Nuclear Power Economics

and Project Structuring

2017 Edition
Title: Nuclear Power Economics and
Project Structuring - 2017 Edition
Produced by: World Nuclear Association
Published: January 2017
Report No. 2017/001

© 2017 World Nuclear Association.

Registered in England and Wales,
company number 01215741

This report reflects the views

of industry experts but does not
necessarily represent those of any
of the World Nuclear Association’s
individual member organizations.
Contents

Executive Summary 3

1. Introduction 5

2. Economics of Current Plants 7

2.1 Plant performance 7
2.2 Generating costs 7
2.3 Capacity uprates 10
2.4 Licence extensions 10
2.5 Political risk 11
2.6 Conclusions 11

3. Market Potential for Electricity Generation to 2040 12

3.1 Electricity sector investment requirements 12
3.2 The potential position of nuclear power – 12
International Energy Agency view
3.3 Conclusions 14

4. Economics of New Plant Construction 15

4.1 Capital costs 15
4.2 Capital cost escalation 15
4.3 Interest charges and the construction period 19
4.4 Small modular reactors 19
4.5 Operating costs 22
4.6 Evaluations of nuclear competitiveness 22
4.7 Reliability of supply and environmental performance 24
4.8 Electricity market regulation 26
4.9 Conclusions 28

5. Risks of Nuclear Projects and their Control 29

5.1 Electricity market regulation and revenue predictability 29
5.2 Nuclear safety regulation 30
5.3 Project delivery 31
5.4 Operations 31
5.5 Decommissioning and waste management 32
5.6 Accident insurance 32
5.7 Political 33

6. Project Structure and Risk Allocation 34

6.1 Development 34
6.2 Stakeholder involvement 34
6.3 Construction 35
6.4 Operation 35
6.5 Decommissioning & waste management 36

7. The Role of Government 37

8. Financing 39
8.1 Electricity markets and financing 39
8.2 Cost of capital 40

References42

Appendix: The Levelised Cost Methodology and the Evaluation of 43

Competitiveness in Regulated and Deregulated markets

1
 Executive Summary

Nuclear power is an economic source of electricity generation, combining

the advantages of security, reliability, virtually zero greenhouse gas emissions
and cost competitiveness. Existing plants function well with a high degree of
predictability. The operating costs of these plants are usually very competitive,
with a low risk of significant operating cost inflation. The capacity factors of
existing plants are high (over 90% in the US). Nuclear power plants provide
electricity when it is needed. Plants are now expected to operate for 60 years
and even longer in future.

Global nuclear capacity factor

90

Average capacity factor
•• Excluding Japanese reactors after 2011
80

70
%

60

50
80 85 90 95 00 05 10 15
Year
Source: World Nuclear Association analysis based on IAEA PRIS data

The International Energy Agency (IEA) sees the global demand for electricity
growing at 1.9% per year in the period to 2040. Given this demand environment,
coupled with the desire to reduce the greenhouse gas emissions from the
generation of electricity, the IEA projects growth of an annualised 2.3% in
nuclear generation over that period1.

Nuclear competes well with rival generation technologies as is indicated by the

assessment of the Organisation for Economic Cooperation and Development
(OECD) - Nuclear Energy Agency (NEA) & IEA2, although the level of
competitiveness does vary at different discount rates and between countries.
In the pivotal Chinese market, nuclear has a lower levelised cost of generating
electricity (LCOE) than any other technology barring hydro.

In some electricity markets, especially those that are deregulated, subsidised

intermittent renewable generation and gas-fired generation not penalised by
carbon costs are creating economic difficulties for all baseload generators,
including nuclear. Where the system and external costs of competitor
technologies are added to the plant-level costs, the competitiveness of nuclear
is enhanced. In order for these advantages of nuclear to be fully realised,
policymakers need to address fundamental market design problems. In some
countries, deregulated markets are being partially re-regulated in order to place
monetary value on the qualities that nuclear power brings (reliability, security,
zero emissions).
1
World Energy Outlook 2016, International
The economics of new nuclear plants are heavily influenced by their capital
Energy Agency. Both growth rates are for
the ‘New Policies Scenario’. cost, which accounts for at least 60% of their levelised cost of electricity.
2
Projected Costs of Generating Electricity Interest charges and the construction period are important variables for
2015 Edition, OECD-NEA&IEA, 2015 determining the overall cost of capital. The escalation of nuclear capital costs

3
 Levelised cost of generating baseload electricity by technology in OECD countries 2015
(US$/MWh, 3% and 10% discount rates)

160

140

120
Levelised cost US$/MWh

100

80

60

40

20

0
3% 10% 3% 10% 3% 10%
Natural Gas Coal Nuclear

Source: Projected Costs of Generating Electricity 2015 Edition, OECD-NEA & IEA

in some countries, more apparent than real given the paucity of new reactor
construction in OECD countries and the introduction of new designs, has
peaked in the opinion of the IEA3. In countries where continuous development
programmes have been maintained, capital costs have been contained and,
in the case of South Korea, even reduced. Over the last fifteen years global
median construction periods have fallen. Once a nuclear plant has been
constructed, the production cost of electricity is low and predictably stable.

Economic risks relate to a range of factors including: the regulation of electricity

markets and the existence of competitor technologies that are subsidised or
fail to account for external costs; nuclear safety regulation; project construction
performance; operational performance; and political risk. Some of these risks
can be managed by the reactor engineering, procurement and construction
contractors or the utility but others are outside the control of the industry. In
practice, current nuclear investment is undertaken in broadly regulated markets
largely via utility balance sheet financing where the operator can offset the
risks of any given generating technology against those of other assets in their
portfolio. Most electricity markets are regulated and characterised by dominant
state-owned companies.

3
Projected Costs of Generating Electricity 2015
Edition (p19), International Energy Agency and
OECD-Nuclear Energy Agency

4
1 Introduction

This report updates the previous monetary value on these other policy
report of the same name published objectives in a way that can support
in 2012, which itself drew on work nuclear power.
in earlier reports. The principal
changes to this report concern: The research and development
additional material on nuclear capital work undertaken in the early stages
costs, in particular evidence that of nuclear power development
capital cost inflation has peaked was a challenging project for
and is in any case not a worldwide government research organizations
phenomenon; the impacts of as well as the industrial sector. The
competitor technologies, in optimum technical solutions were
particular renewables and gas-fired progressively uncovered through
generation; and the challenges multiple and various demonstration
that deregulated electricity markets programmes developed in the
pose for nuclear. A new section on 1950s and 1960s under government
the systems costs of intermittent funding and, at the same time, by
generation has been included. increasingly scaling up the reactor
ratings to compete more easily
All the information presented in with fossil fuels. Designs were
the report has been taken from the mainly motivated by the search
publications of intergovernmental for higher thermal efficiency, the
and governmental agencies, ability to stay online continuously
independent authors and and better utilization of uranium
universities. resources. The breakthrough in the
commercialization of nuclear power
There are two main aims of this was reached when unit ratings
report. Firstly, to highlight that new exceeded several hundreds of MWe
nuclear build is justified in many in the mid-1960s.
countries on the strength of today’s
economic criteria and, secondly, Starting in the late 1980s, a
to identify the key risks associated number of governments moved
with a nuclear power project and away from direct regulation in
how these may be managed to electricity markets (e.g. government
support a business case for nuclear utilities or investor-owned utilities
investment. subject to rate-of-return controls)
to various types of deregulated
Many countries recognize the electricity industry approaches
substantial role which nuclear that typically include a competitive
power has played in satisfying market-based generation sector.
various policy objectives, including There are significant differences in
energy security of supply, reducing the level and nature of regulation
import dependence and reducing between countries but most
greenhouse gas or polluting remain characterised by high
emissions. Nevertheless, as such levels of regulation, either explicitly
considerations are far from being or implicitly. Electricity market
fully accounted for in liberalized liberalization itself comes in many
or deregulated power markets, guises, but the nuclear power
nuclear plants must demonstrate industry recognizes that nuclear
their viability in these markets on power projects must demonstrate
commercial criteria as well as their that they are commercially viable
lifecycle advantages. Efforts are projects that will attract investors.
being made by policymakers in With nuclear energy’s high capital
a number of countries to place a cost and long development and

5
 construction period, investors The information in this report is
focus on ways in which risks can presented as follows:
be managed and risk allocations
optimized. The business case for Section 2 highlights the good
nuclear ultimately depends on the economic performance of current
structure of risk allocation between nuclear plants.
operators, investors, governments,
suppliers and customers. Section 3 demonstrates the need for
substantial new electricity generating
Although new nuclear power plants capacity worldwide.
require large capital investment, they
are hardly unique by the standards of Section 4 examines the ability of new
the wider energy industry, where oil nuclear plants to compete.
platforms and natural gas liquefaction
facilities cost many billions of dollars. Section 5 identifies the key risks of
Projects of similar magnitude can nuclear projects and how they may
be found in the building of new be mitigated.
roads, bridges and other elements
of infrastructure. Many of the risk- Section 6 considers project
control and project management structuring and the different ways of
techniques developed for these allocating risks.
projects can also be applied to
building nuclear power stations. Section 7 highlights the role of
government in ensuring adequate
Risks that are specific to nuclear electricity supply.
plants are those surrounding the
management of radioactive waste Section 8 examines the role of
and used fuel and the liability for financing for major electricity
nuclear accidents. As with many other infrastructure.
industrial risks, public authorities must
be involved in setting the regulatory
framework. The combined goal for
policymakers seeking to incentivise
nuclear must be public safety and a
stable policy environment necessary
for investment.

To support new build projects must

be structured to reduce and share
risks amongst key stakeholders in a
way that is both equitable and that
encourages each project participant
to fulfil its responsibilities.

6
 2 Economics of
Current Plants
Low-cost baseload electricity improvement is even more dramatic
supply has been a critical enabler of – for example, in the United States
economic and social development from 66% to 90%. Levels of 90% and
and nuclear power has played a above have also been achieved by
key role in delivering such supply plants in Europe and Asia for many
for decades in many countries. years. Lower levels can be partly
The economics of nuclear are explained in France by the high share
characterised by low and stable of nuclear power in the electricity mix
operating costs, resulting from the and its use in load following.
low proportion of fuel cost in the total
cost structure, which have enabled The impact of higher capacity factors
nuclear plants to supply reliable, can be seen in the stability of the
competitive and low carbon baseload nuclear share of world electricity
power. Once built and commissioned, generation from the late 1980s. This
and assuming a good operational was maintained at 16-17% until
performance, nuclear power plants the early 2000s, despite few new
should be able to carry out this plant openings, but rapid electricity
indispensable role for the long term. demand growth in the developing
world since then has meant that the
2.1 Plant performance share has now fallen to 11%.
With high fixed costs and low running
costs, average electricity costs for 2.2 Generating costs
nuclear plants fall substantially with Whilst there are many country-
increased output. It is therefore vital specific factors, it is possible to
for nuclear operators to achieve make some general statements
high plant capacity factors4. Nuclear about the trend of fuel and
plants aim to operate continuously operations and maintenance (O&M)
to achieve very low marginal and costs of nuclear plants: nuclear fuel
average costs. costs have fallen over time due to
lower uranium and enrichment prices
With growing baseload electricity together with new fuel designs
demand, capacity factors of nuclear allowing higher burn-ups, while O&M
plants around the world have costs tend to be somewhat higher
increased by 10% since 1990, from than for other thermal modes of
70% to 80%. In some countries, the generation.

