University of Pittsburgh School of Law Energy Law and Policy Institute

Challenges in Electricity Planning, Project Execution, and Operation

Ingmar Sterzing Director, Commercial Operations Westinghouse Electric Company August 1, 2013 Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 1

Westinghouse Electric Company

Westinghouse Electric Company provides fuel, services, technology, plant design, and equipment to utility and industrial customers in the worldwide commercial nuclear electric power industry

Nearly 50 percent of the nuclear power plants in operation worldwide are based on Westinghouse technology

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute Westinghouse Electric Company Headquarters Cranberry Township Pennsylvania, USA 2

Westinghouse Product Lines

Nuclear Services

Focused on operating plant success through reliable operation, maximized power output and better (shorter, more predictable) outages

Nuclear Power Plants

Specializing in the technology of new nuclear power plants and component manufacturing

Nuclear Fuel

A single-source fuel provider for PWR, BWR, VVER, AGR and Magnox reactors worldwide

Nuclear Automation

Instrumentation and control solutions to enhance the reliability of nuclear plant control and safety systems

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 3

AP1000

TM

: Designed for Greater Certainty

Simple, Practical, Standardized and Innovative

• • • •

Passive Safety replace mechanical & electrical systems -- results in fewer materials and equipment Modular design drives faster, predictable construction schedule Reduced Operations and Maintenance Cost versus other plant designs Majority of design utilizes proven Westinghouse experience and technology

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Result: Reduced Construction Time, Greater Schedule Certainty, and Lower Costs

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Enhanced Financing and Lower Investment Risk

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Greater Levels of Safety and Quality

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 4

AP1000

TM

Addresses Investment Risk Reduction

Reduction of risk is the key to new plant construction

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 5

Project Technical and Commercial Factors are Aligned for Project Success and Certainty

Inputs

Customer Inputs & Requirements

Project Planning and Development

Project Execution Plans

Output

Customer and Vendor Alignment AP1000 Standard Model and Lessons Learned Scope and Division of Responsibility Progressive Elaboration Cost Estimate and Price Price and Delivery Certainty Site Specific and Local Experience Commercial Terms and Conditions Value Optimized Project

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 6

AP1000 EPC Delivery Model

• Ensures employees and stakeholders have a clear understanding of how Westinghouse will deliver the AP1000 plant on budget and schedule • Provides consistent delivery of AP1000 Projects meeting customer and stakeholder requirements and exceeding expectations • Consists of standard processes and procedures which are used to deploy projects globally building on prior projects’ lessons learned • Project specific processes are developed or incorporated into the existing processes as unique project conditions require Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 7

EPC Delivery Model-Project Plans

Project Engineering Plan Contract/ Subcontract Management Plan Resource Staffing Management Plan Project Controls Plan EPC Agreement Communication Plan Schedule Plan Information Management System Plan Module Plan Configuration Management Plan Project Execution Plan Process Improvement / Lessons Learned Plan Quality Assurance Plan Regulatory/ Licensing Management Plan Construction Execution Plan Supply Chain/ Procurement Plan Risk & Opportunity Management Plan Standardization Plan System Turnover Plan Project Completion & Closeout Plan Project EH&S Plan Startup & Commissioning Plan

Standard set of project plans built on prior project lessons.

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 8

AP1000 Risk Management

• • Advanced risk management is necessary for the successful execution of multi-billion dollar projects • Failure to manage risk on projects of this magnitude would have a significant impact to the project, to Westinghouse, to partners, to the industry, and to our customers • Advanced risk management capabilities are needed to manage uncertainty, prevent unplanned costs and help achieve project objectives with high confidence Westinghouse has established an advanced risk management culture and a dynamic and continuous risk management system across the organization

AP1000 customers want confidence in Westinghouse’s ability to deliver and fulfill contractual obligations.

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 9

Project Risk Management Lifecycle Processes

Pre-Proposal Phase    Work with partners and customers to Identify potential risks Respond to capture potential benefits and mitigate threats Perform early work to reduce uncertainty Proposal Phase Execution Phase       Assign dedicated risk lead(s) Prepare preliminary plan Perform comprehensive execution risk assessment Incorporate lessons learned Incorporate response activities into plan Align and assess risk with proposed delivery model      Prepare final Project Risk Management Plan Charter project risk team Continually identify, assess and respond to project risk Monitor and control project risk management activities and risk areas Document and incorporate lessons learned A systematic and continuous model for managing and reducing uncertainty in the successful execution of an AP1000 project Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 10

Project Optimization and Risk Response

• • • Risk Response Planning is the process of developing options or actions to enhance opportunity capture and to reduce threats to the objectives.

