UK: Nuclear Decommissioning – Challenges Facing The NDA

On 11 August 2005, the Nuclear Decommissioning Authority ("NDA") published its first draft strategy for consultation (the "Draft Strategy"). The Draft Strategy outlines an ambitious programme for the decommissioning and clean up of the UK's civil nuclear sites, but one which faces considerable challenges.

The NDA came into operation in the UK on 01 April 2005. A non-departmental public body, established by the Energy Act 2004 to manage the UK's nuclear legacy, it has taken over responsibility for the operation, decommissioning and clean up of the UK's 20 civil nuclear sites.

In the months leading up to 01 April 2005 and subsequently there has been a significant rise in major commercial / corporate activity as those who want to participate in the UK nuclear decommissioning market position themselves. To cite just a few examples: the establishment of the British Nuclear Group (BNG) by BNFL; UKAEA tendering for partners to form an alliance to bid for the site management and operations contracts with the NDA (the "Tier 1" contracts as well as for partners at other levels of the supply chain; the acquisition by Amec of NNC; the proposed sale of Westinghouse; and clear indications from a number of major international suppliers and contractors of their interest and commitment.

Such activity is perhaps unremarkable against the backdrop of a marketplace where the estimated cost of the clean up of UK sites has already increased from an initial £48 billion to £56 billion. By its own admission, the NDA does not yet fully understand the scale of operations required to deal with the high hazard legacy facilities at Sellafield and Dounreay (its number one decommissioning priorities). Once the full extent and nature of those tasks are appreciated, the estimated cost will surely increase yet further.

The Draft Strategy, published for consultation on 11 August 2005, addresses decommissioning, waste management, operations, competition and contracting, finance and socio-economic conditions. The consultation period expires on 11 November 2005. The NDA Board meets to approve the final Strategy on 15 December 2005, before submitting it to the Secretary of State and the Scottish Ministers on 23 December 2005.

Perhaps the first, and rather obvious observation to make is that the period between 11 November and 15 December does not allow much time for the NDA to digest and discuss the responses it receives on its Draft Strategy.

Having excited the market, the NDA now has to deliver on its statutory duties and none more so than the promotion of effective competition for contracts.

The contracts which are to be competed by the NDA are the Tier 1, site management and operations contracts. Bidders will compete for the right to become the parent company of the "Site Licensee Company" (i.e. the licence holder at each site, all of which are currently owned by BNG or UKAEA) (the "SLCs") and thereby to take over the management of the SLC and the operation of the relevant site.

In its short life to date the limitations of the financial arrangements which underpin the ability of the NDA to operate effectively have already become apparent. It is seemingly bound by a straightjacket, the ties of which comprise:

• the unattractiveness of prospective multi £million unsecured bid costs for Tier 1 contracts to manage and operate the SLCs for short term contracts of circa five years for a fee of 4% if the performance indicators are met;
• a contract structure that provides little financial security for the supply chain who are therefore unlikely to accept the flow-down of significant financial risk from the SLCs;
• the ability of the Tier 1 contractors to manage the SLCs is rightly subject to the requirements of the regulators but now also by the desire of the NDA to micro-manage certain processes (see, for example, CT15 – Sub-Contracting/Procurement), but where NDA are significantly short of resources to do so; and
• uncertainty over the income stream of the NDA.

The NDA is funded from three sources: (1) Government, (2) commercial activities and (3) funds equivalent to those transferred from BNFL's Nuclear Liabilities Investment Portfolio (NLIP). In the current year (2005/06) the total funding is £2.262 billion of which the amounts are respectively £503 million, £675 million and £1084 million.¹ It is envisaged by the Draft Strategy that the funding will remain at around £2 billion per annum until 2008. However, the limitations of the funding arrangements are increasingly clear including:

• the uncertainty over the future of the Thermal Oxide Reprocessing Plant (THORP) and the Mox (Mixed Oxide) Plant at Sellafield have significant impacts on income from commercial activities;
• that income is vulnerable to unplanned outages;
• funding is annually approved by the Secretary of State, making long term financial commitments difficult in a market where the achievement of value for money and the technical complexity of much of the work often demands the letting of long term high value contracts;
• the European Commission's state aid investigation has restricted the sources of funds available to the NDA for work to be carried out on former BNFL sites to those raised from commercial activities and the sums equivalent to the NLIP. If the outcome of the investigation is unfavourable to the NDA, it has no published plan to address the situation; and
• the likelihood of a further increase to the estimated £56 billion clean up costs, as the full scale of the NDA's task becomes clear coupled with the proposed accelerated programme for decommissioning and clean up, means that the level of Government funding must increase significantly.

Although permitted in certain circumstances by the Energy Act, it is unlikely that borrowing will provide any long term solution to the NDA funding challenges and there is no mention of any such intention in the Draft Strategy. Instead, the NDA has indicated that it intends to look for alternative ways of funding the decommissioning and clean up programme and has highlighted the UK Government Private Finance Initiative (PFI) as a possible route.

In any PFI arrangement it will be the contractor, and not the NDA, who will be the borrower, probably through a special purpose vehicle company. On the current contract structure it will be the SLC who is the procuring authority. However, the only assets of the SLC are its contract with the NDA, its employees and its insurances. In the circumstances, it is hard to see how project finance would be forthcoming without central government guarantees.

As well as concerns about cashflows and the strength of the covenant, funders will look at three categories of risk: technical, political and commercial. In the context of work on nuclear licensed sites, non-nuclear risks may be more highly rated by funders so that funders will be looking for higher cover ratios than either for traditional independent power plant deals or PFI projects.

