Nuclear materials declared by the U.S. and Russian governments as surplus to defense programs are being converted into fuel for commercial nuclear reactors. Arms reduction initiatives and the end of the Cold War have placed the governments of the United States and Russia in a position to declare portions of their nuclear weapons stockpiles as surplus. The two nations have agreed to store or dispose of their surplus nuclear materials in a safe and secure manner, so that they cannot be used for the proliferation of weapons of mass destruction.
The nuclear materials involved are principally highly enriched uranium (HEU)--containing at least 20 percent 235U, a fissionable uranium isotope--and plutonium. HEU can be "blended down" with uranium that contains low concentrations of 235U to produce low-enriched uranium (LEU) containing up to 5 percent 235U. Plutonium can be blended with uranium oxide to form mixed oxide (MOX) fuel. Both LEU and MOX can be used as fuel in commercial nuclear power reactors. After these fuels have been burned in power reactors, they are discharged as spent fuel, which is highly radioactive and difficult to use for weapons manufacture.
In February 1993, the United States and Russia signed The Agreement between the Government of the United States and the Government of the Russian Federation Concerning the Disposition of Highly Enriched Uranium Extracted from Nuclear Weapons (the Russian HEU Agreement), which provided for the United States to purchase 500 metric tons of Russian HEU over a 20-year period. This "megatons to megawatts" agreement is the world's first program for converting weapons-grade nuclear materials from dismantled nuclear warheads to commercial reactor fuel for the generation of electricity. The United States Enrichment Corporation (USEC), a Government-owned corporation, will pay Russia only for the enrichment services component of the LEU derived from HEU. USEC sells the enrichment services component purchased from Russia in the commercial marketplace. The natural uranium feed component of the LEU can be sold separately by Russia.
On the U.S. side, an announcement by President Clinton in March 1995 declared some 200 metric tons of HEU and plutonium from U.S. defense programs as surplus. Inventories of natural uranium and LEU, already in commercially usable forms, also have been identified as surplus to U.S. defense programs. The commercialization of U.S. surplus defense materials is governed by a variety of laws and quotas, including the National Environmental Policy Act of 1969, the Energy Policy Act of 1992, and the USEC Privatization Act.
In sum, according to currently approved commercialization plans, Russian surplus inventories of HEU will provide the equivalent of about 398 million pounds of "natural" uranium concentrate (U3O8) from mined ore to the commercial Western marketplace (excluding China and the Commonwealth of Independent States). U.S. surplus HEU will provide the equivalent of about 37 million pounds U3O8; and U.S. surplus LEU and natural uranium will provide the equivalent of about 40 million pounds U3O8 (Figure ES1). In addition, the material contained in the surplus inventories will introduce equivalent uranium enrichment services into the commercial marketplace: 92 million separative work units (SWU) represented by Russian surplus material and 10 million SWU represented by U.S. surplus material.
According to proposed U.S. government plans, a portion of U.S. surplus plutonium inventories would be fabricated into MOX fuel and burned in commercial power reactors. If approved, the utilization of this MOX fuel would displace the equivalent of around 17 million pounds U3O8. Because the plan is to make MOX available over a 15 year-period, the commercialization of plutonium would have only a marginal impact on the commercial uranium market.
At present, the legal maximum limit for deliveries of uranium derived from Russian HEU is scheduled to reach about 50 percent of projected U.S. commercial uranium requirements by 2010 (Figure ES2), although other policy and market factors are expected to limit sales of uranium from both U.S. and Russian surplus inventories to end users in the near term. In analyzing this issue, three scenarios were examined by DOE: a Reference Case, in which the quantity of uranium to be sold approximates the scheduled availability by 2005; a Lower HEU Feed Case, in which a portion of the Russian-origin material is withdrawn from the Western market for internal use; and an Upper HEU Feed Case, in which additional Russian-origin material not sold during 1997-2000 enters the Western market incrementally from 2002 through 2010. The three scenarios were intended to illustrate different potential levels of market penetration by introduction of Russian and U.S. surplus defense inventories of nuclear materials. However, the proposed utilization of U.S. plutonium in MOX fuel was not considered in the scenarios.
