What affects the profitability of an investment in nuclear energy? What are the risks? Energy researcher and analyst Schalk Cloete presents his latest paper on the matter. He looks at the various effects on nuclear power investment, including the rise of other competing renewable energy sources, and the changing price of energy. *This article is brought to you via our new author platform. If you have an article you want to submit to us for consideration, click here
Highlights
- A cumulative cash flow analysis is presented for nuclear power.
- The large effect of discount rate on levelized costs is illustrated.
- Gradual expansion of wind/solar power over the plant lifetime has only a minor negative effect because wind/solar will only force nuclear plants to ramp down when the electricity price is at its lowest, limiting the lost revenue.
- Other risks like cost overruns, construction delays and early retirements had a surprisingly small influence on expected investment returns.
- However, at its current global average capital cost, nuclear power is not sufficiently attractive to facilitate market-driven deployment.
Introduction
An earlier article offered some qualitative discussions on the risks involved in several mainstream energy options. In the coming weeks I will present analyses for other types on the Energy Post platform (such as the one already published on onshore wind investment risk). The analysis will be presented for a typical developed world scenario. Developing world technology cost levels are very different and will be covered in a future article.
All the most influential assumptions will be clearly explained and their impact on the results will be quantified in a sensitivity analysis. This will give the reader the opportunity to clearly see the quantified impact of the risk under the assumptions they think are the most appropriate.
Methodology
Results will be presented in the form of a discounted cash flow analysis for only 1 kW nuclear power over a five year construction period followed by a 50 year operating period. The investment is made linearly over the five year construction period, followed by the annual receipt of revenues from electricity sales and payment of fuel and operating and maintenance (O&M) costs.
Capital costs are taken as $5000/kW. This was found to be a good global average when adjusting for purchasing power parity . O&M costs are taken as 2% of the capital cost per year and these costs are assumed to increase linearly by 1% per year. Fuel costs were taken as $9/MWh. These assumptions were derived from cost data presented in a 2015 IEA report on electricity costs.
After the initial $5000 capital investment, the annual cash flows from electricity sales at an average wholesale price of $60/MWh and a capacity factor of 80% are shown below. In addition, it was assumed that this baseload nuclear plant only earns 95% of the average wholesale price. Despite the increase in O&M costs assumed, the plant is still easily profitable after 50 years of operation.
Using this information, a cumulative cash flow curve can be constructed (below). As shown, the initial $5000 investment is recovered in year 22 when no discounting is applied (discount rate of 0%). When a discount rate of 3.3% is applied, the net return on investment is zero. In other words, this analysis would return a levelized cost of electricity of $60/MWh if the discount rate is set to 3.3%. Under a more realistic discount rate of 8%, the initial investment cannot be recovered.
Next, the effect of expanding variable renewable energy (VRE) market share over the plant lifetime is explored. Here, it is assumed that the nuclear plant can operate at its maximum capacity factor of 80% up to a VRE market share of 25%, after which the capacity factor drops by 1% for every 1% further increase in VRE market share. VRE starts to occasionally supply all required electricity at this level, forcing baseload plants to ramp down.
On the flip-side, it is assumed that the average value of the electricity sold by the nuclear power plant increases by 1% for every 1% increase in VRE deployment above 20%. Even though further VRE expansion will force nuclear power plants to ramp down, the lost electricity sales will be during the times when the price is at its lowest. Losing out on only the lowest price electricity sales will increase average sales prices. This value increase is assumed to be half the value decrease of individual wind and solar.
Furthermore, it is assumed that VRE market share starts at 7% (current global average) and that it can expand up to a maximum of 60%. The annual cash flow for a VRE expansion rate of 2% per year is shown below. The revenues of the plant reduce gradually as the capacity factor drops from 80% to 45% as the VRE market share climbs from 25% to 60%. This decline is partially offset by an electricity value increase from 95% to 130% of the average wholesale price. Fuel costs also decline with the capacity factor.
The cumulative cash flow analysis shows only minor differences due to these two competing effects, although the economic performance is worsened slightly.
Effect of the discount rate
The effect of discount rate on the average electricity price required is shown below where several different risks related to nuclear power investment are explored. Note that the average electricity price required is used here instead of the levelized cost of electricity to account for the value increase of nuclear with increasing VRE market share. This measure can be interpreted as the average market price over an entire year that will yield a zero return on investment with a specified discount rate.
Firstly, the large effect of the discount rate is clearly visible:Â levelized costs quadruple as the discount rate is increased from 0% to 15%. When the discount rate is set to higher values, the capital-intensive nature of nuclear power combined with its long construction time drive up the average electricity price required to break even.
