FRENCH CIVILIAN NUCLEAR: CURRENT AMBITIONS AND FUTURE

C O N F I D E N T I A L SECTION 01 OF 04 PARIS 001980 SIPDIS E.O. 19528: DECL: 10/28/18 TAGS: ENRG ETRD PREL FR GM SUBJECT: FRENCH CIVILIAN NUCLEAR: CURRENT AMBITIONS AND FUTURE BOTTLENECKS CLASSIFIED BY ECON COUNSELOR STUART DWYER FOR REASONS 1.4 (B) AND (D) ¶1. (SBU) Summary. In 10/16-17 meetings French officials and private sector representatives told Special Representative Frank Mermoud that France wants its national energy industrial groups to be leaders in the "nuclear renaissance". Expansion is being driven by energy security and climate change concerns, as well as the rising energy demands of emergent and populous countries. The French anticipate bottlenecks and rising costs in labor, forging capacity, decommissioning, and waste management. The GOF is focused on the long-term, and says it is working to creating an environment in which new players will adhere to global energy practices that are safe, secure, verifiable and environmentally sound. France's industrial groups are forming strategic alliances with established nuclear partners. In the United States, EDF says the lack of acceptance of French engineering for both new and existing nuclear plants is hurting its relations with MidAmerica and Constellation Energy. End summary. ¶2. (SBU) On October 16-17, State Department Special Representative for Commercial and Business Affairs J. Frank Mermoud, met with the following officials in the French civilian nuclear sector who gave an overview of current policies, activities, and future challenges: -- Alain Bontemps, Secretary General of the French Nuclear Industry Association (GIIN). -- Thomas Branche, Head of Public Policy and Oversight at the Directorate General for Energy and Climate, Sub-Directorate for Nuclear Industry, Ministry of Ecology, Sustainable Development and Country Planning (MEEDDAT) and Olivier Aubourg, Head of External Affairs for the same sub-directorate. -- Matthieu Louvot, Advisor to the President on Industry, Energy, and Transport. -- Francois Scheer, Advisor to the CEO of Areva. -- Jean-Pierre Benque, Senior Executive VP for Development for North America, EDF INDUSTRY STRENGTHS AND CHALLENGES - - - - - - - - - - - - - - - - - ¶3. (SBU) GIIN, MEEDDAT, AREVA and EDF outlined for Mermoud what they see as the French civil nuclear industry's competitive advantages: -- Long-term capability. France has been consistently active in nuclear power reactor commissioning from 1977 to 2001. -- Experience in different technologies. French nuclear industry works with different reactor design: Pressurized Water Reactor, Boiling Water Reactor, Pressurized Heavy Water Reactor, Light Water Pressurized Reactor (VVER). -- Strong global experience. French firms operate on several continents: China, Japan, India, South Africa, Finland, Canada, Russia, South Korea, and the U.S. -- Adaptive to different regulatory and qualification standards. French nuclear industry works in countries which reprocess nuclear fuel and those that don't. -- Adaptive to different forms of local cooperation. Whether it is through commercial representation or JVs with technology transfer and local procurement, French industry's international strategy is to offer a range of partnership forms. ¶3. (SBU) French representatives noted the following challenges in the sector: -- Decommissioning costs. A large number of early generation nuclear plants will soon reach the end of their active lives. Decommissioning is an expensive and time-consuming process which must occur in phases. The long time frame makes cost estimates difficult and cost overruns common. EDF is undertaking life extension through partial investments to upgrade plants, renew licenses and update certifications. They expect to delay the full decommissioning process by 10 years. -- Labor bottleneck. Demographics and labor trends will cause an acute shortage in the industry, notably in the United States, when 35-45 year old engineers retire. The current young workforce also needs retraining. In response to the human resources challenge, aggressive recruitment policies are required now to lure future college graduates back to the industry. In 2008, Areva's recruitment schedule is 1,000 employees per month worldwide. -- Rising energy demands of emergent and populous nations. In the next 10 years GIIN estimates China will increase its energy demand by 10 percent and India by 9 percent. Pressure to increase nuclear generation will stress the "unavoidable construction gap" resulting from concurrent reactor decommissioning, and next generation reactor construction. There needs to be a global plan to cope with the PARIS 00001980 002 OF 004 transition in replacing the nuclear fleet. -- Localization. The civil nuclear revival is attracting countries with different capacities and economic, commercial, and labor policies. Countries favoring local labor and procurement must adhere to international nuclear energy practices regarding building parts, inspection procedures and the protection of materials from criminals or terrorists. -- Waste management. France has to store approximately 10 percent of its nuclear waste, given its whole-cycle approach. National law prevents it from managing another country's waste. The risk of waste mismanagement concerns the public and an accident anywhere could impact the global industry environment. The process of integrating new countries into the civilian nuclear community must include effective safeguards and verification for waste management. -- Forging capacity. Steel forge production is concentrated in Japan. Companies that won't need the central reactor-vessel part for years are placing orders now and making large down payments, but there won't be enough production to