Analysis of global nuclear industry with emphasis on dte energy


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Analysis of global nuclear industry with emphasis on dte energy

  2. 2. Introduction The usage of fossil fuel has started at the same time as the beginning of the industrial era. But as time progressed there is a growing awareness of the repercussions due to increased dependence on fossil fuels. This laid the foundation for nuclear power, though initially for military use, it is now used in most of the areas. As per the recent market studies, 15.7% of the global electricity is from nuclear power generation. The big eight countries have a clearly defined policy and roadmap for the production and consumption of nuclear power. The other countries too have invested substantially in the research and commercial production of nuclear power plants. The setbacks that the industry has seen in the last two decades for various reasons (environmental, disasters) are slowly being removed and nuclear power is once again in the spear head. The reason for the renewed interest is that the large nuclear powers such as the United States, France and Japan are looking at ways to improve the production of nuclear energy due to various economic, strategic and environmental reasons. The second reason is the emerging countries such as India, china etc are making great progress in the field of nuclear energy and China especially is constructing 22 new reactors. Emerging countries are investing in nuclear plants mainly because nuclear power is considered to be cheap, efficient and most importantly clean. (THE WORLD NUCLEAR INDUSTRY STATUS REPORT 2010–2011, M Schneider, A Froggatt & S Thomas ) 1
  3. 3. Because of the recent set back and disaster at Fukushima the following aspects are beingconsidered by all the nuclear energy companies.  The nuclear reactors are being reviewed for safety considerations in many of the countries.  Some of the older reactors are being shut down for example in Germany  Governments are giving limited or no lifetime extensions for the aging reactors.  Some of the governments have suspended the approvals for building new plants.  Reactors currently under construction in zones which are earthquake prone are being reviewed.  The safety regulations are being tightened for the nuclear plants which in turn will mean increased costs. This will lead to nuclear power becoming higher priced than in the past. 2
  4. 4. About DTE Energy DTE Energy Co. is a diversified energy company with focus on the development and management of energy related businesses and services across the country. It has Detroit Edison and MichCon as the operating subsidiaries. The company provides electric and gas services for residential, business and industrial customer. The different business units of DTE Energy are (DTE Energy Annual Report, 2011): Detroit Edison is an electric utility which caters to the electricity needs of customers in Southeastern Michigan. This utility operates nine fossil fuel plants, and two nuclear power plants. The company is also into hydroelectricity. MichCon is a leading natural gas utility and is engaged in the purchase, storage, transmission, distribution and sale of natural gas in Michigan. It also uses its pipeline to link customers to other energy sources in Texas, Oklahoma, Lousiana, Canada and Gulf of Mexico. Gas Storage and Pipelines owns partnership interests in two interstate pipelines and two natural gas storage fields. Unconventional Gas Production comes from drilling in shale and coal seams. DTE Energy produces unconventional gas in Texas Barnett Shale. Power and Industrial Projects is comprised primarily of projects that deliver energy products and services to industrial, commercial and institutional customers; provide coal transportation and marketing; and sell electricity from biomass-fired energy projects. 3
  5. 5. Energy trading is a strong marketer/trader of both physical and financial power and naturalgas.DTE Biomass Energy provides solutions to landfill owners and operations across thecountry with emphasis on renewable energy.DTE Coal Services provides coal sourcing, marketing, risk management, rail management,trading services to coal producers, electric utilities, steel companies etc. The coal istransported to third parties through rail and aids the power plants in reducing the cost offuel.DTE Energy Services develops, acquires, builds, owns and operates energy projects. Itprovides integrated services so as to deliver focused solutions benefiting its businesspartners.DTE Energy Trading is into buying and selling power and natural gas in the commoditiesmarket along with providing energy sourcing and risk management solutions to wholesalecustomers.DTE Energy Ventures provides venture capital investment services for new energytechnologies and is a part owner of Plug Power Inc.DTE Gas Resources, DTE Pipeline Co and Midwest Energy Resources Co. are the otherunits of DTE Energy Corporation. 4
