Orderbooks and Firm Pricing

Across its history, the United States’ nuclear industry has seen large increases in costs and risks due to on-off projects, bespoke reactor designs, vendor failures, and supply chain shortages. Much of this is caused by a lack of orders. Essentially, there is not enough demand to reduce uncertainty and build a robust ecosystem from which the industry could operate. Failures along a single node have bankrupted utilities and developers alike. The solution is not to build fewer nuclear reactors, but to build many reactors along a structured pathway. Such a pathway is known as an orderbook.

Larger Orders Reduce Costs and Expand the Supply Chain

One-off orders fail to secure firm prices. There is too much uncertainty for the supplier. Therefore, a bid for one pump will have a higher per-pump cost than a bid for ten pumps. With ten pumps, a vendor has a stronger incentive to offer a fixed, lower price.

Why? Volume and certainty transform risk. A vendor facing a one-off, custom job (one pump) has high uncertainty about their true costs (engineering, setup, tooling, labor estimation). A vendor will be risk-averse and want to avoid uncertainty. To protect themselves, they will refuse to take on that risk and prioritize larger orders or long-term customers. Many suppliers will refuse to bid on one-off parts, and others willing to take such a project on will offer a cost-plus contract, where the price is the cost to the supplier to make the part plus a profit margin. This essentially transfers all cost-overrun risk to the buyer (e.g., a utility, state, developer, etc.).

With a ten-pump order, the vendor's uncertainty plummets. The vendor can amortize those same setup costs over ten units; their per-unit cost drops due to economies of scale, and they gain efficiency as they build. The project becomes predictable. Given the lowered risk, they are now willing to offer the buyer certainty through a fixed-price contract.

Ordering many of a product expands the number of vendors willing to bid on a parts order, and the effects of market competition take over. Instead of a few suppliers willing to engage in cost-plus contracts, many suppliers will engage, each hoping to lock in a longer-term contract with assured business. These firms will bid competitively, potentially reducing costs for the developer and purchaser.

Reductions in price and risk due to volume are seen across a variety of industries. If I go to order one custom-made t-shirt, the per-unit cost is very high as the suppliers have to incur the costs of setting up their machines and screen printers for just one shirt. The more shirts that are ordered, the lower the per-unit costs as the marginal cost of producing each additional shirt falls. Ten shirts will be cheaper than one, fifty shirts cheaper than ten, and so on. Ordering just one of something requires the vendor to have a high degree of specialty, and purchasers will pay a premium. This effect only becomes more apparent as the complexity of an item increases.

One-of-a-kind mega projects can benefit too. No two airports are identical. Major components like jetway bridges might be custom-made to fit only one airport. But the airport can standardize and order many of the same design for various components, and take advantage of the reduced risk of cost-overrun.

In the nuclear industry, multiple orders of the same reactor lower regulatory risk, enable learning-by-doing, and unlock economies of scale and economies of multiples, even before cumulative experience fully reduces costs through learning-by-doing. Orderbooks solve cost risk before the learning curve kicks in.

Reducing Project Risk Exposure

Having multiple orders changes the risk for the purchaser. The contract type directly changes the vendor's behavior. With a cost-plus contract, the vendor has a weak incentive to control costs. If they make a mistake or work slowly, the costs get passed along to the purchaser; this is a classic moral hazard. The buyer may have to spend money on monitoring and oversight to protect itself. With a fixed-price contract, the vendor has a powerful incentive to be efficient. Every dollar they save on labor or materials is pure profit. Their incentives are now aligned with the purchaser: get the job done quickly and at or below cost.

Fixed prices systematically limit the portion of the project that is exposed to overrun risk. The more parts and components acquired through fixed-price bids, the less the project as a whole is subject to overruns. If 70% of the components are fixed-priced, then only 30% is exposed to overrun risk. Investors will be on the lookout for ways to reduce risk on their investments, and limiting ballooning costs at the component level is key to reducing risk at the project level.

Orderbooks are not just for the project-level

When purchasers form an orderbook, the demand strengthens the market and allows vendors to justify expanding their supply chains. If a single vendor goes under or fails to meet production, the projects can still go forward, as there will be additional suppliers waiting to fulfill the demand. A strong orderbook would reduce the risk of bankruptcy for the purchasers, increase supply chain robustness, and avoid manufacturing bottlenecks.

Of course, some bottlenecks and limitations on supplier diversity will remain even with an orderbook. There might only be a few or a single supplier capable of making highly specialized parts.

Orderbooks enforce the appropriate structuring of financing and construction. Because the reactors will be standardized across orders, the Engineering, Procurement, and Construction firms can employ repeatable contracts rather than having to fine-tune each new contract. This enables accelerated project delivery and lowers both legal and transaction costs.

Orderbooks are not for single parts in untested reactors. There will be lots of changes between the first reactor and the second, which all but guarantees higher costs. These higher costs will be recovered by enabling cost-reducing innovation in later reactors. A well-designed innovation cycle would look something like this:

• Build small

• Prototype

• Optimize

• Build an orderbook for multiple units

The first piece of the process can take place in the DOE’s pilot program; the program is the ideal environment for optimization and iteration. By the time a reactor reaches the orderbook stage, the core-design (primary elements of a design) should be set, and most major innovations in the design itself will have been made. Smaller innovations will continue to be implemented, especially at the factory level and on-site processes.

Orderbooks reduce risk across a series of projects by leveraging the power of volume. From this vantage, a series of orders solves project risk by reducing the portion of the project exposed to overrun risk. Orderbooks expand the market, both in terms of the number of vendors likely to participate and by attracting new market entrants. This increases the robustness of supply chains; incumbents may seek to add on manufacturing capacity so as not to lose business to other firms, and if a vendor fails to deliver or goes under, other suppliers will fill in the gaps. Through the pursuit of an orderbook, purchasers can reap the benefits of economies of scale and multiples early and attract investors before learning-by-doing materializes.

Risk reduction across a number of fronts, from bankruptcy to supply chains, is achieved by doing more, not less. In many cases, six to ten orders of the same reactor are enough to kickstart this process and secure fixed prices.

Let’s build.