Figure 1: Global nuclear capacity factor

90

Average capacity factor
•• Excluding Japanese reactors after 2011
80

70
%

60

4
The capacity factor is the ratio of the 50
actual energy produced by a power plant 80 85 90 95 00 05 10 15
in a given period, to the hypothetical Year
maximum possible, i.e. running full time
at rated power. Source: World Nuclear Association analysis based on IAEA PRIS data

7
 Figure 2: Breakdown of operating costs for nuclear, coal and gas generation

100
16% Waste Fund
Percentage of operating costs Fuel
34% 8% Fabrication

Fuel
78% Fuel 31% Enrichment
87%

4% Conversion
O&M
66%

41% Uranium
O&M
22% O&M
13%
0
Coal Gas Nuclear Nuclear Fuel
Component Cost
Source: Nuclear Energy Institute

Figure 3: EU uranium oxide prices 1980-2014

140

Multinational contracts

Spot contracts
120

100
Uranium price Euro/kgU

80

60

40

20

0
1980 1985 1990 1995 2000 2005 2010 2015
Year
Source: Euratom Supply Agency

Nuclear fuel costs in the US have fallen cost is only a small fraction of the total
from 1.46 cents per kWh in the mid- operating cost (around 14%). In the
1980s to only 0.76 cents per kWh in case of both coal and gas plants, fuel
2014, which has included a mandatory prices fell to all-time lows in real terms
element for used fuel management of in the late 1990s, as additional low cost
0.1 cents per kWh, paid into a central reserves were brought into production.
governmental fund. As can be seen The discovery and exploitation of large
in Figure 3, uranium prices can be quantities of unconventional shale gas
volatile, but their impact on electricity has pushed electricity prices down
costs is relatively minor as the uranium further in the US.

8
 Table 1. Average US nuclear production costs, 1985-2014, 2011 cents per kWh

1985 1990 1995 2000 2005 2010 2014

O&M costs 2.21 2.37 1.96 1.59 1.44 1.57 1.64
Fuel costs 1.46 1.15 0.84 0.63 0.51 0.68 0.76
Total 3.67 3.52 2.80 2.22 1.95 2.25 2.40
Source: Federal Energy Regulatory Commission, Nuclear Energy Institute

The fuel costs of operating nuclear undermine the economics of nuclear

plants are low and can only be in that continent too. In some power
beaten by plants that generate networks, for example the PJM6
electricity without the need for fuel, area in the US and in the UK, the
such as hydro and other renewable difficulties caused by intermittent
technologies. In the US, average generation are recognised and the
nuclear production costs5 were 2.40 value of reliable power generation
cents per kWh in 2014, the lowest of is rewarded by the development of
any thermal generation technology capacity markets.
in that country. However, nuclear
operating costs vary by plant and The trend in nuclear production costs
some nuclear plants in the US have was strongly downwards in the US in
not been able to cover these costs real terms from the mid-1980s until
in the face of both very low cost gas, 2005 but has since then started to
which has depressed power prices, increase. The split between O&M and
and the increased revenue volatility fuel costs is shown in Table 1.
resulting from intermittent renewable
generation. This situation so far O&M costs include both fixed
has been unusual, so in the EU for (occurring irrespective of the level
example, production costs remain of plant operation) and variable
much lower for nuclear generation elements. In Europe, nuclear
than for coal and gas plants. production costs of as low as 1 Euro
However, the continued increase cent per kWh have been achieved
of heavily subsidised renewable in the past in both Finland and
generation in the EU threatens to Sweden. The balance between O&M,

Figure 4: US electricity production costs by fuel type 1995-2014

10 
Coal

Gas

Nuclear
8
US cent/kWh

5
0 Production costs, also known as operating
1995 1998 2001 2004 2007 2010 2013 costs, include fuel and O&M costs.
6
Year The PJM transmission area of the north
and east of the USA is the largest electricity
Source: Federal Energy Regulatory Commission, Nuclear Energy Institute wholesale market in the world

9
 fuel and used fuel (including waste by up to 15-20%. There are many
management) costs depends very examples of this throughout the
much on the age of the plant, with a world, but it has been a particular
tendency for O&M to rise as plants focus in Sweden, the United States
get older but for used fuel charges and East European countries. In
to reduce as the accumulated fund the United States, up to 3.1 GWe of
dedicated to this becomes mature. additional capacity was approved via
In Germany, used fuel charges tend this route between 2005 and 2014.
to be higher so generating costs are Capacity uprates reduce generating
usually around 1.4 Euro cents per kWh. costs by spreading the fixed O&M
costs over a higher output.
Nuclear operating costs could
change further in certain ways: 2.4 Licence extensions
• The decline in the price of uranium In those cases where plant licences
oxide concentrate (U3O8) will are limited in time, owners are
probably be reversed at some point obtaining extensions from their
with the future expected demand
regulatory authorities where they
increases, thereby encouraging
can justify longer operational lives
new mine investment. Fuel service
for their plants. This process is most
costs, which account for more
visible in the United States where
than half the total fuel cost, could
817 of the 100 units have already
be cut slightly further thanks to
been granted a 20-year extension to
technological progress (e.g. higher
their operating licences to operate
burn-up fuel) as well as through
until 60 years and others are in
the implementation of innovations
the process of applying. The NRC
(e.g. in enrichment and used fuel
is currently preparing to consider
management).
licence extensions to 80 years.
• O&M costs are particularly
influenced by regulatory The licence extension process has
requirements, which may vary been more predictable and less
(depending on circumstances) expensive than many commentators
from augmented in-service originally anticipated. For companies
inspection and additional fire in the private sector, extending
protection features, to enhanced
the design lifetime of plants
operator training and reinforced
may also allow them to spread
security measures. Increased
decommissioning charges over a
requirements have resulted from
longer period than originally planned
the safety reassessments following
and further improve profitability.
the Fukushima accident in 2011.
Nevertheless, the substantial capital
expenditure associated with longer
2.3 Capacity uprates operational lifetimes may still force
Uprating the power output of closure on some current nuclear
nuclear reactors is recognized plants that cannot justify the upfront
as a highly economic source of costs involved – especially for
additional generating capacity. The the smaller, older and inherently
refurbishment of the plant turbine less efficient units. But in general,
generator combined with utilizing the extension of the operational lifetimes
benefits of initial margins in reactor of nuclear plants is economically
designs, digital instrumentation and attractive, so long as the political
control technologies and investment environment is supportive. For
in other enhanced generating example, in Canada, Bruce Power is
7
As at October 2016 capacity can increase plant output extending the operational lifetimes of

10
six of its reactors by 30-35 years at a 1&2 and Ringhals 1&2). In countries
cost of $13 billion, which compares where the threat of such additional
favourably with the cost of alternative nuclear-specific taxes is significant,
generation possibilities. this will negatively affect investor
appetite for new nuclear plants and
In France, a figure for the 58 nuclear even for operating lifetime extensions.
units of up to €10 billion in additional
costs has been announced to deploy Political risk can take a number of
post-Fukushima modifications and forms apart from nuclear taxation. For
comply with the requirements of the example, in Japan the restart of the
safety authority. However, these costs reactors currently offline following the
have to be seen in the context of 2011 Fukushima accident is subject
the need to invest heavily anyway in to decisions by the Japanese courts;
areas such as upgraded IT systems in France the premature retirement
and the maintenance of heavy planned for the Fessenheim reactors
components required to extend the has resulted from negotiations
operating lifetimes of these units between political parties and in
beyond 40 years. The total cost of Germany the decision to advance the
this work is estimated at €50 billion, phase-out of nuclear soon after the
which includes the additional €10 Fukushima accident was reported
billion, and will have only a minimal to be the result of an electoral
impact on the levelised cost of calculation by the governing party.
nuclear electricity over the next 20
years of operation. Extending the 2.6 Conclusions
operating lifetimes of the existing
The overall picture for current nuclear
reactors has been judged by the
plants is that they are operating
national audit body as the most
more efficiently than in the past and
economical way to continue the long
unit operating costs are low relative
history of low power prices in France.
to those of alternative generating
technologies. More output is being
2.5 Political risk achieved from each reactor through
A significant threat to the costs of improved performance and capacity
the current operating fleet of reactors uprates; their operation should
in some countries is coming from continue for many years in the
the imposition of additional taxes future, backed by the necessary
on nuclear generation, arguably to investment in refurbishment. These
penalise the perceived excessive improvements have now become
profits supposedly earned by their routine and will be integrated into the
owners. For example, in 2012 there construction of new nuclear plants.
were nuclear-specific taxes of €5/
MWh in Belgium, €6.7/MWh in The political risk facing the economic
Sweden8 and €145/gof fissile fuel functioning of nuclear in a number
(equivalent to €15/MWh) in Germany. of countries has increased with the
The effect of these taxes has been to imposition of nuclear-specific taxes
advance the closure dates of reactors that in some cases have deprived
in Germany (Grafenrheinfeld), Spain operators of the economic incentive
(Garona) and Sweden (Oskarshamn to continue to operate existing plants.

8
An agreement has been reached by the main
political parties in Sweden to phase out this tax.
The effect of this agreement on the expected
closure dates of Oskarshamn 1&2 and
Ringhals 1&2 is unclear as of October 2016.

11
 3 Market Potential for
Electricity Generation
to 2035
Global electricity production and total, which represents investment in
consumption increased at about about 300 GWe of new capacity, split
2.6% per annum over the period $389 billion in the OECD countries
1990-2013 but many forecasters and $672 billion in the non-OECD
see this rate of increase falling in the countries. It should be noted that
future. For example, the International in arriving at these estimates the
Energy Agency’s9 (IEA) New Policies assumed investment cost of new
Scenario projects global electricity nuclear plants in the US, EU and
demand to increase by 1.9% per China rises by 10-40%. Given that the
annum in the period 2014-2040. IEA assumes most of this investment
Non-OECD countries are responsible will take place in regulated markets,
for almost all this growth. In China government policy will play a critical
for example, electricity consumption role in attracting finance.
should have increased 80% by 2040.
In most OECD countries, policies 3.2 The potential position
aimed at lowering demand growth
of nuclear power – the
rates are being implemented as are
those that will shift the balance of International Energy
supply towards those technologies Agency view
deemed to be favourable from an A consequence of so much of the
environmental viewpoint. new generating capacity being fossil-
fired in the New Policies Scenario is
Within the electricity sector, a that world carbon emissions from
large amount of investment in new the electricity sector are set to carry
generating capacity will be required on increasing in the period to 2040.
by 2040 in order to satisfy both the The 450 Scenario has lower electricity
projected 64% increase of demand10 demand growth and also substantial
and the need to replace a large technology shifting in favour of low
number of plants that will be retired carbon technologies such as nuclear;
over this period. The economic the scenario projects 642 GWe of
challenge for utilities of building new nuclear capacity worldwide in 2030
nuclear plants is much lower in the and 820 GWe in 2040. The IEA
face of a rapidly growing rather than a scenarios derive from a model that
static or declining electricity demand; amongst other things assumes that
in the latter case, new plants have to the costs of renewable power sources
displace existing plants whose capital tend to fall as the technologies
costs are often fully amortised and mature, whereas the costs of nuclear
can therefore remain profitable even power, which is already a mature
at low electricity prices. technology, continue to rise. Both of
these assumptions are questionable
3.1 Electricity sector (see Figure 5 and the discussion in
Chapter 4).
investment requirements
9
World Energy Outlook 2016, International According to the IEA11, investment in The IEA scenarios effectively drop
Energy Agency
power generating plants of all types out of a wider energy model of
10
As projected by the IEA for its New
in the period 2014-2035 will cost a the world, building in all the likely
Policies Scenario in the World Energy
Outlook 2016. cumulative $9.5 trillion in the New generation technologies. One
11
World Energy Investment Outlook, Policies Scenario. Nuclear is projected development is that the IEA, which
International Energy Agency, 2015 to account for $1061 billion of this was previously over-pessimistic about

