The Global Nuclear Reactor Industy

THE GLOBAL NUCLEAR REACTOR INDUSTY

Industry overview

During the first ten years after its commercial introduction in 1956, the growth of nuclear power production was exponential, as would be expected for a new energy source. It then slowed down progressively to 10.9% a year by 1990, and has continued downwards to 1.8% a year in 2005 . It is however expected to rise again in the years to come , mainly because of the rise of the electricity demand worldwide (particularly in rapidly-developing countries), the awareness of the importance of energy security and the need to limit carbon emissions due to concern about global warming.

Degree of rivalry

In spite of a growing market, competition is fierce between the few nuclear reactor vendors and the industry is seeing an acceleration of international mergers and acquisitions as it is increasingly crossing national boundaries in a race to achieve critical mass in a high technology industry with high fixed costs and exit barriers. In 2006, three top level business alliances were created in the nuclear industry, combining the six companies which dominate the global market (Figure 1). Hence, the (CR)4 has recently increased to 0.6 .

In addition to that, nuclear power plants orders are long term contracts and customers are not likely to switch from one vendor to another. The combinations of these factors create a moderate level of rivalry even though the upcoming years will be critical to the major players who will have to demonstrate their capacity to their customers’ expectations in terms of cost competitiveness and safety requirements.

Bargaining power of suppliers

Nuclear reactor manufacturers use two main categories of suppliers: tube-makers for steam generator tubing and steel companies for heavy components made of forged steel parts. In the nuclear business, quality standards are tremendously high and only a few firms are qualified to meet the industry requirements. The companies meeting these quality requirements have therefore significant power over reactor manufacturers, who are less likely to switch suppliers without notice, since it involves a long quality auditing and certification process.

There is only a handful of steam generator tubing manufacturers barely meeting the requirements of the nuclear vendors. There are also very few steel-makers capable of manufacturing large sized forgings. Therefore nuclear reactor manufacturers are compelled to reserve capacity on a long term basis. As a response, they tend to backward integrate these steps of the manufacturing process: for example, Areva acquired Sfarsteel in order to produce its own forgings and GE has created a joint venture with Hitachi, a nuclear industry equipment manufacturer. Finally as nuclear reactor manufacturers are not the only customers of steel parts and tubing manufacturers, the suppliers tend to have a relatively high power over their buyers.

Bargaining power of customers

Nuclear power plants are operated by several different types of utility. In some countries, one or more central organizations have been created, dedicated to nuclear power. In other countries either the dominant national utility operates the nuclear capability, or where there are many large utilities such as in the US, they are owned by the relevant operators in the same way that they operate other facilities. While they are subject to the same market disciplines as other generating plants, nuclear plants are under the supervision of government authorities concerned with safety matters . As a result, national policy makers have significant decision power regarding investments in nuclear power. The customers can consequently be considered as concentrated in each national market, giving them significant power. An illustrating example is EDF’s bargaining power (French dominant utility company) over Areva, whose business stems mostly from this customer. However, the high switching costs of buyers compensate this power, utility companies favoring long-term relationships with their manufacturers.

Threat of new entrants

First of all, it seems obvious that the technical expertise needed to enter the nuclear industry is huge: the current reactor vendors stand high on the proprietary learning curve thus setting higher the entry barrier. Unlike software corporations or companies of the dot com economy, high initial investments and specific assets are required to start designing and manufacturing nuclear power plants. This prevents most private investors from entering the business. The only way to enter this market is to conclude partnerships with public organizations, mainly defense and research agencies. This is actually what happened to the current main players which benefited from government funds to design reactors for submarines and aircraft carriers during the Cold War. In addition to that, government policies, regulatory issues due to safety measures and patents held by the major players are another barrier to entry.

In the last few years the nuclear vendors have been progressively switching from large reactors , which were designed to accomplish economies of scale, to smaller modular standardized design. The objective is to better meet customer demand for smaller power plants and shorter delays before operation, which have a high influence on the investment decisions by utility companies. Finally, the trust and loyalty factor is essential in a business where safety issues are a major concern. Nuclear reactor buyers would not easily switch to a new entrant who would have little experience and brand name in comparison with the current players.

Threat of substitutes

The substitutes available for nuclear power plants are fossil-fuel power plants (coal, oil & gas), and renewable power plants (wind, solar, geothermal, hydropower and biomass). Although renewable energy sources are likely to take an increasing share of incremental electricity supply in many markets they are, however, of a dispersed and intermittent nature . Renewables are very suitable complements rather than substitutes. It is likely that most incremental and replacement generating investments to satisfy the base load will use fossil fuels (coal or gas), or nuclear. Typically, nuclear power has higher capital costs than fossil-fuel power but lower fuel costs, meaning that the initial investment is high but exploitation is more profitable on the long run .

The factors favoring the development of nuclear energy are the constant increasing prices of oil & gas and the urge to reduce the greenhouse gases production