It is important to recognise that the nuclear decommissioning marketplace is an international one for contractors, consultants and suppliers. Potential bidders will only engage with such programmes if they are satisfied as to the arrangements relating to liability for third party nuclear damage. In Europe, such arrangements are largely provided by the incorporation of international conventions into national legislation.

The UK is a signatory to the Paris Convention, which is incorporated into the law of England and Wales through the Nuclear Installations Act 1965 (as amended) ("the Act"). The overriding principle of the Paris Convention and the Act is what is known as the "channelisation" of liability to the licensed operator of a nuclear licensed site: only the operator can be liable (subject to three exceptions) in respect of nuclear damage to property or injury to persons.

The exceptions are, in general terms:

• nuclear damage which results from an act of war;
• nuclear damage which results from an act committed with the intention of causing harm or with reckless disregard for the consequences; and
• nuclear damage to the operator's (the licensee's) own property.

The operator's own property is deemed for the purposes of the Act to include any property which is on site for use in connection with the operation or cessation of operation or the construction of a nuclear installation.

The Act creates an immunity in respect of any nuclear damage to any nuclear installation and/or any other property which is on the licensed site for use in connection with a nuclear installation, unless the person who has caused the damage has entered into a written agreement accepting liability for such damage or causes such damage intentionally.

Unfortunately, in the 'flow down' terms which the NDA has required the SLC to impose on its contractors and contractors of any tier, there are deficiencies. In particular, the terms fail properly to reflect the provisions of the Act, do not provide a sufficient written agreement whereby the SLC agrees to accept a liability for nuclear damage to property on site and also potentially exposes a contractor to third party claims for nuclear damage from the NDA under the Contract (Rights of Third Parties) Act 1999. The NDA needs to address these deficiencies.

The decline of skilled recruits within the nuclear industry is well recognised. Many within the industry were relieved that the NDA had, ostensibly as one of its duties, the obligation to ensure the maintenance and development of a skilled workforce. The NDA recognises that there is likely to be a skills shortage in the next 3-5 years.

However, what is not clear from the Energy Act and even more so since the publication of the Draft Strategy, is not only how far the NDA is obliged to go to address the issue, but exactly how it intends to do so.

The Energy Act provides that the NDA can educate and train persons in the decommissioning of nuclear installations, the clean-up of nuclear sites and any other activities in relation to which it has functions. Although "other activities in relation to which it has functions" would include the NDA's operational functions, the obligation on the NDA to provide this education and training is only "to the extent that it considers it appropriate to do so." In other words, the Draft Strategy was the opportunity to address this, but it is silent on the issue.

Nothing in the Energy Act actually obligates the NDA to develop a skilled workforce for the continued operation of designated nuclear installations or facilities for treating, storage and disposal of hazardous material.

This poses a number of questions. Why is the NDA not under an obligation to ensure the maintenance and development of a skilled workforce in respect of the continued operation of the facilities the NDA has responsibility for? How does the NDA propose to ensure the maintenance and development of a skilled workforce? What budget has the NDA for performing its somewhat limited obligation?

The NDA has stated that it intends to work closely with others tasked with improving the situation, such as Cogent (the Sector Skills Council) and will support initiatives such as the Nuclear Institute, a National Nuclear Skills Academy and Young Foresight .

However, it does not appear that the NDA itself intends to take any action, other than relying on new or pre-existing initiatives to fulfil its obligations. Whist these initiatives may have a long term impact on the skill-base, it seems unlikely that they will have any significant impact over the next 3-5 years. The Nuclear Institute will take its first intake of students this year for MRes, MPhil, PhD & EngD courses later this year. The National Nuclear Skills Academy has not yet been established and Young Foresight, which has yet to develop a nuclear programme, is primarily aimed at 13 to 14 year olds.

The NDA has allocated £25 million over the next 5 years to support these initiatives, but the Draft Strategy does not make clear how this money will be allocated.

One of the criticisms of the Draft Strategy is that much of it is dependent on decisions first being reached or action being taken by other bodies (notably the Government). For example, the strategy for management of nuclear fuels depends largely on the Government making a decision on nuclear new build in the UK.

One of the most ambitious targets of the Draft Strategy is the reduction of the Magnox decommissioning programme: the NDA aims to have all 11 Magnox reactor sites cleared and available for alternative uses within 25 years. This is a significant acceleration of the current proposed 125 year programmes.

Acceleration of the Magnox decommissioning is, however, dependent on finding a long term solution to storage of the intermediate level waste ("ILW") from the Magnox sites, or at least an alternative interim storage solution to the current method of storing the waste in facilities on each reactor site.

The NDA has made a clear link between the need for the Government to make an early decision on the CoRWM recommendations (due in July next year) and the benefits of early clearance of the Magnox stations and provision of long term ILW arrangements.

The NDA is facing some tough commercial challenges. High bid costs, short term contracts and low margins may undermine effective competition. The Draft Strategy is too contingently dependent on decisions and actions from parties outside the control of the NDA. It is also long on expenditure plans and short on income plans, including the financial and contractual security for long-term contracts. Interested bodies are busy preparing their responses to the Draft Strategy. It remains to be seen whether the NDA has allowed itself sufficient time to assimilate them.

Mark Richards is a partner with law firm Pinsent Masons and the Co-Chairman of the Nuclear Industries Association Legal / Commercial Issues Working Group.

Rebecca Harvey is an Associate with Pinsent Masons.