12
Figure 5: Average annual unit investment cost in power plants by type in the New Policies
Scenario, OECD countries (top) and China (below)

5000

4500

4000

3500

3000
US$/kw

2500

2000

1500

1000

500

Nuclear 
Hydro 
Other renewables 
Coal 
Gas
0
2000-2006 2007-2016 2014-2020 2021-2025 2026-2030 2031-2035
Year

3500

Nuclear 
Hydro 
Other renewables 
Coal 
Gas
3000

2500
US$/kw

2000

1500

1000

500

0
2000-2006 2007-2016 2014-2020 2021-2025 2026-2030 2031-2035
Year
Source: International Energy Agency, World Energy Investment Outlook, 2015

Table 2. IEA nuclear capacity scenarios for 2030, GWe gross

New Policies 520

IEA
Current Policies 488
2016
450 642
Source: IEA (2016)

13
 current reactors shutting down, now Whilst this goal is certainly ambitious,
recognizes that they are generally it can be delivered if the nuclear
performing very well in economic construction performance that was
terms and operating periods are achieved in the 1970s and 1980s is
generally being extended, unless repeated.13
there are political impositions on this
process (as in Germany). 3.3 Conclusions
Even when ignoring all environmental
Projected to 2050, the IEA’s 2 Degree considerations, it is clear that
Scenario12 (an extension of its 450 the extent of the requirement for
Scenario which is described in the new generating capacity affords
World Energy Outlook) includes a nuclear an opportunity for continued
nuclear energy component of 930 good growth prospects. Should
GWe (sufficient to meet 17% of world governments implement policies
electricity demand). Given that this to incorporate the external costs
scenario relies in part on an ambitious of fossil fuel burning and allocate
increase in capacity from renewable system costs to those generators that
energy sources and fossil-fuelled incur them, the economic benefits of
power plants with carbon capture nuclear power would become more
and storage, and that either of these visible to potential investors. The
generating segments could fall short, key to grasping this opportunity is
the World Nuclear Association is undoubtedly keeping the economics
promoting a target whereby 25% of attractive, both with the current stock
electricity is generated by nuclear. To of reactors, where the case has
reach this level by 2050 would require already been made strongly, and now
1000 GWe of new nuclear capacity. with new nuclear build programmes.

12
Energy Technology Perspectives 2015,
International Energy Agency, and Technology
Roadmap Nuclear Energy 2015 Edition,
Nuclear Energy Agency and International
Atomic Energy Agency
13
Energy Harmony on a Major Scale, Nuclear
Engineering International, 26 April 2016

14
 4 Economics of New
Plant Construction
4.1 Capital costs Once the plant is completed and
electricity sales begin, the plant owner
The overall economics of new nuclear
begins to repay the full investment
plants are dominated by their capital
cost, comprising the sum of the
costs. In the assessment of new
overnight costs and accrued interest
capacity, the studies quoted below
charges. The price charged must
show that capital costs including
cover not only these costs, but also
accrued interest account for around
annual fuel costs and expenditure on
65-85% of the levelised cost of a
operation and maintenance (O&M)
new nuclear plant14. For combined
of the plant. A periodic charge for
cycle gas turbine (CCGT) plants,
the eventual decommissioning of the
usually around 20% of the levelised
plant should also be made, provided
costs are accounted for by plant
over the economic lifetime of the
capital requirements, with most of the
plant, however, this is likely to take
remainder being fuel requirements. For
place some 40 to 60 years after plant
renewable electricity projects, the capital
commissioning.
cost element can be as high as 90%
because there is no fuel cost to using
About 80% of overnight costs are
wind or sunlight as energy sources. EPC costs, with about 70% of
these consisting of direct (physical
The importance of these very different plant equipment with labour and
cost schedules rises with the rate materials to assemble them) and
of interest levied. When interest 30% indirect (supervisory engineering
rates are high, projects with high and support labour costs with some
initial capital costs, such as nuclear, materials) costs. The remaining 20%
are disadvantaged in comparative of overnight costs are contingencies
financial appraisals. However, interest and owners’ costs (essentially the
rates in OECD countries have been cost of testing systems and training
in decline since the 1980s and staff). In addition, first-of-a-kind
today’s very low rates are expected to (FOAK) costs are a fixed cost of
persist for some time; indeed, some a particular design of reactor and
economists argue that these countries can amount to very significant
have entered an era of low interest investments. The way in which these
rates15. Once capital-intensive power are added to overnight capital costs
plants are completed, the capital depends on how the vendor wishes
costs and accrued interest must be to allocate these across its reactor
recovered through a long operating sales.
lifetime with fuel and O&M costs well
below the prevailing electricity price.
This has been the general experience
4.2 Capital cost
with nuclear plants. escalation
With relatively few nuclear plants
14
This broad range is taken from Capital costs are incurred while the constructed in North America and
Synthesis on the Economics of Nuclear generating plant is under construction Western Europe over the past two
Power, William D’haeseleer, European and include expenditure on the decades, the amount of information
Commission, November 2013. There
is a discussion of the levelised cost
necessary equipment, engineering on the costs of building modern
methodology in the Appendix. and labour. These are often quoted nuclear plants is somewhat limited.
15
For example, Laurence Summers, Bold as ‘overnight’ costs, which are An important source of information
reform is the only answer to secular exclusive of interest accruing during comes from the OECD’s Nuclear
stagnation, Financial Times, 7 Sept 2014
the construction period16. They Energy Agency (NEA) and the IEA,
16
For convenience, it is assumed that the
include engineering, procurement and who periodically publish a joint report
plant is built literally overnight so that the
capital costs can be separated from the construction (EPC) costs, owners’ entitled Projected Costs of Generating
financing costs. costs and various contingencies. Electricity, the most recent of which

15
 Table 3. Capital cost estimates for a new nuclear reactor, $/kWe

Country Technology Overnight cost A Investment cost B

1998 2015 1998 2015
Europe
Finland BWR 2 256 2 672
PWR (EPR) 4 896 6 959
France PWR 1 636 2 280
PWR (EPR) 5 067 7 202
East Asia
Japan BWR 2 521 3 146
ABWR 3 883 5 519
South Korea PWR 1 637 2 260
ALWR 2 021 2 580
North America
USA PWR 1 441 4 100 2 065 5 828

A. Overnight cost includes owner’s costs pre-construction and during construction and EPC costs.
B. Overnight cost plus imputed interest charges during construction at 10% a year.

Source: IEA, 2001, Nuclear Power in the OECD, OECD-NEA & IEA. Projected Costs of Generating Electricity 2015 Edition, OECD-NEA & IEA

appeared in September 2015. In plants and for which the capital

this publication, the level of nuclear cost estimates should therefore be
capital costs varies considerably by relatively well founded.
country – see Table 4 below which
selects only those countries with new The French nuclear programme
or recent nuclear programmes and provides some further useful data
may be compared with estimated on capital costs. The Cour des
costs in 1998 – and it is apparent that Comptes17 has said that the costs
nuclear capital costs have escalated of building nuclear power plants has
over time. increased over time from €1170/kWe
(at 2010 prices) when the first of the
Insight into nuclear capital costs currently operating 58 PWRs was
can also be gained from the NEA built at Fessenheim (commissioned
& IEA historical series of levelised in 1978), to €2060/kWe when
cost estimates taken from previous Chooz 1 and 2 were built in 2000
editions of Projected Costs of and a projected €3700/kW for the
Generating Electricity and which Flamanville EPR. It can be argued
use the standard NEA & IEA that a lot of this escalation relates
assumptions. It is encouraging to to the much smaller magnitude of
note that, in view of the dominant the programme by 2000 (compared
influence of capital cost on the with when the French were
levelised cost of nuclear power, the commissioning 4-6 new PWRs per
series indicate that capital costs year in the 1980s) and the failure
in some cases may have peaked to achieve series economies. The
or be close to peaking. Figures French programme also arguably
6 and 7 show this data at both shows that industrial organization
the 5% and 10% discount rates and standardization of a series of
17
Les Côuts de la Filière Electronucléaire, for a sample of countries that are reactors allowed construction costs,
Cour des Comptes, 2012 currently constructing nuclear power construction time and operating and

16
 maintenance costs to be brought divided by the total installed capacity
under control. The total overnight (63 GW), the average overnight cost
investment cost of the French PWR is €1335/kW. This is much in line with
programme amounted to less than the costs that were then provided by
€85 billion at 2010 prices. When the manufacturers.

Figure 6: Historical Nuclear LCOEs (2013 US$/MWh, 5% discount rate)

80

70

60
2013 US$/MWh, 5% discount rate

50

40

30

Finland

France
20 
Korea

Slovakia
US
10



China

1990 1995 2000 2005 2010 2015

Year
Source: IEA/NEA Projected Costs of Generating Electricity 2015 edition

Figure 7: Historical Nuclear LCOEs (2013 US$/MWh, 10% discount rate)

120

100
2013 US$/MWh, 10% discount rate

80

60

Finland

France
40 
Korea

Slovakia
US
20



China

0
1990 1995 2000 2005 2010 2015
Year
Source: IEA/NEA Projected Costs of Generating Electricity 2015 edition

17
 Table 4. Overnight Capital Cost trends for historical reactor programmes

Country Construction start Annualized rate of change in overnight

capital cost
USA 1954-1968, 18 demonstration reactors -14%
1964-1967, 14 turnkey reactors -13%
1967-1972, 48 reactors completed pre-TMI +23%
1968-1978, 51 reactors completed post-TMI +5 to +10%
France 1957-1966, 7 gas-cooled reactors -17%
1971-1991, 59 light-water reactors +2 to +4%
Canada 1957-1974, 6 reactors -8%
1971-1986, 18 reactors +4%
West Germany 1958-1973, 8 reactors -6%
1973-1983, 18 reactors +12%
Japan 1960-1971, 11 imported reactors -15%
1970-1980, 13 foreign designs +8%
1980-2007, 30 domestic reactors -1 to +1%
India 1964-1972, 5 imported reactors -7%
1971-1980, 5 domestic reactors +5%
1990-2003, 6 domestic reactors+ 2 imported -1%
South Korea 1972-1993, 9 foreign designs -2%
1989-2008, 19 domestic reactors -1%

Source: Lovering, Yip and Nordhaus, op. cit.

Most recently, Lovering, Yip and supply chain could see a reduction
Nordhaus18 have compared the of nuclear capital costs. Table 5
historical nuclear cost experience presents a summary of the results.
in seven countries. It is evident
that there is a wide range of A number of possibilities have been
experiences. The US has exhibited identified19 to reduce capital costs.
the most extreme cost inflation but For example,
with a very wide variation; for the US • Replicating several reactors of one
reactors in the lowest cost quartile design on one site can bring major
there was very little cost inflation. unit cost reductions.
There was high cost inflation in
• Standardization of reactors and
Germany and to a lesser extent
construction in series will yield
in Canada but in India, France
substantial savings over the series.
and Japan there was very little
cost inflation. In South Korea, as • Learning-by-doing is regarded
indicated above, costs fell over time. as potentially a significant way
18
Historical construction costs of global The authors conclude that a range of reducing capital costs, both
nuclear power reactors, J.Lovering, A.Yip,
of different cost-drivers have been in through replication at the factory
T.Nordhaus, Energy Policy, 91 (2016) 371-382
play, many of them country-specific. for components and at the
19
Reduction of Capital Costs of Nuclear Plants,
The study gives some support construction site for installation.
OECD-NEA, 2000.
20
The Economic Future of Nuclear Power, for a cautious optimism that the • Larger unit capacities can provide
University of Chicago, 2004 gradual globalisation of the nuclear economies of scale.

