Nuclear Mega Project Risk Analysis Model - Energy.gov

Nuclear Mega ProjectRisk Analysis ModelOak Ridge TennesseeNovember 5, 2009

Content–Objectives–Risk Assessment Approach–Nuclear Risk Assessment Model Overview–Lessons Learned2

Objectives Present a new approach to analyzing risks of large and complex projects that maybe directly applied to DOE Discuss an example of how this methodology was recently used in a nuclear project,and how this can fit DOE’s unique challenges Present the benefits of using a risk assessment for protecting the government’sinterests and reduce risk exposure3

Content–Objectives–Risk Assessment Approach–Nuclear Risk Assessment Model Overview–Lessons Learned4

Approach to risk assessment follows a logical progression ofrisk identification, impact, and mitigation ure relevantrisksKey Tasks Develop views onrisk causationRiskAnalysisRiskMitigationQuantify impact ofriskMinimize riskimpact on projectUpdate outputs asproject evolves Analyze Develop view of Developunderlying riskcausationsoverall projectimpacts Identify all “rootcauses” of riskandcorrespondingcost andschedule impacts Map risks toproject tasks,escalation rates,and/or costelementsProductsPreliminary RiskRegisterLife CycleMaintenancecustomized reports Develop and Assess root Identify risks withcause likelihood Estimateindividual costand schedule riskimpactsmost significantimpact on projectcost and schedule Update Model and Developmitigationstrategies Run pre-mitigation MonteCarlo simulationDistributions ofCost and PCD5updatemaintenanceprocessinputs as events,both internal andexternal to project,arise Run post-mitigation MonteCarlo simulationRisk MitigationStrategiesRisk AnalysisModel

The core of the risk assessment approach is the Nuclear RiskAssessment (NRA) ModelImpact AreaFocus of NuclearRisk AssessmentModelReplacementPowerSchedule Lost marginopportunity Cost impact of schedule delay Total project cost (overnight; escalation;impact of delay)Project Cost Total cost of financing plant construction(debt and equity)Financing CostRisk Areas Levelized cost of energy for nuclear versusalternative baseload technologiesRelative EconomicsSeparate, standalone assessment Ability to fully recover project costsCost Recovery6

The NRA Model captures the complex inter-relationshipsamong risks and their ultimate impact on schedule and costsIllustrative Risk AlignmentCost ImpactsSchedule stEstimate By definition, each risk has three t andScheduleIntegration Timing of risk occurrence is addressedthrough detailed WBS and schedulealignmentScheduleEstimate–A root cause–A probability (or likelihood) of the causegiving rise to a specific impact (or rangeof impacts)–A potential, future impact, orconsequence There are two distinct types of impactsmodeled in the eworkPerformance7–Risks having less than a 100% chanceof occurring–Uncertainties around quantity and priceassumptions are not associated with aprobability and have a continuousimpact distribution for all iterations

The risk model, and accompanying analysis, focuses onquantifying risk and uncertainty - and impacts of mitigationPurpose of the Mitigation ViewFrequencyPre-Mitigation Impact Distribution Understand the range of possiblemitigating actions – by key risk element Determine the individual and collectiveimpacts of mitigating actionsTotal Project Cost Define appropriate scenarios andcombinations of mitigating actionsFrequencyPost-Mitigation Impact DistributionMitigationImpact Provide for an ongoing framework andcapability to assess risk mitigationTotal Project Cost8

A range of potential risk prevention and mitigation activitiesare considered for individual risksRisk Prevention and Mitigation CategoriesDescription Contract Ts & Cs: Contractual terms that provide theappropriate incentives / penalties for contractorperformance, allocate risks in the most effective manner,and allow owners to have the necessary project oversightContractTs & CsAdvancedPlanningImpactMitigationSupply ment Advanced Planning: Detailed planning activities aimed atidentifying and resolving issues that could impact scheduleand costs (e.g., extensive construction planning) Owner Project Management: Ensuring availability of deepproject management capabilities and performance metricsthat allow the owner to provide active oversight of projectactivities Workforce Strategy: Activities which allow thedevelopment and retention of the needed pool of skilledresources (technical and craft) Supply Chain Management: Direct involvement inselecting, monitoring, and evaluating supplier performance Impact Mitigation: Activities that may lessen the severity ofthe impact in the event a risk does occur9

The model was developed to reflect a current view of potentialoutcomes and be updated as events evolveDecision and EventOutcomesProject Maturity CurveCurrentViewExpectedProject CostProgressRiskCategoriesTimen 1Timen 2Timen ProjectCompletion xxPolitical OEM / cingMarket20yy Initial views may be based on a preliminaryestimate reflecting a low degree of ying logic for planning and executionwould reflect an initial perspective on scope,roles and performance levels–Cost and schedule elements individuallysubject to changes in unit and factor costs Nature of DOE EM projects requires a model thatcan be updated effectvely10

Content–Objectives–Risk Assessment Approach–Nuclear Risk Assessment Model Overview–Lessons Learned11

