initially made in an LTO economic analysis, such as the impact of inflation or decommissioning costs, may become invalid. When the
are tied also becomes uncertain. Uncertain electricity demand produces volatility in electricity prices, which can heavily skew predictions. Market risks are normally linked to highly fluctuating fuel costs, carbon dioxide policies and electricity prices. Electricity markets are characterized by:
— Large variations in demand over the course of a year;
— The need to physically balance the demand and supply at every point of the network;
— The non-storability of electrical power;
— The inability to control power flows to most individual consumers;
— The limited use of real time pricing by retail consumers;
— The necessity of resorting to non-price mechanisms (even blackouts) to deal with imbalances, since markets cannot react quickly enough to avoid them.
At the opposite end of the spectrum, tight price regulation can also be detrimental. Policy intervention may prevent electricity prices from rising high enough to support new investments. The risks involved in regulating the price could become even more of a concern, when coupled with a climate change policy. These types of regulatory interventions may significantly affect investment risks and lead to inadequate generation capacity.
Political risks
Governmental commitment to nuclear power development is a prerequisite for nuclear construction because of its safety implications, but that commitment is not a guarantee that taxation, laws and regulations governing electricity markets may not change and harm investments in nuclear power generation. Policy related risk factors are linked to the various forms that policy intervention may take, for example, a policy whose objective is minimizing environmental effects. Environmental policies may require additional investments to meet tighter standards, or may even force some capacity reduction. Other political risks that may directly affect NPP operation are changes to the national radioactive waste and spent fuel management and decommissioning policy, changes to the tax regime, and the like. In the past, drastic retroactive regulations, phase-out decisions and so on have caused disputes about licensing, local opposition to cooling water sources, redesign requirements and other issues, and have delayed construction and completion of nuclear plants in a number of countries.
In the same category are policy mandated public enquiries. The uncertain outcome and possible complexity and length of public inquiry processes may further add to the list of uncertainties.
There is a difference between ordinary market uncertainties and uncertainties induced by government policies.
Investors perceive market uncertainties, such as fluctuations in fuel prices and reservoir levels, as being easier to manage than uncertainties that stem from sudden policy changes. Some investors may adopt a wait and see strategy in response to the risk of policy changes; others may increase premiums on their investments. Both attitudes can affect new construction and LTO initiatives and push up market prices [21].
Social risks
Social risks relate to issues with the public as a stakeholder. The tide of public acceptance could turn, to the point of undermining the viability of a nuclear power generation or LTO project during or even after the implementation phase. The general public and other stakeholders could, for example, react to perceived radiological risks by setting acceptance requirements for NPPs that are difficult to meet. Social risks can be mitigated by drawing on experience. Barring unforeseen and extreme events in the area of public support, nuclear power utilities have generally been able to successfully deal with questions of public concern. In many countries, operators have achieved public support by demonstrating strong operating performance and by offering local incentives, including jobs and job training, participation in infrastructure and economic growth. Social risks can be reduced by taking into account all concrete commitments offered to community support programmes and by surveying the general sentiment towards nuclear power development initiatives in the area. The national industry safety record, however, remains the basis on which policy makers have been able to point to nuclear power generation as an important response to the imperatives of energy security and environmental protection.
Contingencies
To cover all unknown risks and those that are difficult to quantify, an overall contingency allowance is normally allocated. Deterministic or probabilistic methods can be used to estimate such contingencies. Deterministic methods usually assign extra costs to the base cost estimate (BCE) to take into account risks and uncertainties. The amount is estimated based on historical records, on expert judgement, or by comparison with other projects. It may be set as a percentage of the BCE or as a percentage of the specific activities associated with the uncertainty. The BCE percentage is usually higher during the initial project stages and then lower when more information becomes available. Regardless of the availability of new information, the estimates of contingency risks (probabilistic or otherwise) should be periodically updated. Due to their inherent empirical character, deterministic methods tend to overestimate the contingency reserve.
Probabilistic methods are better suited to deal with uncertainties. They provide less conservative and more reliable estimates of the costs associated with contingent risks. They can be applied to an LTO portfolio of a fleet of NPPs and allow the evaluation of the risk profile of the entire fleet, and hence of the overall profitability of its entire LTO programme.
To help initiate a formal risk factor database, Table 2 contains a sample of a generic checklist of risk factors that may have an economic/financial impact on an LTO project. The list can be expanded or adapted to the specific conditions of each NPP.
More information on the feasibility study of which the risk assessment is a part can be found in Appendix III.