meet building plans for new reactors. (Note: Areva announced in July a new investment program in its plant Le Creusot to expand its capacity in ingot production. By 2010, Areva expects to locally produce 100 percent of the components required to build an EPR. End note.) -- Uranium stocks. Balancing uranium demand and supply is a growing European concern that falls under the authority of the European Atomic Energy Community (Euratom) Supply Agency. The Agency must ensure equal access to all forms of uranium as a strategic resource and it has an exclusive right to conclude supply contracts. MEEDDAT officials said besides management of limited stockpiles, the chief fear is that uranium falls into the hands of criminals or terrorists. EDF stocks are reportedly secure until 2020, but the group is planning for the longer term. SARKOZY'S STRATEGIC VISION - - - - - - - - - - - - - - ¶4. (SBU) Presidential Advisor for Energy Louvot told Mermoud that President Sarkozy's civilian nuclear plans are part of France's broader long-term development and cooperation policies. Sarkozy will be aggressive in establishing a secure international environment for civilian nuclear development that includes training for personnel, adequate legal and regulatory controls, transparency, and compliance with international safety standards. ¶5. (C) Created in April 2008, the President's Council on Nuclear Power includes the Prime Minister, the MEEDDAT, Foreign Affairs, Economy, Research, Defense, and Budget Ministers, the Chief of the Armed Forces, the Secretary General of the Armed Forces and the Administrator of the Commission on Atomic Energy. It decides which countries are acceptable partners for the French nuclear industry. In simple terms, Louvot said the Council's role is to ensure French civilian nuclear activity is not associated with another Chernobyl. ¶6. (C) Although the Council's selection criteria are classified, the MEEDAT's Branche noted that commercial interests are key, while safety and infrastructure standards and personnel training opportunities are equally crucial factors. Elysee Advisor Louvot said France currently encourages strategic partnerships with countries with an established nuclear industry, citing China, the UK, and the United States. In principle, it will not refuse to work with Middle Eastern/North African countries, but they must follow global nuclear energy practices. Countries which cross nuclear military and civilian lines are not eligible. Louvot and MEEDDAT noted ongoing bilateral discussions with Morocco, Jordan, and the UAE. Louvot said the dialogue with Algeria and Egypt is "more complex," without providing additional detail. FRENCH INTERNATIONAL NUCLEAR AGENCY -- - - - - - - - - - - - - - - - - ¶7. (SBU) Once the Elysee country list and industry parameters are met, the choice on a strategic partnership becomes a commercial one and falls to EDF or Areva. If one of the companies decides to engage, the new French International Nuclear Agency (AFNI) steps in as a fee-based consultancy service to advise strategic partners on legislative, safety, security, and workforce matters. AFNI's clientele will include emergent nations wishing to enter into the civilian nuclear energy field, those who have stopped and want to start up again, or rich countries with a political desire for energy diversification (UAE). Throughout the process, AFNI will promote partnerships with French service providers. AFNI is led by an inter-ministerial group under the leadership of MEEDDAT's General Director of Energy and Climate Change. AREVA GLOBAL STRATEGY - - - - - - - - - - - PARIS 00001980 003 OF 004 ¶8. (U) Areva's international advisor Francois Scheer told Mermoud that France's long standing experience and whole-cycle non-proliferation approach makes it a unique leader. Areva's overall strategy is to obtain 30 percent of new nuclear generating capacity worldwide in the next 30 years. Eighty percent of its activities focus on countries with an existing nuclear industry. In a country without a nuclear industry, Areva's approach, which supports long-term non-proliferation objectives, requires feasibility studies that can take up to 10 years, establishment of appropriate legal and regulatory institutions (minimum 2-3 years),seismic studies, compliance with IAEA standards, and political stability. Broadly speaking, the earliest a new generation reactor could be built in a new partner country lacking civilian nuclear experience is 2020 (versus seven years for construction in countries with a nuclear industry). ¶9. (C) When questioned on media speculation about the possible recapitalization of Areva, Scheer explained it would be necessary to cover current investments in human capital, maintain a growth rate of 10 percent per annum and to set aside money for future decommissioning costs and industrial capacity expansion. CEO Anne Lauvergeon wants to maintain Areva's integrated nuclear focus. Lauvergeon approaches the recapitalization option from an "industrial logic" that makes potential stakeholders such as Bouygues or Alstom unattractive. Areva does not want to impose Alstom turbines on its clients. While the Minister of Finance previously was against recapitalization, GOF views are evolving and it is now more open to the option. Scheer concluded that ultimately it will be President Sarkozy who decides how and when recapitalization occurs. ¶10. (C) The notion that Areva, EDF, Total, Suez-Gaz are seen as French national champions may not always sit well with potential partners, Scheer said, and these groups need to become European champions based on commercial criteria. Areva is especially active in creating international strategic alliances via joint ventures. A case in point is its partnership with