18
• Simpler designs, possibly which 11 Korean reactors were their successful adherence to initial
incorporating passive safety commissioned but only one in construction schedules that largely
systems, can also yield savings France. Given that this period was accounts for this improved global
as can improved construction characterised by rising commodity performance. The key appears to
methods. prices and increased employee pay lie in the replication of standardised
• A predictable and consistent rates in Korea and China, the likely reactor designs at a series of sites,
licensing process should result in cost moderating influence of series and even more so at the same site.
substantial savings. The key is to economies is apparent. Figure 9 shows the construction
get the new plant up to safety and time in months taken for the series
design requirements and running 4.3 Interest charges and of CPR-1000 reactors built between
2005-2016 in China and Figure 10
as quickly as possible, avoiding the construction period shows the construction performance
unexpected costs and starting
The construction time of a nuclear for the series of P4 reactors built in
at the earliest date to generate
power plant is usually taken as the France between 1977-1993. Whilst
revenues.
duration between the pouring of the the French experience shows some
first concrete and grid connection. upward drift in construction period,
It seems clear that the economics of
In advance of construction, a the record is not as bad as portrayed
nuclear power are much improved
substantial amount of time and by critics of the industry.
if a number of standard models
effort is involved in planning and
can be ordered. The economies of
gaining approvals and licensing
series production then come into for the facility. Construction interest
4.4 Small modular
play and the fixed overhead costs costs can be an important element reactors
of design and permitting involved of total capital costs but this Small modular reactors (SMRs) are
in the supply of nuclear grade depends on the rate of interest characterised by electrical capacity
components and systems can be and the construction period. For of less than 300 MWe and designs
spread over a number of units. a five-year construction period, a that allow for modular construction.
Possibly of equal importance is University of Chicago study (2004)20 In recent years there has been a
the reduction of construction and shows that the interest payments revival of interest in SMRs in the light
permitting risk that is associated during construction can be as much of the limited economies of scale
with building a number of as 30% of the overall expenditure. realised for large reactors. SMRs
standardised units which allows This increases to 40% if applied to a promise faster construction and
greater predictability and reduced seven-year construction schedule, quicker delivery of series economies
timelines for the development of demonstrating the importance that could offset their higher per kWe
additional plants. of completing the plant in line capital costs and thereby deliver
with the original schedule. The levelised costs that are in line with
The recent experience in Asia, industry, however, believes that the those for larger reactors. Savings
particularly China and South construction period could be as could come from the following
Korea, has certainly reinforced the low as four years. Where investors considerations:
idea that series construction and add a risk premium to the interest
• Construction should be more
standardisation can reap significant charges applied to nuclear plants,
rapid as a result of the use of
benefits in lowering capital costs. the impact on the financing charges
factory produced units that can be
In both of these countries there will be substantial. The industry has
transported relatively easily to the
has been a continuing programme to demonstrate that this premium
site and ‘plugged in’ to other units
of construction over 1998-2015 is unwarranted, on the basis of
leading to lower site costs.
and it is of note that the escalation consistent achievement of building
of costs shown in Table 4 and plants on schedule and on budget. • More rapid construction should
Figures 6 and 7 for Europe and result in lower interest costs during
North America were found not to There is evidence that this is starting the construction period.
be applicable to China and South to happen as Figure 8 shows. The • Quality control should be
Korea. For example, the ratio median time taken to construct improved as a result of factory
of French to Korean overnight nuclear power plants has fallen in the construction thereby leading to
costs increased from 1:1 in 1998 last 15 years; it is the predominance less construction, permitting and
to 1:2.5 in 2015, a period in of construction in East Asia and operating risk.

19
 Figure 8: Global median reactor construction periods since 1981 and numbers of grid connections in each period

140

23
120

100
85
131 29 12
80
Months

4 5 10
20 10
60

40

20

0
1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011-2012 2013 2014 2015
Year
Source: IAEA, Power Reactor Information System

• The production of larger numbers downgrading of its credit rating and

of reactors should allow series consequently a higher cost of capital
economies to be delivered more to the utility. Geoffrey Rothwell21 has
quickly and certainly, so the suggested a possible saving on the
learning-by-doing cost reductions cost of capital raised for a nth-of-a-
would be realised more rapidly. kind (NOAK) SMR of 2.4% per year
• Lower absolute plant capital versus a FOAK large Gen III reactor.
requirements that could result in Should savings in the cost of capital
lower utility leverage and thus lower of this order be realised, he estimates
premia on utility debt. that SMRs could compete well with
larger reactors on the levelised cost
The last consideration is particularly of generation.
significant as the financing of large
reactors is a major challenge for all In most OECD countries, electricity
but the biggest utilities, especially in demand growth is expected to be
more deregulated markets. The high low or even negative over the coming
volume of finance required for large decades. The risk to a utility entailed
reactors, to cover an investment cost by an SMR investment in such a
that can be in excess of $6 billion in market is very much lower than for a
the US and EU, often represents a large reactor. Moreover, the SMR site
significant proportion of the utility’s is likely to allow subsequent additions
21
Economics of Nuclear Power, G.Rothwell,
market capitalisation. The risks of capacity in a manner more closely
2016. He provides an illustration (p123) that associated with nuclear construction calibrated to demand increases
if the utility present value was $20 billion are thereby translated into risks to whilst simultaneously delivering
then an investment of $12 billion for two
the credit worthiness of the utility as further series economies resulting
large FOAK reactors would result in a cost of
capital of 6.9% versus 4.5% for an investment a whole. The debt ratio of the utility from the construction of multiple
of $4 billion in two NOAK SMRs. might well be increased leading to a reactors on a single site.

20
Figure 9: China: CPR-1000 construction performance in months 2005-2016

80

70

60

50
Months

40

30

20

10

0
3

-1

-1

-2

-1

-1

-2

-2

-2

-3
o-

o-

e-

e-

e-

e-

g-
de

ng

de

an

ng

ng

ng

an

ng
nh

nh

nh

gd
ga

ga

an
sh

sh
ng

ng
qi

jia

qi

jia

jia
ya

ya

ya

gg
Lin

Lin

in
Fu

Fu
ng

ng

ng
jia

jia
Ni

Ni

N
ng

ng

ng

en
ng

ng
Ya

Ya

Ya
Ho

Ho

Ho

ch
Fa

Fa

ng
Fa
Earliest Latest
Same coloured bars = reactors constructed on the same site
Source: World Nuclear Association Database

Figure 10: France: P4 construction performance in months 1984-1993

100

90

80

70

60
Months

50

40

30

20

10

0
-1

-2

-1

-3

-1

-1

-4

am lle-1

-2

No -2

No -1

-2

-3

-4

-2
Ca an-

Ca ille-

y-

h-

y-
nt

nt
el

el

an

el

le

el

ch
le

nl

nl
c
lu

lu

lu

vil

lu

vil

ge

ge
no

no

no

no
i

fe

fe
lb

lb

Pe

Pe
Pa

Pa

Pa

Pa
an

lle

an

lle

ol

ol
-A

-A

tte

tte

tte

tte
Be

Be

G
am
St

St

Ca

Ca
Fl

Fl

Earliest Latest
Same coloured bars = reactors constructed on the same site
Source: World Nuclear Association Database

21
 The characteristics of SMRs might improvements in plant operating
also lead to revenue enhancement as practices as lessons from best
a result of: practice are taken up more broadly.
• Greater opportunities arising to use Indeed, the deregulation of electricity
process heat and to co-generate markets has arguably helped in
resulting from the ability to site generalising best practices in
reactors closer to communities reducing O&M costs throughout the
or commercial activities (SMRs industry which together with higher
feature a higher level of passive capacity factors has improved the
competitiveness of many plants.
safety than large reactors).
• Greater ability to flex generation to
match the demand volatility that is 4.6 Evaluations of
expected from the increased use of nuclear competitiveness
intermittent renewables. As nuclear plants have relatively
high capital costs but low operating
To date, SMRs are under construction costs, it is important to the overall
in Russia, China and Argentina economics of nuclear that plants
and are currently envisaged to be operate at very high load factors,
employed in isolated locations, such supplying the demand for baseload
as the Northern regions of Russia, electricity. Although renewable
and for co-production, such as water energy sources are likely to take
desalination in Saudi Arabia. an increasing share of incremental
electricity supply in many markets, it
4.5 Operating costs is still expected that most incremental
and replacement generating
The operating costs of nuclear
investments to satisfy the baseload
plants are typically low and the
demand will use fossil fuels (coal or
subject has been covered in Chapter gas) or nuclear.
2 of this report. It should be noted
that, when evaluating nuclear plants There have been many studies
using new designs, fuel use should carried out which assess the relative
be more economical than for older electricity generating costs for new
plants, for example by allowing plants utilizing different technologies.
higher burnups. The OECD-NEA & IEA publishes
the Projected Costs of Generating
Nuclear fuel costs include charges Electricity, a standardised levelised
for used fuel management and cost assessment of a wide range of
disposal. These are well-identified generating technologies in different
and validated, providing a good level countries, at roughly five-year
of predictability of long term costs22. intervals (the last edition in 2015).
Financial contributions are usually
made over the economic lifetime of Projected Costs of Generating
the plant towards plant dismantling Electricity 2015 Edition, highlights
and eventual site restoration. Given the continued competitiveness of
that plants are expected to have long nuclear in many countries since
operating lifetimes, the contributions the previous report in 2010 and the
are not significant (usually less than general improvement since the 1998
1% of the total levelised costs). report. This is generally due to the
improved operating performances
As noted in Chapter 2, O&M of nuclear plants and to higher fossil
22
The Economics of the Nuclear Fuel Cycle, costs vary between countries but fuel price expectations. A summary
OECD-NEA, 1994. the prospect is for continuing of the results (see Figure 11) shows

22
Table 5. Levelised Costs of Electricity, US$/MWh, 10% discount rate

Technology Country / Regional Data Levelised Cost (US$/MWh 2013)

Nuclear USA 102
Europe 109-136
China 49-64
South Korea 51
Hydroelectric USA 87-194
Europe 40-388
China 28
Onshore Wind USA 52-79
Europe 85-151
China 72-82
South Korea 179
Offshore Wind USA 167-188
Europe 170-261
South Korea 327
Solar Photovoltaic USA 103-199
Europe 123-362
South Korea 176-269
Gas USA 71
Europe 101-263
China 95
South Korea 122-130
Coal USA 104
Europe 83-114
China 82
South Korea 86-89
Source: OECD-NEA & IEA, Projected Costs of Generating Electricity 2015 Edition

that, even at a 10% discount rate, of the cost of capital in a number • The absence of a global conclusion
nuclear is the cheapest option in of countries where state-owned as to whether nuclear is the
many countries. For all countries, the enterprises can borrow on similar best option. In all circumstances
report assumes a cost of carbon of terms to government. an assessment of the specific
$30 per tonne; it also projects the conditions is required. Nuclear
costs to five years in the future, a The key messages of the 2015 report discounted at 3% is very
particularly important consideration are: competitive, but less so if it is
for renewables where the capital • The role of government to provide a discounted at 10%.
costs of wind and solar are assumed predictable and durable regulatory
to continue falling. The 2015 report Other points include:
environment, with visibility and
introduces estimates based on a 3% credibility for the investors and to • The costs of nuclear, gas and coal
discount rate which shows nuclear help ensure the competitiveness of to less than $150/ MWh (excluding
to be unambiguously the lowest cost low-carbon technologies, via the special cases).
baseload generation technology. This internalization of CO2 permit costs • Where gas is cheap (as in the
rate can be seen as representative by fossil fuel fired generators. US today) it is hard for nuclear to

