The Importance of "Economic Order Quantity" for Starting a New Nuclear Construction Industry in the US
During one phase of my professional career, I realized that I needed to learn more about manufacturing and operating a business. A typical person with my upbringing – son of a school teacher and an engineer – might have decided that the best way to fill in that knowledge hole was to go back to school. Fortunately for me, my life situation at the time did not include that as an option – I had a family to think about, an insufficient bank account and a dislike of borrowing money.
During a conversation with a good friend who was the part owner of a small factory producing custom packaging machinery, I learned about an opportunity to obtain an MBWA – management by walking around – at a local plastic product factory that was in need of a general manager. He introduced me to the factory owner – Jim Garlets – a man who had worked his way up from sweeping the floors of a factory while in high school. I realized there was an opportunity to learn by doing, so I accepted the job. It was not an easy three years, but the practical lessons that experience provided have been more deeply ingrained than most of the lessons in any of the thousands of formal lessons that made up my classroom training.
Jim was an excellent teacher; like many of the best he often left the remainder of the problems to be solved as homework. Very soon after my arrival, Jim gave me a single sheet of paper that had obviously been reproduced a few times and told me that it might be a good idea for me to make some copies for my own use. The paper had a list of variables with blanks next to them and then three copies of a rather straightforward equation. (Unfortunately, I did not save a copy, so I am recreating this 15 year old experience from memory.)
The variables described all of the inputs needed to determine the cost of producing a part using the injection molding machines that Jim had collected and turned into the production end of his factory. The list included the type of plastic, the mass of a single part, the cost per unit mass of the plastic, the cycle time of the machine, the number of cavities in the mold, the number of operators required, the size of the machine required, the amount of time required to set up the job, the mass of the sprue that distributed plastic to each of the cavities, the success ratio of the production (which factored into the waste of both time and material from parts that failed inspection), an allowance for post production finishing, the number of parts per box, the cost of each box, the number of parts in each production run, and the time required to clean up from the job and make the machine ready for the next job.
For a new part, there was another single page to fill out. The results of that page supported an estimate for the one time costs of designing a new mold, producing that new mold, testing the production set up, producing samples, and rework. The results of that one time sheet became a single number for the cost per part sheet for those parts that were going to be added to our internal product line. For custom jobs, they became part of the response to a request for a quote (we normally operated off of verbal requests). For the internal product line parts headed to retail markets, there was a third sheet for contracted costs like designing and printing marketing materials and obtaining packaging services.
Before Jim would bid on any production job and before he would release an internally developed part for marketing, he would painstakingly go through the process of determining each of the inputs and run the calculation for the production cost for each part at least three times using at least three different inputs for production runs – low, medium and high volume. When I first looked at the sheet, I did not quite understand how much difference that single input made until I had “done the numbers” for several different parts that were already in our product line. (During the three years on the job, I ran those numbers for hundreds of different parts and automated the process with some refinements.)
Because of the effects of set up and clean up costs, the cost per part could vary by several orders of magnitude depending on the size of the production runs. For those parts that we designed and added to our own inventory, the effects of the initial tooling were hugely important. A high quality, heavy duty injection mold can cost several tens of thousands of dollars, even when the parts that drop out of the mold with each cycle of the machine get sold for a few pennies.
Some of our customers were not terribly sophisticated and had a difficult time understanding why they would get such a wide variety of quotes depending on the size of their orders. They would often try to convince us to sell them 100 pieces, but charge them the 10,000 piece price. The inventors who had a new idea were often the most difficult – they sometimes wanted physical samples of production parts and could not understand why a product that might sell for a few dollars could cost thousands of dollars to produce in sample quantity.
It took some training to help our small sales force understand why it was so much more profitable for them to sell large quantities of parts for which we already owned the tooling than to get excited about a new idea for a toy or a kitchen gadget. We did produce some new products each year, but the process of selecting those products was very careful and required a number of challenging discussions backed by hard nosed estimates. The money at risk was mostly Jim’s, but everyone in the discussion understood just how important it was to make choices based on realistic numbers.
If you have gotten this far without giving up, you might be wondering what this has to do with the atomic energy industry.