Siemens, which is also one of its most formidable competitors. AREVA AND THE UNITED STATES - - - - - - - - - - - - - - ¶11. (SBU) Scheer confirmed the importance of the U.S. market for Areva, which started 30 years ago when it cloned Westinghouse reactors. Now the North American market represents 15-17 percent of total sales (Asia 19 percent, Europe/CIS 56 percent, Africa/Middle East 8 percent). Areva uses third generation recycling (COEX) in the U.S. which eliminates the flow of pure plutonium, a response to American nuclear non-proliferation concerns. Besides the Areva-Bechtel consortium, the JV between Areva and Urenco, Enrichment Technology Company (ETC),provides uranium enrichment centrifuge technology. Anticipating a rise in American demand for enriched uranium, ETC will build a second uranium enrichment plant in the U.S., which will allow for closure of the USEC plant in Paducah, KY. Areva announced October 23 that it joined forces with Northrop Grumman to build a plant in Newport News, VA to manufacture heavy components, including steel forges, for the U.S. EPR generation III reactor. ¶12. (SBU) Scheer underscored the positive impact renewed U.S. interest in the civilian nuclear industry will have on the global market. France is very happy CH2M Hill is taking the lead in the UAE, where Areva joined with Total and Suez in a nuclear power plant project and is offering a range of lifecycle services. The bottom line, Scheer said, is that the market is global and there is enough room for all players: Areva, GE, Westinghouse and the Russians. OTHER AREVA COMPETITORS AND STRATEGIC PARTNERS - - - - - - - - - - - - - - - - - - - - - - - - ¶13. (SBU) China and India are Areva's major recent strategic partners. Areva will build two EPRs in China and provide the materials and fuel to operate them. China negotiated for strong technology transfer, whereas India prefers little technology transfer. In September France and India signed a cooperation agreement on electrical transmission and distribution production. A strategic partnership was established between Areva's non-nuclear Indian subsidiary Areva T and D India and GE consumer and Industrial India. Areva has been talking with Indian authorities (along with Russian and American competitors) to sell EPRS to India. Scheer believes the recent agreement facilitating nuclear cooperation between the United States and India is helping pave the way for nuclear expansion. ¶14. (C) Asked about opportunities in the German market, Scheer, a former French Ambassador to Germany, explained that France can't push too hard for change in public opinion, as it would further complicate the delicate ongoing dialogue with Berlin. The difficult Franco-German dialogue on civilian nuclear energy is one aspect of the intricate move to forge a common European energy policy. PARIS 00001980 004 OF 004 ¶15. (C) Scheer said France wants to convince its European partners that Russia is part of the European market and the Europeans, including France, need to collaborate with it. The Russians should be seen as serious competitors with a strong industrial capacity offering relatively low costs, Scheer noted. EDF AND THE U.S. - - - - - - - - ¶16. (SBU) Incoming Senior Executive Vice President Development for North America, Jean-Pierre Benque, told Mermoud he sees a bright future for EDF in the U.S. and in cutting CO2 emissions. Standardization of technologies is crucial for the future of the civilian nuclear industry, Benque said. The purpose of EDF's JV with Constellation Energy, UniStar, is to provide support for the expansion of the clean, safe, and sustainable nuclear energy in the U.S. The creation of UniStar was important for EDF as a means of covering the transition period between existing nuclear reactors and new reactors. EDF is exploring life expansion options for operations and building new nuclear energy plants. "We need to harmonize the learning curves", emphasized Benque. CONSTELLATION IS OFF THE TABLE - - - - - - - - - - - - - - - - ¶17. (C) Benque said he believes EDF's offer for Constellation Energy was rebuffed because the United States does not want EDF involved in existing nuclear plants. EDF is pleased with Constellation as a partner, but its takeover offer has become political. MidAmerican can bring money, skill and operations, but its engineering is outdated. EDF has Areva technology and planned to deploy Areva EPR reactors in North America using new AP1000 technology. Benque said EDF would appreciate advice in working with Constellation. ¶18. (C) With respect to the U.S. market more generally, limiting work to new nuclear is not enough. There needs to be a balance between servicing existing operations and building new nuclear plants. Benque said his impression is that French nuclear engineering is not welcome in the United States. EDF is favorable to a Franco-American partnership with MidAmerica Energy, but the package should be on both new and existing nuclear plants. EDF is not looking to be the leader in the nuclear field in the U.S., as it understands the sector is sensitive and touches on national security. Benque suggested that EDF is open to discussions on working with Westinghouse and using its technology, particularly if that moves EDF closer to formalizing an agreement with MidAmerica. (Note: EDF is Constellation's largest shareholder with a 9.5 percent stake. Constellation and EDF's JV Unistar will build four next generation nuclear reactors in the United States.) Mermoud suggested to EDF, Areva and MEEDDAT contacts that reciprocity for some projects would be a good policy to pursue. French companies could work more with U.S. companies in France, but also in third country markets. ¶19. (U) This cable has been cleared by J. Frank Mermoud. STAPLETON