23
 Figure 11: Levelised cost of generating baseload electricity by technology in OECD
countries 2015 (US$/MWh, 3% and 10% discount rates)

160

140

120
Levelised cost US$/MWh

100

80

23
LCOE plant costs have been taken from 60
Projected Costs of Generating Electricity
2015 Edition. System costs have been taken
from Nuclear Energy and Renewables, NEA, 40
2012. A 30% generation penetration level for
onshore wind, offshore wind and solar PV
has been assumed in the NEA estimates of 20
system costs, which include backup costs,
balancing costs, grid connection, extension
and reinforcement costs. A discount rate of
0
7% is used throughout, which is consistent 3% 10% 3% 10% 3% 10%
with the plant level LCOE estimates given in
Natural Gas Coal Nuclear
the 2015 edition of the Projected Costs of
Generating Electricity. The 2015 study applies Source: Projected Costs of Generating Electricity 2015 Edition, OECD-NEA & IEA
a $30/t CO2 price on fossil fuel use and uses
2013 US$ values and exchange rates.
24
The impact of intermittent renewables on compete. Continuation of low gas transmit the electricity from where it
other generators has often been overlooked prices is, however, far from certain is generated to where it is needed.
in the literature reviewing system costs. – low prices will induce significant The costs incurred in providing
A recent exception is Integration Costs
Revisited – An Economic Framework for Wind demand increases and curtailment backup and transmission/distribution
and Solar Variability, L.Hirth, F.Ueckerdt, of supply plans. facilities are known as system costs
O.Edenhofer, Renewable Energy 74, 925-939. and these costs vary greatly between
• At good sites, the cost of large
The authors estimate the ‘utilisation effect’
(capacity factor) on thermal generators; at hydro is very low (<$50/ MWh) but different generating technologies. For
40% intermittent penetration the utilisation the most suitable sites have largely nuclear and fossil fuel generators,
rate of thermal generators falls to 47%. The already been developed. systems costs relate mainly to
cost of the lower level of thermal utilisation is
estimated as €49/MWh. • The rapid decline of solar costs to the need for reserve capacity to
25
Report of the ExternE Project, European quite competitive levels; however, cover periodic outages, whether
Commission, 2001. Human activities like as with wind power, the system planned or unplanned. The system
electricity generation or transport cause costs associated with intermittent
costs of intermittency have not
substantial environmental and human health
damages, which vary widely depending on been included. This point deserves renewable generation relate to their
how and where electricity was generated. some elaboration. inability to generate electricity without
The damages caused are for the most the required weather conditions and
part not integrated into the pricing system.
4.7 Reliability of supply their generally dispersed locations
Environmental policy calls these damage
distant from centres of demand;
costs externalities or external costs. Public
policy should aim to ensure that prices reflect and environmental these systems costs are far higher
total costs of an activity, incorporating the
cost of damages caused by employing taxes,
performance for renewables than they are for
subsidies, or other economic instruments. In order to provide reliable electricity dispatchable generators. The system
This internalization of external costs is supply, provision must be made for costs of renewables increase as
intended as a strategy to rebalance the social their penetration rises, which is
backup generation at times when
and environmental dimension with the purely
economic one, accordingly leading to greater generating plant is not operating. the objective of policymakers in a
environmental sustainability. Provision must also be made to number of countries. Adding the

24
 Figure 12: Comparative LCOEs and system costs by generating technology in four countries ($/MWh, 7% discount factor, 2014 and 2012)

350
 System  LCOE
300

250
$/MWh, 7% discount factor

200

150

100

50

0
r
as

re d
So nd

r
al

re d
So ind

r
as

re d
So ind

Nu al

r
s

re d
So ind

V
ea

ea

ea

ea
ho Ga

ho Ga
rP

rP

rP

rP
ho in

ho in

ho in

ho in
Co

Co
G

G
i
ffs e W

ns e W

ffs e W

ffs e W

W
cl

cl

cl

cl
la

la

la

la
Nu

Nu

Nu
r

r
ho

ho
ns

ns

ns

ns
O

O
O

O
France Korea United Kingdom United States

Source: Projected Costs of Generating Electricity 2015 Edition, OECD-NEA & IEA; Nuclear Energy and Renewables, OECD-NEA (2012)

systems costs of renewables to their of baseload generators, including certain states in the USA and until
plant-level costs greatly increases the nuclear, that is not captured in this challenge is resolved, e.g.,
overall costs of reliable supply. The the levelised cost estimates given by the introduction of long-term
future competitiveness of intermittent in studies such as the Projected capacity markets or power purchase
renewables depends very much on Costs of Generating Electricity. The agreements, investment in baseload
the resolution of a number of current negligible marginal operating costs generation capacity in these markets
uncertainties which could moderate and priority grid access of wind is likely to remain insufficient.
their systems costs, including and solar mean that, when climatic
the success of ‘smart’ demand conditions allow generation from The environmental and social
management, the volatility-reducing these sources, they undercut all other impacts of different generating
effects of increased interconnection electricity producers. At high levels technologies also vary greatly.
and above all the development of renewable generation, e.g. as These impacts are referred to as
of electrical storage solutions at implied by the EU’s 30% renewable external costs, which are those
reasonable cost. Figure 12 shows the penetration target, the nuclear load that are not expressed in monetary
impact of some estimated system factor is reduced and the volatility of terms and incurred by the plant
costs23 on the overall levelised costs wholesale prices is greatly increased operator but that impact on third
in four important nuclear countries. whilst the average wholesale price parties, e.g., the health of the local
level falls. The increased penetration population. The nuclear levelised
The overall cost competitiveness of of intermittent renewables thereby costs noted above incorporate all
nuclear on the other hand and as reduces the financial viability of the major external costs of operating
measured on a levelised basis (see nuclear generation (and other a nuclear plant, whereas fossil fuel
Figure 12), is much enhanced by baseload generators)24. The modes of generating electricity have
its modest system costs. However, integration of intermittent renewables traditionally not incorporated their
the impact of intermittent electricity with conventional baseload substantial environmental effects,
supply on wholesale markets has a generation is a major challenge as shown in the ExternE report25
profound effect on the economics facing policymakers in the EU and (European Commission 2001).

25
 Figure 13: Lifecycle greenhouse gas emissions intensity of electricity generation methods $30/tCO2 taken into account by
authors of the Projected Costs of
1600
Generating Electricity 2015 Edition
 Average Emissions Intensity Range Between Studies
1400
study. In Europe, since 2013, the
GHG emissions (Tonnes CO2 e/GWh)

European Union Allowance price is

1200 stagnating around €5-9/tCO2. Other
factors may have played a role in
1000 the observed emissions reductions
worldwide including the impact of
800 policies and subsidies supporting
renewable energies, the depressed
600 economical context in recent years
and energy efficiency improvements.
400
The European Union is considering
a reform of the Emissions Trading
200
System to ensure more stable and
0 higher permit prices needed to
support the delivery of the EU’s 1990-
te

al

il

as

ar

ric

d
V
O

as
rP

in
Co
ni

cle

ct
lG

2030 greenhouse gas emissions

W
om
Lig

la

le
Nu
ra

So

oe
Bi
tu

reduction target of 40%.

dr
Na

Hy

Source: Comparison of Lifecycle Greenhouse Gas Emissions of Various Electricity Generation Sources, The World Nuclear Association
World Nuclear Association, 2011
has issued a report27 comparing
As fossil fuel generators begin to estimates from a range of sources
incur real costs associated with for greenhouse gas emissions from
their impact on the climate, through various generating technologies
carbon taxes or emissions trading indicating that nuclear power plants
regimes, the competitiveness of new are amongst the lowest of any power
nuclear plants will improve. This is generation technology.
particularly so where the comparison
is being made with coal-fired plants
4.8 Electricity market
(because they are so carbon-
intensive) but it also applies, to a regulation
lesser extent, to gas-fired plants. The nature of the electricity market
regulation governing a nuclear plant’s
The likely extent of charges for operation is very relevant to a utility’s
carbon emissions has become an choice of generation technology.
important factor in the economic Electrical power generation, including
evaluation of new nuclear plants, nuclear, was largely developed
particularly in the EU where an by public bodies in a regulatory
emissions trading regime has been environment that facilitated long-term
introduced but which is yet to reflect investment. In some countries, nuclear
the true costs of carbon emissions. plants were built primarily to ensure
Nevertheless, “about 40 national and national security of supply, although
over 20 sub-national jurisdictions are competitively priced electricity with
putting a price on carbon. Together a stable cost was clearly also very
these carbon pricing instruments important. Even today, reducing the
cover … about 12% of annual global dependence on imported fossil fuels
26
greenhouse gas emissions.”26 with uncertain price prospects remains
State and Trends in Carbon Pricing, World
important in many countries. The
Bank Group, Washington DC, 2014
27 Carbon prices on these markets expected long-term stability in costs
Comparison of Lifecycle Greenhouse Gas
Emissions of Various Electricity Generation have stayed relatively low since was also an important consideration
Sources, World Nuclear Association, 2011. their inception, lower than the favouring nuclear and it remains a

26
Figure 14: Worldwide carbon pricing jurisdictions

Source: World Bank Group, State and Trends in Carbon Pricing, 2014

strong argument today. Government- virtue of delivering a high level of marginal cost of electricity in each
owned or rate-of-return regulated supply reliability but at an economic trading period. The market operator
utilities have an overall economic cost (potentially as a result of over- selects the lowest price bids received
objective of meeting demand at an investment) that has persuaded many from generators in order to meet
agreed (i.e. high) level of reliability countries to liberalise or deregulate demand for each trading period
at a low long-term cost of electricity, the power market. and the price of the last bid sets the
which usually results in a portfolio of wholesale spot price for that period.
generation types, fuels and locations. The move to a market-based A generating unit will be dispatched
In such a system there is no significant electricity industry approach changes in this system by a market operator
wholesale market setting prices for the above state of affairs. Short-term based on short run marginal cost
the nuclear generator. Critically, the electricity market spot prices (and (i.e. the change in costs resulting
system allows the total costs of all expectations of future spot prices) from small and temporary changes
units in the portfolio, including nuclear, are expected to provide economic in plant output), sometimes referred
to be recovered. This ‘traditional signals for power plant investments. to as ‘avoidable’ costs. For a nuclear
model’ of electricity supply had the Spot prices are intended to reflect the power plant such short run costs

27
 are very low compared with other 4.9 Conclusions
thermal generators as most plant
Nuclear energy competitiveness
costs relate to ‘unavoidable’ or
depends mainly on the capital required
fixed costs, namely operations
to build the plant (and implicitly the
and maintenance costs (O&M),
construction time) together with
some fuel costs (including
the service charge on that capital
costs for the management and
(which is proxied in levelised cost
disposal of used fuel), recovery of
calculations by the discount rate). If
construction costs, and accrual of
a discount rate of 5-8% is used, then
plant decommissioning costs. In an
nuclear is usually competitive with other
electricity market based on short run
generating technologies assuming
marginal costs, a nuclear plant is
overnight capital costs in the typical
likely to be dispatched almost all of
the time and the difference between ranges apparent today for a number of
the wholesale market price and zero countries. This cost advantage could
represents revenue. increase with a reduction of nuclear
capital costs, which can be expected
In the market-based electricity once the FOAK costs for the currently
supply systems of the past, marginal new reactor designs are absorbed,
producers had been relatively high learning-by-doing has spread and
operating cost fossil fuel plants. The construction time reduced. It is to be
prices achieved in such systems expected that, once a number of plants
were sufficient to cover the fixed of the same design are successfully
costs of nuclear albeit with a great completed on time, finance will be
degree of uncertainty relating to the forthcoming for subsequent units on
amount of revenue that would be more favourable terms.
earned. Since the start of the new
millennium this expectation has been When system costs are added to
upset by two developments. First, the plant levelised costs of different
the exploitation of unconventional generation technologies, nuclear
gas in some markets (mostly North energy’s competitiveness as a low
America) has lowered the cost of carbon energy source is increased
gas-fired electricity, which in some further. However, the impacts of
locations has resulted in very low subsidised intermittent renewables
wholesale electricity prices. Second, and ‘un-carbon costed’ gas are
the promotion of renewables with depressing wholesale prices in
similarly almost zero marginal costs deregulated markets and the
has in some locations and at some advantages of nuclear will not be
times also reduced wholesale realised fully until these fundamental
prices.28 These two developments market design problems are
have for some nuclear plants addressed by policymakers.
greatly reduced revenues. Where
such competing technologies exist New nuclear plants generate
in deregulated markets, as the electricity at predictable, low and
US experience shows, it can be stable costs for 60 years of operating
difficult for nuclear power plants life and in all likelihood even longer in
to be financially viable although the future. Their system and external
it is possible to design support costs in normal operation are also
28
Low wholesale prices do not however equate arrangements that recognise the both low. Investment in nuclear
to low prices for consumers; the variability of benefits that nuclear power brings should therefore be attractive to
new renewables has to be managed either by
to overcome these challenges (e.g., industrialised countries which require
back-up generation, additional grid capacity
or by storage, the costs of which will be long-term power contracts, capacity significant baseload amounts of low
passed on to consumers. payments, and carbon pricing). cost power over the long term.