The core of the risk model is a cash flow projection that usesMonte Carlo simulation to integrate cost and schedule risksSimplified Model ArchitectureRisk Register Root cause Likelihood of occurrence Impact type (cost, schedule,relative economics, and/orcost recovery) WBS element, cost element,and/or escalation rateimpacted Impact range (acrosstriangular or normaldistribution)Project Schedule1 Task start date Task duration - dynamicallylinked to schedule risks Task dependencies (drivingcritical path)Task start date, duration,and dependencies interactto determine end datesand critical pathCost EstimateThe risk register contains risksassociated with nuclear plantconstruction and defines how theyimpact the project cost and/orscheduleLikelihood of occurrence andimpact data are included fromboth a pre- and post-mitigationperspective Vendor & owner costsdistributed across scheduletasks and broken down by costfactor Costs adjustable foruncertainty and cost risksReal dollar cost estimatesreferred to as ‘cost basis’(by schedule task)1: Excel-based12Cash Flow Projection By schedule task and year Dynamic to capture quantityestimate uncertainty and costand schedule risks Reports total nominal projectcosts through completiondate, financing costs, andlost margin opportunity /replacement powerMonte Carlo is runthrough cash flowprojection withsimultaneousadjustments to taskdurations, cost bases,and escalation rates

The effectiveness of the NRA Model relies on the underlyinganalytics as well as customized, dynamic featuresKey Model Characteristics Dynamic, risk-adjustableschedule Dynamic, risk-adjustable cashflow projection linked toproject schedule Cost breakdown into costfactors with distinct, riskadjustable escalation rates Task specific run rates tosimulate cost of scheduleextension Cost factor specific spendcurves to simulate distributionof cost over years Uncertainty ranges built intocost estimates and combinedwith risk in Monte Carlosimulation The cost impact assessment is based on a dynamic nominal cashflow projection by schedule task and across the construction period–Baseline cost estimates are adjusted for risk via overnight costs,escalation factors, and schedule extensions–Baseline schedule estimates are adjusted for risk via durationextensions for individual schedule tasks–Resulting project completion date depends on aggregation ofschedule task start dates, durations, and inter-dependencies–Costs by schedule task are summed for each year to yield totalproject costs The combined impact of the risk factors is assessed through aMonte Carlo simulation that generates a distribution of commercialoperation dates, project costs, and lost margin opportunity–The impact of risks on financing costs is modeled throughalternative scenarios Significance of individual risks can be measured by a covarianceanalysis and by isolating risks to assess discrete impact13

The Project Risk Register documents specific attributes foreach risk, including likelihood and impactRisk Register OverviewAttributesAttributeRisk NameDescriptionRisk CategoriesRegulatory riskFinancial riskPolitical riskMarket riskProject riskTechnology riskA short title for each risk which allows forease of identificationLikelihood of OccurrenceLevelRisk DescriptionA detailed, qualitative description of anevent and consequence'sRisk CategoryPredefined risk categories to group eachrisk by primary driverLikelihood of OccurrenceSchedule Tasks, CostFactors, and Escalation RateImpactedImpactsImpact InterdependenciesProbability associated with this riskoccurringThe activity (or group of activities)associated with the cost or scheduleimpactIncremental cost or schedule impactrelative to baseline across a defineddistribution if risk event occursAND, OR, and AND/OR relationshipbetween impacts for a single root cause(i.e. for covariance)14ProbabilityUncertainty (e.g.,commodity price100%Very Likely95%Likely82.5%Possible50%Unlikely17.5%Very Unlikely5%Impact / DistributionDistributionImpactMost likely, low, and high valuesMean and standard deviationMean and standard deviation

The risk register captures broad details associated with eachrisk (New Nuclear partial register example)No.78Risk FactorName78 Design ChangeDuring COLA7979a EngineeringCompletion79Root CauseDesign changesduring DCD reviewprocessRisk DescriptionIf FOAKE design leads to design changes during the DCD reviewprocess, then rework would result in SER and COL schedule delaysInadequate detaileddesign engineeringIf detailed design engineering completion percentage is less thanneeded for construction, then construction start would be delayedRiskCategoryTechnology361279bFinal design approval Triangular& rule-makingduration36127979cESBWR engineeringcost basis ( MM)Triangular 10 20 303939a DOE 2010ProgramNI / TI EngineeringdurationTriangular34.563939bESBWR engineeringcost basis ( MM)Triangular 48 96 1927575 EPC ContractTerms &ConditionsEPC & ownerdisagreementIf EPC contract terms and conditions can not be agreed in a timelymanner, then project schedule would be delayedProjectPossibleEPC ContractualAgreement durationTriangular36127676 EPC RoleModificationEPC role changeIf GEH role is modified, extending contract negotiation, then projectschedule would be delayedProjectVery UnlikelyEPC ContractualAgreement durationTriangular2362929 DOE LoanDOE loan guarantee If DOE loan guarantee approval process is delayed, then the CPCNGuaranteeapproval delayapproval would be delayed and cost of debt would increaseAproval ProcessPoliticalPossibleObtain approval forguarantee durationTriangular0612If Congress reduces DOE NP2010 Program funding for thedevelopment of the design, then GEH engineering cost wouldincrease to offset the reduced funding15PoliticalPossiblePossibleNI / TI EngineeringdurationDistributionTriangularImpact ValuesMode /High /LowMeanStDev3612TriangularCongress reducesDOE NP2010Program fundingProjectLikelihood ofCost or ScheduleOccurrenceElement ImpactedUnlikelyNI / TI Engineeringduration