– Avoid • Either take significant action to reduce the threat risk factor to zero or revise program criteria to eliminate the exposure to the risk – Transfer • Delegate the ownership of the risk to a third party – Mitigate • Taking early actions to reduce the probability and/or impact of the risk to a more acceptable level.

– Accept • Some risks cannot be eliminated or addressed through a viable strategy. These risks must be managed effectively or provisioned.

Westinghouse seeks to first mitigate risk through design and effective execution.

Westinghouse prefers to align scope and risk with the party best capable of managing the scope and mitigating the risk.

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 11

Risk Management and AP1000 Pricing

• • • •

Uncertainty for Planned Events

Contingency is a cost factor used to account for uncertainty in the cost estimate, and includes cost allowances for areas such as: – Design uncertainty – Equipment cost estimates – Labor productivity – Wage rates – Commodity costs Contingency does not include any allowance for risk items The use of contingency funds by the project is expected The level of confidence in the amount of contingency needed changes as the project progresses • • • •

Uncertainty for Un-planned Events

Risk allowance accounts for the potential cost exposure of unplanned activities and events Risk allowance may include cost allowances for areas such as: – Defects liability – Performance guarantees – – Schedule guarantees Force Majeure Events – Regulatory Changes – – Catastrophic loss Permitting uncertainty The use of risk allowance by the project is not expected The level of risk allowance required is dependent on the project delivery model, risk tolerance, and the commercial arrangements Residual project delivery uncertainties can be managed collectively with reserve funds (risk and contingency) to minimize the overall cost impact associated with distributed and uncoordinated risk provisioning.

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 12

Project Cost and Price Terms and Concepts

Fee/Profit Risk Contingency Actual Costs and Planned Committed Costs Management Reserve (Contingency and Risk) Price Total Allocated Budget (TAB) Estimate At Completion (EAC) Budget at Completion (BAC)

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 13

Uncertainty of Achieving Project Cost Objective

Management Reserve Fee/Profit Range of possible Cost Low Cost Loss Contract Budget at Completion (BAC) Total Allocated Budget (TAB) • Desired

outcome

•

Acceptable outcome

•

Unacceptable outcome

• There is a probability that the project will be completed with a total cost less than the Budget at Completion (BAC) • Effective project performance can enhance the probability that this occurs • There is a probability that the project will be completed with total cost greater than the BAC but within budgeted reserves (TAB) • Effective project performance can enhance the probability that this occurs • There is a probability that the project will be completed with total cost greater than the Total Allocated Budget (TAB) • Total project costs will exceed budgeted limits established for the project and may exceed risk tolerance of the organization • Business can decide to allocate reserves to mitigate or accommodate risks • Business must be willing to sustain or accept the potential for such a loss or seek to mitigate this potential outcome Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute Break Even High Cost • Devastating

outcome

• There is a probability that the project will be completed with a total cost beyond the capability of the business to accept such a loss • Total project costs will far exceed the risk tolerance of the organization • Potentially unlikely outcome but given the impact, the business should protect itself to the extent possible (Force Majeure, Insurance, etc.) 14

• • •

Innovative Commercial Approach to New Plant Development

New nuclear plant stakeholders want confidence that their investment will provide a return in balance with the level of risk The AP1000 program was founded on the principle of re-building confidence in new nuclear projects Westinghouse seeks – to be flexible and innovative in order to arrive at a balanced approach – – to work in an open, transparent manner to build trust and confidence to align scope and risk with the party best capable of managing the scope and mitigating the risk – to arrive at a delivery approach that optimizes the value of the overall project and gives the stakeholders the appropriate incentive to help assure high quality, on-time, on-budget delivery

The right technology, the right team, and an effective commercial approach is necessary element for the successful execution of multi-billion dollar projects

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 15

A Successful Risk Management Culture…

Integrity, Transparency, Flexibility, Diversity

Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute

Georgia, Plant Vogtle 3 and 4 with 1 and 2 in the Background, July 2013

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AP1000 Standard Model Improve Certainty

• • • AP1000 program was designed with standardization as a foundation principle – Standardization eliminates risk and increases stakeholder confidence Standardization provides for increased certainty in all aspects of project delivery that relate directly to improved project financing – – – – – Licensable design Finalized design Demonstrated equipment fabrication Proven construction techniques and execution plan Repeatable processes and procedures Lessons learned are continually incorporated from the experience gained on China and US projects Westinghouse is confident in the standard plant model which will provide a high level of commercial certainty for standard plant scope Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute 17