28
5 Risks of Nuclear
Projects
Structuring a nuclear new-build of the event occurring and the
project for success requires the consequent impact. Measures to
identification and understanding of the manage or monitor the risk can be
various risks associated with a project identified and a further assessment
of such magnitude and complexity. made of the residual probability
Some risks are quite similar to those in and impact. These methods are not
any power investment project; others unique to nuclear power projects and
are unique to nuclear. In developing are discussed below:
a project, a utility will undertake a
comprehensive risk assessment,
which will be reviewed and updated
5.1 Electricity market
as the project progresses. regulation and revenue
predictability
Nuclear projects are capital intensive, The prospects for nuclear power are
with long project schedules and greatly affected by the type of market
involving hundreds of contractors
regulation encountered. For any
and suppliers. They have significant
operator in a deregulated market,
fixed operating and maintenance
revenue unpredictability is a key
costs and low fuel costs. They exist
risk. The uncertainty affecting future
in a rigorous regulatory environment
electricity prices and indeed whether
where the regulator actively patrols
the nuclear operator will be able to
plant operations and has authority
secure customers for its output have
to impact unit construction and
an important bearing on revenue
operation. Nuclear plants are also
predictability. The private investor
subject to public scrutiny and
will be particularly concerned about
concern. In normal operation, nuclear
risks in the first two decades in
plants are environmentally friendly but
the life of a plant, when there is
public concerns often focus on the
likely to remain a large volume of
questions of long-term management
of nuclear waste and potential outstanding debt related to the plant.
consequences of very low probability The possibility of revenues falling
safety events. The large number of below costs (including the cost of
stakeholders and their interactions debt finance) for a significant period
creates complexity, posing a major will lead the providers of capital
project management challenge. to demand a high risk premium.
In some cases, electricity prices
Table 5 lists risks that are associated below even operating costs have
with a nuclear project. Table 6, in been a reality for nuclear plant
Section 6, shows how these risks operators and have for example
may be mitigated. resulted in the premature closure
of the Kewaunee and Vermont
Construction schedules for nuclear Yankee plants in the USA. Revenue
projects are notably long. This can risks in some deregulated markets
influence the allocation of cost- have been heightened with the
inflation risk in relevant construction development of new sources of low
contracts. It can also impact on cost natural gas and the promotion
the negotiation of power purchase of renewables with extremely low
agreements (PPAs), if these are a operating costs. The long-term
requirement before construction economic advantages of nuclear
commences. power are also greatly eroded by
the relatively high discount rates
In preparing its risk assessment a applied to the assessment of power
utility may assess the probability projects. The high capital intensity

29
 Table 6. Nuclear power project risk

Development Construction Operation Decommissioning

Regulatory assessment Safety Safety Safety
Site suitability Design completion/ Plant performance Design completion/changes
Environmental impact changes Skilled and experienced Regulatory assessment/
Planning approvals Regulatory assessment/ workforce approvals
approvals Nuclear event elsewhere Contractor performance
Vendor and contractor Nuclear event Equipment supply chain
performance
Beyond design basis Skilled and experienced
Equipment supply chain events workforce
Skilled and experienced Fuel supply chain Transport routes to/from site
workforce
Availability of waste
Construction quality
Technical

management routes and

Transport routes to site disposal
Industrial relations
Economics Design changes Electricity markets Decommissioning fund cost
Demand forecast Delay Trading and price escalation
Used fuel and radioactive Capacity factor Decommissioning fund
waste disposal performance
Carbon price
Fuel costs
Business Case

Capital additions
Early closure
Cost of waste and used
fuel disposal
General public support and local approval
Policy supporting the need for nuclear power
Societal and

Decommissioning and waste management policies and implementation

Political

Carbon pricing mechanism

Environmental policy

and long development/construction the average cost of its operations. terms. Most regulated markets
period of a nuclear power project are Thus in regulated electricity supply are typified by large state-owned
offset by an operating lifetime that systems where new generating utilities that are able to borrow with
may be 60 years or longer; however, technologies are introduced, the effectively a sovereign guarantee.
nuclear project cashflows after about utility is able to control the impact The economics of nuclear plants in
30 years of operation have little net on existing plants and may be able such markets are therefore greatly
present value using a commercial to pass opportunity costs onto enhanced.
discount rate at the time a financial consumers. The potential access of
investment decision is made. new generation technologies to these
5.2 Nuclear safety
markets is as a result controlled in a
In contrast, regulated markets way that it cannot be in deregulated regulation
are characterised by a far higher markets. Nuclear operators in Safety is of utmost importance in
degree of revenue predictability, regulated markets are able to assure nuclear operations. Regulatory
whether rates are set by a regulatory investors of a more certain return concerns can delay or halt
body or by a utility with sufficient on their capital and consequently nuclear plant construction or
pricing power to set rates to cover are able to obtain finance on better operation. While public protection

30
is an essential governmental environmental issues can be fully international regulatory and safety
responsibility, that goal must be addressed. The new licensing bodies with the aim of harmonizing
pursued, to the maximum extent framework aims to assure potential regulatory and utility requirements
possible, through a regulatory investors that their investment in a new for reactor designs throughout the
environment that provides sufficient nuclear plant will not be jeopardized world. Such harmonization would
predictability to elicit the investment as long as construction adheres to lower costs for manufacturing,
necessary to bring the benefits of the approved design and standards. construction, maintenance, and
nuclear technology to the public. Delays caused by public intervention refuelling outages. Standardized
The nuclear industry has recognized in the past are now prevented by designs can be mass-produced and
that it can contribute to stability strictly defined time-frames for public with economies of scale.
and smoothness in the regulatory hearings and consultations. It bears
process by achieving greater emphasis that adequate staffing of It has been recognised that those who
constancy in reactor designs. regulatory agencies is important for build first-of-a-kind (FOAK) reactors
Ultimately, the public interest is timely decisions. bear the burden of one-time risks
served by regulatory certainty and provide followers with valuable
combined with smooth procedures.
5.3 Project delivery information and experience. To reward
this benefit, the US government has
The regulatory licensing process can New-build risks include costly
introduced FOAK incentives that
be broken into several stages. The delays due to problems with
include loan guarantees, investment
first is reactor design certification. designs, supply of equipment and
tax credits and insurance against
The second is site approval, which materials, personnel, construction
regulatory delays.
is usually made easier on sites with and commissioning. These risks, not
previously constructed reactors. unique to nuclear, can be allocated
Countries that are introducing nuclear
Next come licences for construction amongst the plant owner-operator,
power for the first time are already
and operation. Additionally, in most the plant engineering, procurement
subject to considerable start-up
countries local planning approvals and construction (EPC) contractors,
burdens. They are therefore well-
and environmental assessments are the plant vendor and financiers.
advised to adopt proven designs
needed both by law and as a means Contracts can provide for a fixed
that have already passed the FOAK
of achieving and demonstrating delivery price, with penalties for
stage and have accumulated some
public acceptance. delays and incentives for completion
operational experience.
ahead of schedule or below budget,
US experience provides a good but the complexity of a project means
Because nuclear projects are
example of strengthening regulatory that contracts must also provide for
especially capital-intensive, effective
certainty in the new-build process. mechanisms to resolve difficulties as
project management is essential
The Nuclear Regulatory Commission they arise.
if risks are to be managed, costs
(NRC) has established a licensing contained, and schedules met.
framework that provides for pre- A new generation of reactors has
In this fundamental respect,
approval of a prospective site been designed to reduce project
nuclear new-build projects are
for a new plant, certification of risks. Building these reactors using
little different from any other major
reactor designs well ahead of any pre- fabrication, pre-assembly
construction project; they demand
construction, and the issuance and modularization along with 3-D
top management personnel applying
of a single licence to build and modelling, open-top construction
proven techniques.
operate a new plant using a certified and other advanced construction
design and a pre-approved site techniques can further control
– a combined construction and risks. The new reactor designs 5.4 Operations
operating licence (COL). take advantage of the significant While nuclear operations clearly
R&D, construction and operating involve a variety of risks, it should
The new approach moves all design, experience available in what can be noted that existing nuclear plants
technical, regulatory, and licensing now be called a mature technology. are being run very professionally
issues to the front of the licensing in some 30 countries around the
process so that before construction The nuclear industry (the reactor world – creating a strong foundation
begins and any significant capital vendors and utilities) works in for the operation of new reactors
spending occurs, safety and cooperation with national and in those nations as well as other

31
 countries now preparing to initiate Finally, plant security concerns
nuclear power programmes. Nuclear from natural events (e.g. floods,
operations have benefited from earthquakes or severe climatic
skill improvement programmes, the conditions) are covered in new
advice of nuclear regulators, and the plant evaluations. Protection against
sharing of information and technical terrorist attacks clearly requires
assistance through international collaboration and support from
professional associations (notably, government authorities.
the World Association of Nuclear
Operators). Enhanced maintenance
5.5 Decommissioning
and support services now guarantee
performance for up to 60 years, so and waste management
future operational risks are likely to End-of-life risks relate to plant
be deemed less significant than in decommissioning and dismantling,
the past. Nevertheless, a number and radioactive waste and used
of operational nuclear power plants fuel management. Used fuel costs
have experienced prolonged (i.e. are in many countries regarded as
longer than a year) outages for a part of the overall fuel cost, with
variety of reasons. During such an ongoing charge levied to take
a prolonged outage, the nuclear account of management. It depends,
power plant earns no revenue and however, on the establishment of
is likely to have higher than normal an appropriate national political
costs, as efforts are made to return framework.
the plant to operation. The negative
impact of a prolonged outage for a Decommissioning costs are usually
merchant nuclear plant will result in a covered by annual charges levied
severely negative impact on returns on electricity consumers to cover the
to investors and such outages may ultimate cost, fixed by national rules,
not be insurable. similar to used fuel. However, a range
of possibilities exist, for example,
The risk of poor operational in France nuclear operators are
performance can be controlled by required to establish funds covering
the employment of a well-trained decommissioning and waste
and experienced workforce, management from the beginning of a
applying a carefully planned and plant’s operation29.
implemented maintenance regime.
Ongoing support from vendors is
also important in controlling any
5.6 Accident insurance
technological risk associated with The cost of accident insurance
new designs. contributes to the total cost of a
nuclear power plant, as it does to the
With regard to the replacement of cost of other potentially high impact
plant equipment, the business case industrial facilities such as hydro
for new build may require that the dams, and oil and chemical facilities.
project includes a contingency fund A severe nuclear accident with health
for some capital expenditure through and environmental consequences
the operating lifetime of the plant in beyond the plant boundary is a very
addition to predicted replacements low probability event, albeit one
identified in the vendor’s design. with high costs should it happen.
With regard to fuel, the utility must It should be noted that most of
also consider its fuel procurement these costs arise from the effects of
29
Costs of Decommissioning Nuclear Power strategy to control any cost or government-mandated precautions,
Plants, OECD-NEA, 2016 supply-chain risks. e.g. evacuation of potentially