  6. 6. PESTEL for Global Nuclear Energy Industry and DTE ENERGY The different political scenario, economic situation, social, technological, environmental and legal issues discussed here effect DTE Energy in their initiatives as an US based company. (THE WORLD NUCLEAR INDUSTRY STATUS REPORT 2010–2011, M Schneider, A Froggatt & S Thomas) When analyzing the Political factors influencing the global nuclear energy industry, it is important to remember from the beginning the Republican Party was pro- nuclear and the Democratic Party was anti –nuclear. The United States governmental policy which depends primarily on the two year Congressional term has not been able to provide the consistent direction for the industry which has a plant life and operating cycles to the tune of 60 years. This makes the decision making difficult in terms of developments in the industry because long term planning and technological developments without neutral policy makes it risky. 5
  7. 7. Similarly the different taxes in place such as the National Waste Policy Act fees, CarbonTax etc effect the growth of the industry. The commercial nuclear power plants need to payUSD 1.00 for every MW generated which amounts to almost USD 30.00 billion revenuefor the US government. This proves to be a burden for the plants in operation as the totalamount to be paid can amount to millions of dollars for the plants. Many plants are in theprocess of suing the DOE as this fund collected has not been used for providing a nationalwaste repository as promised. The proposed Carbon policy which requires industries whichcontribute to the atmospheric carbon emissions tax can lead to a significant equivalence fornuclear sources as against the carbon based sources of electricity. The reason many of thecompanies in the nuclear industry are not being supportive about this move as most of them 6
  8. 8. are also into other areas of energy production. The Price-Anderson Nuclear LiabilityInsurance policy created in 1957 has been consistently supported by the government. Thisis more than a subsidy and till date about USD 151 million has been paid as claims till date.There are different agencies which are affecting DTE Energy in particular and the NuclearEnergy industry in general in the country. The first of them is the Department of Energy(DOE) which manages the national nuclear lab for military purposes. DOE provides partfunds for research purposes even for the commercial sector. But these funds are not on acontinuous basis and hence do not support the industries long term needs. From 2005, DOEhad been offering loan guarantees to the nuclear industry. The nuclear loan guarantees needthe recipient to make a down payment to the government for security against risk. 7
  9. 9. The next organization to consider is the Nuclear Regulatory Commission. The NRC was anon political organization till recent times. The chairman and the commissioners are chosenso as to keep the politics away from the policies. But currently there has been a change inthis with the current chairman having a political connection with the President Obama andthe Senator of Nevada. The current chairman, Dr. Jaczko was the person who influencedthe review of Yucca Mountain. He was in favor of the Fukishima implementation withinfive years but was voted against by the rest of the commissioners.Detroit Edison has filed a Combined License Application with NRC about 5 years back.This plant will be using the proposed the General Electric-Hitachi Economic SimplifiedBoiling Water Reactor (ESBWR) technology and would be located at Fermi 2 nuclearplant. The licensing and construction of the new nuclear power plant will take about 11years to complete.The International Atomic Energy Agency (IAEA) is the international regulatory agencywith power to control the nuclear energy industry. But this is not the complete situation asnone of the countries would accept succumbing to an external authority. The countrieswhich are emphasizing on the commercial production of nuclear power will be morewilling to have IAEA as a regulatory authority.The international treaties and regulations too have a major impact and influence on thenuclear energy industry. The first of them is the non-proliferation treaty that has beenframed so as to ensure that countries do not invest in nuclear plants weapons. But the treatymeant that the countries which had nuclear weapons could retain the program whereas 8
  10. 10. those countries which did not have agreed to not build them. Some key countries like India,Israel, Pakistan, North Korea, Taiwan did not accept the treaty.Nuclear energy will be a key part of any country’s energy portfolio. And many of theemerging countries have made tremendous progress in their nuclear energy programs. IfUnited States chooses not to continue with the investments in this industry for developmentof new technologies, new reactors, etc then it is sure to lose its market leadership in theworld. The nuclear energy has tremendous potential for peaceful use in various walks oflife and hence ideally it is important to leverage the leadership for the benefit of the world.Looking at the economic factors affecting the nuclear energy industry one should evaluatethe impact of these factors for both the current and the future developments. The first aspectto consider is the interest rates. The Federal Reserve has taken a decision to have lowinterest rates. But this is being opposed so as to downgrade the US debt situation. The keyimpact of the interest rates in the current nuclear plants is on the cost of fuel cycle. Lowinterests mean that the uranium purchased and used in the reactor in the future would be ofless cost. The value of time, in case of high interest rates leads utilities to delay thepurchase cycle and postpone the delivery till the last so as to avoid paying interest. The fuelpurchase is affected mostly by the Federal Reserve interest rate in comparison with thegovernment bond rating.In case of new plants, the lower interest rates are even more beneficial. A new reactorwould take about 10 years so as to start operations. Hence the interest rate has great impact 9