I have spent a number of hours over the past few weeks thinking about the stalled “nuclear renaissance”, the vision of a fleet of identical EPRs that Unistar’s Mike Wallace shared with the ANS Utility Working Conference about 4 years ago, and the importance of obtaining an economic order quantity before making a production decision. Though I wish the world was different, my conclusion is that I fully understand why Constellation Energy has announced that it is willing to sell its interest in Unistar for a buck and a partial recoupment of the money that it has spent.
If the leaders in the US think that we can restore an industry that has the capability to build large nuclear power plants on what amounts to a tiny trickle of orders in the single digits over the next ten years, they need some lessons from Jim Garlets about the importance of obtaining orders with a high enough unit volume to make a new product development worth the effort.
Unless we change directions soon and start investing some risk capital in actually building new facilities, I fear that the universe of required suppliers will move on. My bigger concern is that the influx of new engineering and technical students who were attracted by the noise are going to have to put their computer skills to use for something besides running core neutronics models. There will be jobs in operating and maintaining existing plants, but many of the fresh grads did not go through the hard days of study to prepare for participation in a stagnant industry.
I am not giving up and not negative about the prospects of at least some success, but it is time for a resounding wake up call to the people who are sitting on the sidelines and afraid to spend money for new production facilities during a time when money is really, really cheap.
I am in the process of obtaining a 30 year fixed rate mortgage for a non productive asset – a house that we hope to make into a welcoming home for grandchildren and their parents to visit. We have locked in an interest rate on that loan that is 1/3rd of the interest rate that my wife and I paid on our first house.
We bought that house in February 1983, about the time that project costs on plants like Vogtle 1 & 2 and South Texas Project 1 & 2 were soaring into the stratosphere due to interest rates that exceeded 15% and long, TMI related delays. To give you an idea how important that difference in interest rate is for a 30 year loan, our house payment will be about 40% higher than the payment on our first house – for a loan that is about six times as large on a house that contains more than twice as many square feet and about 4 times as much land.
I have a money market account where we have been accumulating the down payment for that house; the interest on that account, with its five digit balance, is so close to zero that I do not expect to obtain more than $5 for the entire year. I would love to find an investment that would reliably pay 3-4% per year. Are there any investment professionals out there who are setting up funds specifically aimed at lending money to nuclear facility builders who can see just how valuable new plants will be once people recognize that “cheap gas” is a mirage dependent upon a brief dip in market demand and a temporarily favorable regulatory decision giving an exemption to the Clean Water Act?
Update: (Posted at 0555 on October 19, 2010) On a much happier note, I found an article about a proposed two unit EPR in California’s San Joaquin Valley titled Can Solar, Nuclear or Both Save California’s San Joaquin Valley? Here is a sample quote:
“Nuclear’s getting a lot more popular than it was before,” said John Hutson, president and chief executive of the Fresno Nuclear Energy Group, during the CPUC appearance, part of the commission’s “Thought Leaders” discussion series on energy topics. Although Mr. Hutson did not mention it, President Obama has said that expansion of nuclear power generation in the United States is necessary.
“We will ultimately carry the day,” Mr. Hutson said of potential litigation or other impediments to the nuclear plant’s construction. “There are no issues left to address.”
One more happy note. Just in case my early morning pessimism is wrong and the leaders of the nuclear industry do get their act together and begin ordering the components required for building a number of new nuclear power plants in the United States, we might need to have some excited young people getting prepared to take on the important task of building and operating long lived, reliable power stations. My friends at PopAtomic Studios have just entered into a partnership with the Michael Krupinski Memorial Foundation to raise money to support atomic education by selling sharp looking cases displaying pieces of graphite from CP-1. Get one before they are all gone!
I wish tou or someone could demonstrate the difference in creating 16 GW of nuclear capacity using 25, 100, 1000 and 1600 MW plants. workout the times and loan instalments for various options. Small reactors are a hot topic now and it may clarify matters.
@ jcdhall
One of the biggest factors making small reactors viable in the USA is the size of the market in many places. There are thousands of small Electric utilities that with a bond could afford 100 million dollars for a small reactor to power their grid. This would allow people with a much smaller capacity, both in money and in expertise, to invest in nuclear power. The money part seems obvious, but the expertise part is also essential. It takes a large number of highly educated, and trained workers to operate a large power reactor. It is much more difficult – in fact physically impossible for a 1,600 MW reactor to be passively safe. But when you drop below 250 MW you can engineer passive safety so that the safety systems don’t need nearly the monitoring of a large system and the effects of a problem might be financial but will not be a safety issue.