32
affected populations, rather than an institutional solution to raising
directly inflicted injuries to health and funds to meet compensation claims.
environment. The Nuclear Damage Compensation
Facilitation Corporation is financed
Plant owners must carry insurance to by Japanese nuclear plant operators
cover most operating risks. Liability plus access to government bonds
for severe accidents is defined by with a value of up to $86 billion (as of
international conventions (notably, the December 2013) and is responsible
Vienna and Paris Conventions as well for making payments to those
as the Convention on Supplementary affected by the accident as well as
Compensation for Nuclear Damage) acting as an insurer to the industry.
and/or by national legislation (such
as the Price-Anderson Nuclear
Industries Indemnity Act in the United
5.7 Political
States). In contrast to many other Governmental commitment to the
industrial sectors, these frameworks need for nuclear power is a pre-
precisely define and cap the liability requisite to any nuclear construction,
borne by the operator, with the but that commitment cannot obviate
possibility for public authorities to all risks of laws and regulations
accept responsibility for liabilities in governing electricity markets and
excess of the cap. They also have taxation being modified.
the advantage of requiring that strict
and exclusive liability rests with the Another aspect of political risk is
plant operator (i.e. regardless of that public acceptance can shift,
fault and to be borne by the operator perhaps undermining a project’s
alone) which greatly simplifies the viability during or after construction.
options for claimants in claiming for Barring unforeseen and extreme
damages. Insurance is reportedly events, however, utilities are in a
available on commercial terms to strong position to minimise this
cover damages of between $10-15 risk by drawing upon the industry’s
billion at a cost of 0.1-0.2 ¢/kWh30. considerable experience in dealing
with questions of public concern.
Japan was not party to any In most countries, the industry has
international convention relating succeeded in gradually building
to liability and compensation for public support for nuclear power,
damage caused by a nuclear by demonstrating strong operating
accident at the time of the March performance. The industry’s
2011 accident at the Fukushima excellent safety record is the basis
Daiichi plant; it is now a contracting on which policymakers have been
party to the Convention on able to point to nuclear energy
Supplementary Compensation for as an important response to the
Nuclear Damage. Soon after the imperatives of energy security and
accident, the government brokered environmental protection.

30
Liability for Nuclear Damage, World Nuclear
Association Information Library. The figure
is in line with an estimate provided in a
survey of information on nuclear economics
by William D’haeseleer (Synthesis on the
Economics of Nuclear Power, European
Commission, 2013). He suggests probability-
weighted unit damage costs arising from a
nuclear accident of 0.1 ¢/kWh.

33
 6 Project Structure and
Risk Allocation
The essential aim of project • Market – formed by electricity
structuring is to achieve an efficient customers wanting electricity at a
application of capital and resources. competitive price.
Project risks should be assigned to • Utility (generator) – which is
the party most capable of handling ultimately responsible for developing
their control. and running the complete project.
• EPC contractors – companies
The structure of a new nuclear power
which are responsible to the owner
project will be influenced greatly by
for delivery according to schedule
the market in each particular country
and budget.
or region. A project in a deregulated
market will be structured differently • Vendors – which are responsible
to one in a regulated market. In a for supplying equipment and
regulated market, investments may be technology to either the owner, the
made following regulatory scrutiny of a EPC contractor or as part of a joint
plan which, once agreed, allows costs venture or consortium, according
to be passed through to the consumer. to schedule and budget.
• Regulatory authorities – which
There is no single way to structure a are responsible for addressing all
nuclear project; a number of project matters related to protecting public
models can succeed. The essential safety and the environment, from
characteristic is a suitable sharing the design stage to plant operation
of risks and benefits. However, just and fuel management.
as standardisation of design can
lower both the cost and risk of new Table 7 overleaf shows ways in which
plants, so can standardized business the risks of nuclear projects listed
structures. It is expected that the in Table 6 can be monitored and
number of different approaches will controlled.
be reduced as more experience is
gained and projects repeat structures 6.1 Development
that work well.
During the phase of project
development when government
Although project structures may
effectively controls the permitting and
vary, and can be complex in some
approvals process, the risk of the
markets, there will be similar parties
design being rejected or the project
involved and the allocation of
being delayed is likely to be carried
risks will always be a key factor in
by the utility and potential reactor
assessing whether the business case
vendors. Using internationally-
for a nuclear power station can be
accepted designs, preferably
assembled. Simply transferring a
risk does not make it disappear. The already built elsewhere, can help to
receiving party must demonstrate that control risks of rejection or delay,
it can control the risk if uncertainty is but substantial sums of money can
to be lowered to acceptable levels. be committed, and be at risk, even
before the first concrete is poured.
The prime participants in a nuclear
project are: 6.2 Stakeholder
• Government – responsible for involvement
overall energy policy and, in some Stakeholder participation is a key
cases, financing. to allaying concerns about waste
• Financiers – investors in debt or management and the safety and
equity required to finance the project. security of nuclear installations.

34
 Table 7. Risk control and monitoring in nuclear power projects

Development Construction Operation Decommissioning

Internationally-accepted Develop sound Involvement in Decide on decommissioning
designs contractual arrangements organisations such as strategy as early as possible
Building on existing for involved parties the World Association of Invest in workforce training
nuclear sites Invest in supply chain Nuclear Operators
infrastructure Good training
Good training programmes
programmes Invest in new nuclear fuel
Invest in transport facilities
infrastructure ‘Fleet’ approach to
Previous construction reactor management
Technical

experience Invest continuously in

Strong project plant maintenance and
management improvement
Seek investment from Stick to standardized Develop sound long- Contribute to well-defined
major power users designs term power contracts fund as required
Build business case on Use an appropriate mix of or otherwise develop
various demand scenarios permanent and contract revenue stabilisation
staff options (e.g., capacity
Investigate opportunities
markets)
for revenue stabilisation
Develop a balanced
Business Case

portfolio of fuel contracts

in line with utility risk
management policies
Nuclear knowledge
management
Public debates and hearings
Regular opinion polling
Societal and

Gain cross-party political support

Political

Emphasise environmental advantages of nuclear

Develop waste management policy with government

Public hearings and debate contractual arrangements among the will reside with the utility. Because the
are sound means for improving utility, EPC contractor and vendors. expense of nuclear plants will have an
dialogue and ultimately saving time. Here there is a range of possibilities. impact on company balance sheets,
Providing information to the public For example, in a turnkey project forming consortia to share risks may
and its representatives is essential the EPC contractor assumes almost often be a good solution.
to building trust with the wider all risks of cost overruns. Financial
community. Such information also penalties and rewards are common 6.4 Operation
serves a documentary function, for parts of the construction contract Once a plant is running, the utility will
putting on record what has been relating to timing and quality. As an control most of the risks – specifically,
proposed and approved, to avoid the alternative, utilities can assume greater for safe operation and for maintaining
possibility of recurrent argument. risk in exchange, perhaps, for the control of O&M costs. The utility can
opportunity to benefit from a lower manage its fuel and O&M costs by
6.3 Construction overall cost. EPC contractors and entering into long-term deals with
During the construction phase, the vendors will seek to limit their exposure suppliers and contracting out key
various risks can be covered by and ultimately a portion of the risk services such as plant outages.

35
 During operations, there are The threat of revenue volatility and
obvious benefits to using reactors reduced capacity factors resulting
of standardised design and of from low cost gas-fired and
running a series of reactors in a ‘fleet’ intermittent renewable generators are
approach. Sharing the fixed costs outside the direct control of nuclear
and a common supply chain – and operators. The solutions to these
taking advantage of knowledge and threats in terms of carbon pricing and
experience at similar plants – plainly lower renewables subsidies require
enhances both economic and safety action by policymakers.
performance.
6.5 Decommissioning
Operators can gain performance
benefit and also security from and waste management
regulatory penalty by responding Plant decommissioning, as well
actively and cooperatively to as the management of waste and
advice from regulatory and safety used fuel, must be the responsibility
authorities. Such responsiveness, of the industry, operating within
coupled to transparency in plants a sound regulatory framework.
operations, contributes to public Public authorities must, however,
trust and acceptance. For example, bear ultimate policy responsibility
in the areas surrounding French for ensuring that facilities for the
nuclear plants, local information management, storage and disposal
commissions meet regularly, of long-lived wastes are provided.
bringing together utility officials This requires the establishment
from the operator and stakeholder of segregated funds to cover
representatives. radioactive waste disposal expenses.

36
7 The Role of
Government
Nuclear power requires regulation is proportionate to the
governmental support in the form risk it seeks to control and should
of policies that affirm its value and be consistent across industries.
which establish a framework for International standards are to be
its operations. Inevitably, issues preferred to avoid the imposition
surrounding radiation and possible of unnecessary burdens on trade
weapons proliferation create public and the transfer of technology.
interest, to which governments To enhance efficiency and lower
should respond. The effectiveness costs, construction and operating
of the government response in licences can be issued together.
satisfying public concerns affects The local planning process should
the political and public context concentrate on local issues,
surrounding nuclear projects. Where ensuring full deliberation within a
nuclear issues remain controversial, time-limited framework.
uncertainty carries a significant
premium in the business case for Safety regulation of operations
new nuclear power stations. Public safety is a prime
responsibility of government, which
As a starting point, government should take account of the evidence
should commit to nuclear power as regarding the risk of harm, including
a part of national energy strategy the advice from international
and, in countries facing a likelihood organizations and agencies, such as
of change in governing party, this the World Health Organization and
should include a considerable the International Commission on
degree of cross-party consensus. Radiological Protection.
Clearly there cannot be absolute
guarantees that government policy Radioactive waste and used fuel
will not change, but there needs management
to be at least an agreement that Government must accept and
nuclear power is recognised as a act on its responsibility to
long-term commitment. coordinate a comprehensive
plan for the long-term storage
A government supporting nuclear of radioactive waste and used
power can be reasonably expected to fuel, while coming to terms with
undertake the following: the issues of reprocessing and
geological repositories. While plant
Energy policy operators should be expected
As a reference point and guide for to contribute their share of the
all stakeholders, government should costs, governments must lead
define a long-term energy policy on this sensitive but fundamental
addressing the major challenges of issue, which involves all users of
energy supply, security of supply and radiological and nuclear materials
environmental protection. (such as hospitals). In some cases,
governments will need to work with
Regulatory and local planning other countries to develop shared
system storage and disposal facilities.
Government oversight authorities
must apply standards in such a Decommissioning
way as to meet the objectives of Government policy must ensure that
protecting public safety and security each plant operator makes financial
while facilitating the gain from the provision for decommissioning, using
production of nuclear power. Good a segregated fund.