  11. 11. on the cost being shelled for the project. This is the key reason for the need of loanguarantees by the nuclear companies.Another economic factor to consider is the demand for electricity. This demand in turnaffects the economic growth. In the past few years for various reasons the growth indemand for electricity has not been that high. This means that the current plants woulddelay the upgrade plans for the plants for enhancing productivity. Similarly in case of thenew plants to be established, because of the slow growth in demand companies will not bemaking too much investment to construct new nuclear plants. This is because the newplants require significant investment and hence the demand should be high. In the South 10
  12. 12. East part of the United States one can see new investments coming up, this is because thedemand has been steady in this region.Inflation does not affect the nuclear industry much. This is because though inflation canaffect the amount to be paid in terms of raw material costs and construction costs, in case ofan existing plant, the key costs for energy production are the fuel and the operation costs.Uranium is not affected much due to inflation and the operation and maintenance costsmight vary only in terms of the labour costs. But in case of new plants this will not be thecase as they will be more costly because of the rising costs of raw materials due to inflation.If the US dollar is weak as was the case recently this would in turn increase the costs of thematerials that need to be imported. United States does have significant reserves of Uraniumbut mostly it is imported from other countries. But as the cost of fuel is not too high, hencethe fractional changes do not much affect the total costs. Hence as currently the US dollaris not doing that well and the economic growth is just on the recovery path, many utilitiesare vary of making investments in this area. This situation will change once the economywill be on the path towards recovery. 11
  13. 13. Looking at the social factors affecting the nuclear energy industry, the first aspect toconsider is the demographics. Most of the baby boomers are now in the verge of retirementand this fact impacts many of the industries in the country thus in turn affecting theeconomy. The nuclear energy career was considered by many in the last two decades to bea bad choice; many from these baby boomers are not part of the working personnel in thisindustry. But this has changed enormously in the last five years with many being interestedin nuclear energy. The reasons for this can be the environmental needs, the reducing oilreserves, and the green movement.Because of these reasons the demographics of the nuclear energy industry is a little bitskewed in the sense that most of the workers belong to the above 50s age bracket. In fact inmost cases the companies were seen rehiring people as getting trained resources becamedifficult. In general the employee age demographics should show a bell curve where manyof the employees should be in the age group of 40s, but in case of the nuclear industry it isnot so. With the current enhancedinterest in the nuclear powercompanies are once again hiringaggressively and the neweremployees come under the age groupof less than 30 years. This bi modalage distribution will have significantimpact on the knowledge transition,employee motivation, leadership and 12
  14. 14. even innovation. (World Nuclear Industry, Status Report, Antony Froggatt & Peer de Rijk,2001)Coming to the education, the workforce in the nuclear industry belongs to the highlyeducated group with many having advanced technical degrees. Now many universities areinvesting a lot of money in their nuclear engineering units so as to have the right labfacilities and research units. The operational staff in the nuclear industry have moretechnical and on the job training than schooling.The environmental factors influencing the nuclear industry are many and quite powerfultoo. The Anti- Nuclear Movement has been very strong and has many organizations withthe aim of reducing the proliferation of nuclear plants irrespective of the usage. TheFriends of the Earth is one such organization founded in 1969 which advocatesenvironmentalism and human rights as their core focus. They campaign aggressivelyagainst nuclear power as they consider that it will lead to global warming. Greenpeace isanother organization founded with the sole aim of protesting against nuclear weaponstesting. They try to act as change agents through peaceful means and are in the forefront ofenergy revolution to protect the planet. The Fukishima disaster has made DTE Energy tooto revisit the safety of the Fermi Nuclear Plant and they have given a press release statingthe safety of the plant. In fact the plant has proved to be safe and could even with stand therecent tornados. 13