These both relate directly to the cost and capacity of small reactors to compete.
The last factor that Rod is constantly talking about is the ability of a factory to build 10 to 100 a year of these systems thus reducing costs in tooling and labor and making the systems cheaper and cheaper as they are built. This approach also reduces training since manuals, and simulators can be written and built to train and update people for hundreds or thousands of systems rather than perhaps 5 or 6 of the 1,600 MW systems.
All in all, small is beautiful in the nuclear world.
I too am excited about the prospects for ‘small’ reactors. I just think if you can get the (absolute) price to build these down to one or two hundred million (for a small plant), that it’ll be easier to get the money to build 100+ small plants instead of 10 or 20 big plants. If you can get small plants built, and over the course of several decades, the public and the financial industries get ‘comfortable’ again with nuclear power as being safe and practical, it would probably then become easier for utilities who really *need* big plants, to be able to get the funding to build them. I might be wrong – I’m not an expert in anything (the closest I come to being an ‘expert’ is in computer programming, and even that I”m still just a student), but I dunno, it just seems like if you can start small and grow the industry from that ‘small’ starting point, it’s got to be easier than trying to get people to come up with 8-15 Billion for a single huge plant.
You know Rod, that raises an interesting point I’ve been wondering about for awhile. I’m no investing or corporate finance expert, but I’ve long wondered how nuclear advocates could “put their money where their mouth is” and buy into corporate bonds for reactor finance projects, etc. I get tired of hearing about how “Wall Street won’t invest in nuclear builds,” when people like us who are educated about the economics of nuclear (particularly how stable the revenue stream is once the power starts flowing) would be more than willing to sink some of our investments there.
In many places consumers can change their electricity supplier and choose between standard and “green” energy, some offer 100% wind power (when the wind doesn’t blow, they supposedly buy offset certificates). But they offer only green or non-green power. What we would need is the full range of choices, including coal and nuclear, then consumers would be voting with their wallets and the “loud minority” green groups would be in for a surprise.
If Michigan, Detroit, and the UAW were not so myopic, there are quite a few billion dollars of excess installed manufacturing base waiting for work. Unfortunately (speaking as a former UAW member and resident of Detroit), I am not sure they are up to the task.
While this may be a golden age for financing big projects like nuclear power plants, it is not a golden age for those wanting to build such plants when facing the numerous obstacles placed in their way by government and the courts. The Calvert Cliffs 3 project is an example of anti-nuclear interests seated in government that use their power to thwart any nuclear renaissance. The move to force the Indian Point nuclear plant to build cooling towers rather than pass through river water for cooling (while allowing a coal-fired plant with similar cooling needs to continue with its river water pass though cooling) is another example. Let’s toss in Vermont Yankee, where a insignificant amount of tritium water leaked from the plant. This incident is being used by anti-nculear forces both outside and inside government to deny a license extension.
In a contest between patient risk capital and a hostile government regulatory environment, risk capital always loses. I’m afraid this won’t change until enough voters are hit hard in the pocketbook by the high cost of energy from renewables and increasingly scarce fossil fuels.
“In a contest between patient risk capital and a hostile government regulatory environment, risk capital always loses.” Very-well said.
This is what the “loan guarantees are socialist” crowd does not understand. The guarantees are a hedge against the unchecked moral hazard of government.
Many free marketeers do not understand thoroughly their own passion. As one of that ilk myself, I find it troubling.
I agree, although I’d phrase it as “project risk” rather than “moral hazard”.
Does the high price of the declined Calvert Cliffs loan guarantee reflect some awareness of just how big that governmental risk is? And is the immorality of charging to insure against their own future misdeeds apparent to anyone in government?
The Chinese are going to find out what a large number on modular nuclear reactors does to the cost of building a plant. There are four AP1000 Westinghouse designed plants (same design as Southern) under construction with many more being planned. The Chinese supply chain is being built with the expectation that dozens of AP1000s will be built in China. I think the fate of nuclear power will be determined by China.