37
 Nuclear liability Climate change
Government must have a clear and Any government pursuing a
consistent policy and legal framework serious policy on the mitigation of
defining the respective insurance greenhouse gases must support
responsibilities of government and measures to penalize carbon
nuclear operators. emissions. A policy that penalizes
carbon inherently strengthens the
Power market competitive position of nuclear
Government must ensure an efficient power. An example of institutionalised
and reliable energy market, both carbon penalties is the European
currently and in the future, and which emissions trading scheme, a
provides some excess of capacity regional system of greenhouse gas
to meet growth and unexpected tradable quotas, within a sequenced
demand. To achieve this, the market framework of reductions in emissions
regime should be designed to necessary to avoid runaway global
encourage long-term investment. warming and ocean acidification.
In order to encourage nuclear An alternative is direct carbon taxes,
development in deregulated systems, which might be seen as preferable in
government may need to provide view of the low level of permit prices
some means of revenue assurance associated with the EU’s emissions
over a significant period, such as the trading scheme. Whichever approach
strike prices fixed for 35 years that is adopted, nuclear should be
have been offered to the operator of treated as an important low-carbon
the Hinkley Point C plant in the UK. technology.

38
8 Financing

All discussion of nuclear financing creative in managing and distributing

must inevitably focus on one risk but they cannot reduce the
essential principle: a good project economic risks facing nuclear power
structure will attract financing at plants. Nonetheless, there are
the lowest possible cost. Equity very large sums of money seeking
providers – investors willing to take profitable investments and for nuclear
risk in exchange for the prospect projects to gain financing, it requires
of higher return – have a different only that projects be structured so as
tolerance for risk to providers of to demonstrate clearly that they are
debt. With more complex project creditworthy.
structures, investors may perceive
there to be more risk, increasing what
they will require in expected return 8.1 Electricity markets
or requiring a higher proportion of
equity. The optimal management of and financing
risk should allow a higher proportion The structuring of the nuclear
of relatively low cost debt finance. project – and how it is financed,
particularly the relative amounts of
In assessing whether they will provide debt and equity – depends heavily
debt financing, banks and other on the model of plant ownership
lending institutions will evaluate a and nature of the power market.
project’s creditworthiness. In the Both are crucial to the allocation of
case of project finance, they will risks between project participants.
look for a strong set of creditworthy As has already been described,
contracts. Most often, the borrower electricity markets vary in the
will be a large utility; here the lender degree of regulation and the level
will look for a strong balance sheet, of regulation greatly affects the
an established cashflow and will also financial options available to the
weigh the borrower’s experience project. In regulated markets,
in building and operating a fleet of utilities with well-capitalised balance
nuclear and other units. Lenders do sheets and the ability to pass on
not take risk other than the credit risk regulatory-approved costs will be
of a borrower and require a level of able to access large volumes of
certainty that their loan will be repaid debt finance. In contrast, merchant
on a given date. utilities in deregulated markets
will need to issue a much higher
In the 1970s and 1980s, many share of relatively expensive equity.
investors, notably in the USA, lost In practice, government support
money on nuclear and coal plant is likely to be a feature of nuclear
investments when market liberalisation financing through mechanisms
ended the ability to pass on all costs such as investment or offtake/price
to customers and left a legacy of support agreements via state-
stranded costs (i.e. those unlikely ever owned or controlled entities (such
to be repaid by subsequent operating as utilities or banks) and guarantees
profits). Then, in the late 1990s for private loans.
and early 2000s, electricity trading
arrangements in many markets Specific financing routes for nuclear
changed fundamentally, leaving some projects include:
financiers cautious about the entire
energy sector. Balance sheet financing by
utilities
Within complex structures, financial Many utilities, especially in regulated
institutions can be innovative and areas, are integrated electricity

39
 service providers with strong balance the investment by Rosatom in the against alternative technologies.
sheets that enable them to finance Akkuyu plant in Turkey which features Despite an increased ability to
even large capital costs, such as a fixed price deal for 70% of the mitigate many risks, the historical
nuclear power plants. Most utilities power produced over 15 years and experience of delays in plant
have a significant element of state an eventual sale of equity to Turkish construction has resulted in the
ownership and almost all nuclear companies. Alternatively, the project perceived need for a significant risk
reactors under construction have equity could remain with Rosatom for premium on lending for new nuclear
been financed via this traditional an extended period in which case the as compared to other technologies.
method, supplemented by loans model would be ‘build-own-operate’. Nuclear projects usually also require
in some cases from state-owned In practice, this structure is a niche a higher initial equity share, adding to
finance companies, and it is likely to possibility for nuclear. the cost of capital. These differences
remain the dominant model for the can be crippling to project
foreseeable future. Power user investment economics. Risk perception initiates
In this model, which was adopted a vicious circle, whereby adverse
Project finance for the fifth Finnish reactor under risk perception leads to more costly
Debt investors lend to a single- construction at Olkiluoto, the equity is financing, which makes the project
purpose entity, whose only asset largely contributed by a consortium of look even riskier in financial terms.
is the new power plant and whose local energy-intensive industries and This circle can only be overcome
only revenue is future power sales. local utilities. The owners will take the by improved plant construction
This structure has advantages for output of the plant at cost, amortizing performance.
sponsors as projects are highly the debt portion from the market. If
leveraged. Whilst equity will be the plant operates well, the owners The cost of capital is variable, with
required during the pre-construction will receive relatively cheap electricity merchant generating plants attracting
phase, the sponsors will need to over a long period, avoiding the risks a higher risk premium, which inhibits
contribute the greater part of their of having to buy or sell power on the large nuclear projects. In contrast,
equity investment only at a later open market. This financing route large, well-established and vertically
stage, while their other assets depends on there being a sufficient integrated electricity utilities with
are protected. The main difficulty number or scale of energy-intensive strong balance sheets have ready
is attracting debt financing at industries willing to participate in the access to relatively cheap borrowing
reasonable rates and the track financing. on a large scale and can also
record for project finance in nuclear withstand a high gearing (debt to
has disappointed. In the USA, it Vendor finance equity) ratio. This is most likely to be
was hoped that government loan the best model for new nuclear power
Reactor vendors may choose to
guarantees could enable this projects.
invest equity in a nuclear plant.
financing route but the failure of the Clearly, the vendor has a strong
Calvert Cliffs 3 project indicated that Alternatively, where large power
interest in the project progressing
loan guarantees in themselves were customers invest in the nuclear plant
and will be in a good position to help
insufficient. and agree to take the output under
resolve any development problems
long-term arrangements (as in the
concerning the reactor. Vendor
Concession arrangements case of the Olkiluoto 3 project, where
balance sheets are limited and any
there is no risk premium), or in the
Concessions are a variety of offering is likely to meet only part of
US regulated market, the cost of
project finance that might involve the financial requirement. Once the
capital should be relatively low as
a government-run competition reactor has been constructed and is
many market risks to the utility are
for a company (or more likely a operating satisfactorily, the vendor
mitigated.
consortium) to build, finance and will most likely seek to refinance and
operate a specified number of sell its stake.
Reducing the risk perception – and
nuclear plants in return for which
the consequent risk premium – is
there would be arrangements to 8.2 Cost of capital essential to future nuclear projects.
ring-fence revenues for a period of
The capital intensity of nuclear This gain can be expected to occur
time at an agreed tariff. An example
projects means that the cost of over time as early projects, such
of such a partnership is the ‘build-
capital strongly influences total as those being developed in the
own-operate-transfer’ concept behind
generation cost and competitiveness USA, demonstrate a clear break

40
with the past and show that risks
can be mitigated by sound project
structures. These initial successes
should also induce greater public
confidence, support and acceptance,
leading to a virtuous circle of
declining risk perception for future
projects.

In the context of volatile electricity

markets, certain inherent features of
nuclear energy should contribute to
the lowering of risk perception, as
compared to alternative technologies.
These include:
• Cost stability during the operational
phase, resulting from the low share
of fuel in overall operating costs.
• Fuel supply security.
• High capacity factors.
• Potentially large upside benefit
from efforts to decarbonise the
power sector.

41
 References

1. Euratom Supply Agency (http://ec.europa.eu/euratom/observatory_price.html)

2. Nuclear Energy Institute (http://www.nei.org/)

3. US Federal Energy Regulatory Commission (https://www.ferc.gov/)

4. Bruce Power (http://www.brucepower.com/about-us/refurbishment/)

5. World Energy Outlook 2015, International Energy Agency

6. Nuclear Power in the OECD, International Energy Agency and OECD-Nuclear

Energy Agency, 2001

7. Reduction of Capital Costs of Nuclear Plants, OECD-Nuclear Energy

Agency, 2000

8. Les Côuts de la Filière Electronucléaire, Cour des Comptes, 2012

9. Historical construction costs of global nuclear power reactors, Lovering,

Yip, Nordhaus, Energy Policy, 91, 2016

10. The Economic Future of Nuclear Power, University of Chicago, 2004

11. The Economics of the Nuclear Fuel Cycle, OECD-Nuclear Energy Agency, 1994

12. The Future of Nuclear Power, MIT, 2003 and 2009

13. Projected Costs of Generating Electricity, various editions, International

Energy Agency and OECD-Nuclear Energy Agency

14. Nuclear Energy and Renewables, OECD-Nuclear Energy Agency, 2012

15. Integration Costs Revisited – An Economic Framework for Wind and Solar
Variability, Hirth, Ueckerdt, Edenhofer, Renewable Energy 74

16. Report of the ExternE Project, European Commission, 2001

17. State and Trends in Carbon Pricing, World Bank Group, Washington DC, 2014

18. Comparison of Lifecycle Greenhouse Gas Emissions of Various Electricity

Generation Sources, World Nuclear Association, 2011

19. Costs of Decommissioning Nuclear Power Plants, OECD-Nuclear Energy

Agency, 2016

20. Synthesis on the Economics of Nuclear Power, William D’haeseleer,

European Commission, 2013

21. Economics of Nuclear Power, Geoffrey Rothwell, 2016

42
 Appendix

The Levelised Cost Methodology and the

Evaluation of Competitiveness in Regulated and
Deregulated Markets
The economics of generating electricity should be evaluated in a consistent
manner across the various possible technologies. It is important to distinguish
the key elements in the cost structure of a nuclear power plant and compare
these with the costs of other modes of electricity generation. National and local
circumstances and conditions are crucial in these evaluations.

The standard procedure used in investment decisions is to ‘levelise’ the costs

over the life of the plant and divide by the amount of electricity produced to
give a cost per kWh. Given that the value of money decreases over time i.e. its
‘time value’, it is necessary to apply a discount rate to present the costs on a
common basis, in order to allow economic comparisons31. The discount rate is
sometimes set by a public authority as a target rate of return on capital, but in a
deregulated market it is effectively the rate of return required on the project by
financial markets – in other words, the cost of capital (a risk-weighted average
of the interest rate on any loan capital and the required return on equity,
known as WACC32). The levelised cost of electricity (LCOE) is equivalent to
the electricity price needed to cover both the operating and annualized capital
costs of the plant and is used as a marker for economic viability.

Whilst this procedure works well for investment decisions in regulated markets,
in deregulated markets calculation of the LCOE is only a first approximation for
determining economic viability. The variability of electricity prices and difficulty
of forecasting such prices, especially in the face of the spread of low-cost
gas and intermittent renewables as well as new techniques of demand-
management, means that there is no certainty in deregulated markets that
the LCOE will be covered by revenues. Although a limited forward market
for electricity exists, the long timescale over which a nuclear power plant will
operate means that future revenues are very uncertain.

31
These are often referred to as
discounted cash flow (DCF) or net
present value (NPV) methodologies.
32
Weighted Average Cost of Capital

43
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Nuclear Power Economics and Project Structuring - 2017 Edition

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