  15. 15. Porter’s Five Forces Model Threat of New Entrants: In the nuclear energy industry the barriers of entry are high; hence there is not much intensity in the competition as against other industries with low barriers of entry. Hence DTE Energy being in the high barrier sector does not see immediate threats in terms of new entrants. Because of this there would not be many changes in the price or the utility quality. More over to start a nuclear plant it requires huge capital investments and strong government regulations Power of Suppliers: In terms of suppliers there are very few suppliers in the nuclear energy industry and there are not many substitutes for the provision. Another aspect is that the nuclear energy providers are a tight group which is governed by the regulatory authorities. Power of Buyers – This industry is heavily influenced by the key players and the environmentalists. Hence the developments or initiatives have to be started with care and caution so as to ensure that the money and time invested are not wasted as in the case of some of the nuclear plants proposed which have seen tremendous social and organizational opposition. Substitute Products – New or emerging substitutes for energy product s can be one factor which can be considered as a threat for the industry. But nuclear energy is seen as a green and clean energy source better than the other sources of energy. Rivalry and Intensity – Rivalry between the different companies in the nuclear energy segment is not too high hence this will not influence the pricing. 14
  16. 16. SWOT ANALYSIS OF DTE ENERGY The key strengths of DTE Energy are as given below:  Good position in the market irrespective of the product category. This enhances the company’s brand image and puts the company in a substantially stronger position.  DTE Energy distributes its products across the globe with a very well developed network of dealers and distributors. It has its operations in Australia, New Zealand, Austria, Finland, Germany, Netherlands, France, Ireland, Spain, United Kingdom, Sweden, and North America i.e., United States and Canada. The United States accounts for the company’s largest market  Diversified business model ensuring the financial health and growth of the company while reducing overall risk  Focus on innovation. The company invests substantially on research and development and believes in continuous improvement and innovation. Efforts are directed at developing new products and processes so as to improve the capabilities of existing products  Healthy profits on a continuous basis.  The company collaborates with educational and research institutions in North America, China and Mexico. 15
  17. 17.  Employee friendly company with benefits to employees.The key weaknesses of DTE Energy are as given below:  The employee productivity at DTE Energy is considered to be lower than the other companies in the industry  The company’s per employee revenue is much lower than that of its immediate competitors such as Textron, Boeing and General Dynamics.  The employee benefit obligations have been overfunded to the extent of many million US dollars  In the year 2010, the company has tried to cut down its costs by firing as many as 550 employees and 370 blue collar employees have been laid off earlier to that.  The key market revenue is showing steady decline.The opportunities available for DTE Energy are:  Increasing electricity demand (including energy efficiency)  Replacement of ageing power plants  Nuclear power deployment worldwide  New applications of nuclear technology worldwide  Level playing field policies (funding and subsidies versus taxation) 16
  18. 18.  Interest of young generations in nuclear: Education and training - up coming engineers and tech staff  Increase in fossil fuel prices The threats for DTE Energy are:  The competition can affect the revenues and margins of the company so as to reduce the profits.  The competition can force the company to reduce prices thus reducing the overall profits  The tightening of credit in financial markets adversely affects the ability of the company’s customers to obtain financing for significant purchases and operations  The supplier base might be affected and there can be an increase in the potential for one or more of its suppliers to experience financial distress or bankruptcyConclusion Considering the PESTEL analysis, Porter’s Five Forces Model and the SWOT analysis, one can conclude that DTE Energy is well placed in the nuclear energy industry. It has made the right investments in this field to leverage on the increasing demand for energy and the changing economic conditions. More over because of its investments and tie ups with the universities and other nuclear research facilities they are a forward looking company with 17
  19. 19. continuous technology advancements. Their current nuclear energy plant Fermi 2 islicensed to operate till 2025 and they are planning on getting an extension even up to 2045which would help them to cut down the increasing raw material costs for new plantconstruction. Their people friendly policies and environmental responsibility make it one ofthe socially responsible companies sought after. 18
  20. 20. References 1. DTE ENERGY website: 2. Annual report of DTE Energy: 0vk.htm 3. Industry Analysis, Scully Capital, 2002 4. World Nuclear Industry, Status Report, Antony Froggatt & Peer de Rijk, 2001 5. SWOT analysis Part 2 – O&T, European Nuclear Energy Forum, Bratislava – Prague, May 2011 6. THE WORLD NUCLEAR INDUSTRY STATUS REPORT 2010–2011, Mycle Schneider, Antony Froggatt,& Steve Thomas 7. Nuclear Energy in Michigan, August 2011 19