My optimistic side says that the first Chinese AP1000 will come on line in 2013 with the 2nd, 3rd, and 4th a year or two later. The Chinese sourced (5th and thereafter) plants will start operations in 2015. All these plants will operate almost flawlessly because the high level standardized training. Modular construction will be proven cost effective. By the time the 2nd plant at Southern becomes operational, 2017, the Chinese will be ready to sell us AP1000 plants at half the price of a US sourced plant. By 2017 the world will be more convinced that a high CO2 atmosphere is dangerous. The rest of the world will ramp up nuclear at the same rate the Chinese did.
My pessimistic side says that the Chinese are ramping up way too fast. The next big nuclear incident will be in one of the new Chinese plants. Only strong socialist governments will build nuclear power plants. The US will build no new nuclear plants. The climate effort will move to efforts to remove CO2 from the atmosphere or the shade the earth or move away from the low land. Ug.
With 20-30 AP1000s in China, we are going to start seeing economies of scale. I think we will also see it as the SMRs begin to catch-on, especially in the developing world. I see that market taking to those like they did with cell phones and netbooks, skipping right over the telephone poles and printing presses.
Economy of scale is not lost on the Russian nuclear industry either. Development of an integrated turbine reactor on large scale is underway. AP1000 in China may find issues with water availability. Climate change will impact every industry in terms of infrastructure for economy of scale production. Portable modular reactors will play a huge role in filling the needs during relocations for reasons of increased sea levels to start with. Failing to plan for changes and challenges in the next century is not an option for the world’s leading economies.
“Failure is not an option…”
Failure is always – ALWAYS – an option. You might not enjoy the consequences, however.
Nuclear power is a field where “failure is not an option” should be a banned phrase. Always consider the possibility of failure and take that possibility seriously.
How is this plant in the Central Valley going to pay for itself? That desalinated water must be unbelievably expensive. Can you explain how it makes money for investors? And unless it is using saline water, I’m at a loss to understand how using the Fresno waste treatment water doesn’t impact on already scarce water supplies in the Valley.
@Tom W. – the central valley plant will make both water and electricity. Desalinating water can be done using the “waste heat” that is normally discharged as part of the steam cycle.
The value of the electricity will be quite high in California where most of the power is currently produced by either burning natural gas inside the state or by burning coal in a distant place like Idaho, New Mexico or Montana and then sending it via crowded transmission lines.
The plant will, like the very large and profitable three unit plant at Palo Verde in the desert outside of Phoenix, use the waste water from a city for cooling. It will not consume that water, it will just add a bit of heat to it which will be later dissipated into the atmosphere.
What is your proposed alternative power supply? The existing power plants are dirty hydrocarbon consumers and they are more expensive to operate. Solar and wind are mere distractions mainly marketed by the existing fuel suppliers.
The article said that the plant wouldn’t be used primarily for power generation but desalinization:
“Mr. Hutson said the primary purpose for building the nuclear complex, which is to have two reactors, each with a peak capacity of 1,600 megawatts, is not to produce electricity. “We’re in this for the water,” he said, and the nuclear development group is looking at “water, food, farming first, and electricity second.”
The plans call for energy from the nuclear complex to be applied to desalinating ground water in the San Joaquin Valley, for many decades one of the world’s most productive agricultural regions.”
So it sounds to me that they are using more than waste heat for desalinization and that most of the energy will go to that than electricity, no?
You might recall that N-plants have been proposed in the Valley before and went up in flames over the issue of the plant “stealing” agricultural water. Even city waste water can be used for other purposes. What does agribusiness have to say about this plant?
One issue in America is that there is so many electric utilities. I’ve been following the European electric industry with interest over the past few years, and its quite amazing that there is like 5 or 6 companies that control most of the industry now. Absolutely huge companies.
These companies can handle regulatory risk through their sheer size. They have a portfolio of projects they are developing of different technologies, across multiple nations. And they know some of the projects will never make it through before being stopped. It all just gets priced in to the final bill.
If the US electric industry moved to say 5 major producers who controlled 80% of production and distribution, those companies would not be so worried about risking money. It wouldn’t be betting the company. They could also build more of the same units as obviously each producer would settle on one vendor and establish a deep relationship. The same as now.