DOE analysis results indicate that the spot-market price of U3O8 is expected to rise in all the scenarios(Figure ES3). Currently, Western requirements for uranium fuel exceed mine production. The difference is supplied by withdrawals from commercial inventories and imports from the Commonwealth of Independent States (CIS), including those from Russia. Because of restrictions placed on imports of CIS-origin uranium delivered to U.S. end users, there has been a price differential between the "restricted" and "unrestricted" markets since 1992. That differential is anticipated by DOE to diminish and, possibly, to disappear altogether with the increased availability of uranium derived from blending down Russian HEU. The average spot-market price for U3O8 on the restricted U.S. market is projected by DOE to range between $14 and $17 per pound by the middle of the next decade--higher than the lows seen in the mid-1990s but much lower than the peak prices of the 1970s and 1980s.
Over the next several years, U.S. and Russian surplus defense inventories are expected by DOE to become the second most important source of uranium, behind mine production. Nevertheless, the rise in spot-market price is projected by DOE to be sufficient to induce additional mine production. Mines in Australia and Canada with relatively low production costs are projected to supply at least 70 percent of the U3O8 used to fuel Western reactors from 1997 through 2010. In the Lower HEU Feed Case, prices would be slightly higher than in the Reference Case (by less than $2 per pound U3O8), and U.S. mine production would increase from just under 6 million pounds U3O8 in 1997 to 11 million pounds U3O8 per year by the end of the next decade.
Of course, market projections are subject to considerable uncertainty, and the commercialization of U.S. and Russian surplus inventories is especially sensitive to a variety of political and other considerations. An interruption in the inventory commercialization schedule could reduce the availability of natural uranium feed, requiring more expensive mine production and higher market prices to meet demand. Uncertainty with regard to the availability of supplies from Russian HEU could lead to volatile prices. Or, conversely, more aggressive marketing of the inventory material could drive prices down. On the demand side, construction deferrals and early retirements of nuclear power plants could reduce demand and, as a result, prices for nuclear fuel. Retirements of nuclear power plants considered in the analysis are based on assumptions made for the reference case projections published in the Energy Information Administration's Nuclear Power Generation and Fuel Cycle Report 1997.
The enrichment services market, with a current excess of capacity, is less subject to the price volatility that has been seen in the uranium market over the past decade. Marketable enrichment service (SWUs) derived from surplus defense inventories will largely be controlled by USEC, which is expected to sell the excess through long-term contracts (rather than on the spot market) in order to avoid price fluctuations that would affect its own business. It is also possible that USEC could begin marketing LEU as "enriched uranium product" (EUP) directly to end users, as opposed to the typical practice of just providing enrichment services for natural uranium already owned by the end users. (Russia could also become a major supplier of EUP, but current trade restrictions limit the penetration of Russian-origin uranium in the Western market.) In the United States, as the deregulation of electricity markets progresses, electricity generators with nuclear facilities could find advantages in purchasing EUP, through greater flexibility and lower costs of inventory management.
The availability of competitively priced uranium derived from U.S. and Russian surplus defense inventories is expected by DOE to lower uranium procurement costs for U.S. nuclear power generating companies below levels that would prevail if the market were supplied entirely by newly produced uranium. Assuming that commercialization of the surplus inventories proceeds on schedule, and then considering the most likely of three scenarios regarding potential uranium supply, the cumulative savings in uranium procurement costs for U.S. electricity producers in 1996 dollars are estimated to be between $2.9 billion and $3.4 billion from 1997 through 2010 (Figure ES4). The estimate of potential cumulative savings is considered the most likely by DOE from a broad range projected between $2.1 billion and $5.3 billion dollars in 1996 dollars. Savings in the higher end of the range would be realized if the development of known low-cost reserves is restricted through government policy. On the other hand, the savings could be less than the most likely estimate if new low-cost reserves are discovered and put into production during the forecast period.
The total effect of commercializing U.S. and Russian surplus defense
inventories on nuclear power generating companies' fuel costs would also
depend on the behavior of the enrichment services market. Under the current
condition of worldwide production overcapacity, the price of SWU in constant
dollars is not anticipated to rise appreciably. USEC is expected to sell
the SWU it receives as U.S. Executive Agent for the Russian HEU Agreement
in a market neutral manner. It is assumed by DOE that most of the potential effect
of commercializing surplus defense inventories on fuel procurement costs
could be measured by changes in the price of uranium. With access to U.S.
and Russian SWU, USEC could elect to close one of its enrichment plants.
Under a plant closure scenario, the price of SWU could rise in response
to a decline in excess capacity. However, any increase in the cost of enrichment
services is expected only to offset partially the impact of lower uranium
price on reducing total fuel procurement costs.