As could be derived from the previous section, the increase of VRE market share at a rate of 2% per year had only a minor influence due to the competing effects of lower sales volumes and higher average prices.
Early retirement of the plant after 30 years instead of 50 years only had a significant effect at low discount rates. When the discount rate is increased, the plant performance after 30 years of operation is strongly discounted, making the effect of early plant closure negligible.
A cost overrun to $7000/kW instead of $5000/kW had the largest effect of the different risks investigated. A significant increase in capital costs worsened the plant economic performance even more at high discount rates.
Finally, a delay in plant completion from 5 years to 7 years only showed a significant effect at high discount rates. When the time value of money is high, a significant delay in the time when the plant starts to produce revenue has a substantial effect on overall project economics.
Quantifying the risk
Next, the four risks discussed in the previous section will be quantified in a sensitivity analysis. This quantification is done by determining the discount rate giving zero return on investment when the average electricity price is set to $60/MWh. The annualized return on investment is then quantified as the discount rate minus 2% to account for margin erosion from technological improvements of new plants that come online during the plant lifetime as well as financial/legislative costs (paying the bankers and lawyers involved in setting up financing for the plant).
As shown below, the investment return is a little over 1% when the nuclear plant construction and operation proceeds as planned with VRE market share not exceeding 25% (blue bar). The orange bars show that VRE expansion has a relatively small negative effect on investment returns, depending on the rate of expansion.
Early retirement of the plant has a larger effect, especially in the extreme case where the plant is retired after only 20 years of operation. Investment returns become negative when the plant is retired after 32 years of operation. Cost overruns also have a relatively large effect, yielding negative returns at a capital cost of $5,900/kW and higher.
Finally, a construction delay had almost no effect on the investment return. When low returns are expected (as is the case here), the time value of money is low, meaning that a delay in revenues is not a problem.
In general, I was quite surprised by the low degree of sensitivity of the expected investment returns in this risk analysis. As shown in the previous articles discussing wind and solar power, the risks facing those technologies have much larger negative effects on investment returns.
Conclusions
This article has quantified the impact of typical nuclear power risks on expected investment returns. Although the risks are relatively low, the calculated annualized investment return of 1.3% in the base case is not attractive.
Nuclear power will need to find a way to substantially reduce its costs before it can become economically attractive next to alternatives. The one nation where nuclear power costs are attractively low on a purchasing power parity basis is South Korea (about $3000/kW). At this capital cost, the expected annualized return under the base case assumptions jumps to 5.5%, which is reasonable from an investment point of view given the low risks quantified above.
Nuclear power therefore remains an interesting clean energy option, although its costs will have to decline significantly before it can present a compelling case for investment. At the current global average price point, nuclear power remains at the mercy of politicians because its economic case is not strong enough to facilitate pure market-driven deployment.
***
This article is published by kind permission of the author. Schalk is working on a series of risk analyses which will be published on Energy Post soon.
Helmut Frik says
What is missing is a analysis how the value of nuclear power declines at higher shares of nuclear power. The same effectalalysid in the analysis of wind and solar was ignored here.
This effect stopped further expansion of nuclear in france.
Schalk Cloete says
Nuclear power produces the same output during times of high and low wholesales prices. Wind/solar, on the other hand, concentrate most of their output during times of low prices and produce very little during times of high prices.
Therefore, nuclear will only start to see value declines when the market share becomes so high that nuclear alone regularly supplies the entire load. In this case (France) I agree that nuclear expansion will be halted by value declines, but for the remaining 99% of the world, this is not relevant.
Helmut Frik says
Well nuclaer in france reaches 100% of the demand at summer night s at similar market shares than renewables in germany as it looks like (nuclear in France has significant curtailment in summer nights already).
Wind +Solar combined have their maximum output mostly at noon, when demand is also high.
Nigel West says
France operates a portfolio plants the economics of that are different to single plant ownership. Reactors that are not required to run baseload in France tend to be older plants where the costs have been written down so the marginal costs of production is low.
EDF has not stopped building new reactors because of value decline. Free of political interference work by now would have started on France’s second EPR.
Helmut Frik says
marginal costs of a plant have nothing to do weather they are written down or not. Usually newer plants have lower marginal costs, being more efficient, needing less people to operate and suffer less wear & tear usually.
Bas Gresnigt says
It took ~20years before competition on the French electricity market gradually became significant. But last year EDF lost ~1million customers to the competition being mainly renewable. Many being German renewable utilities that started an operation in France.
So EDF no longer makes excellent profits and has little reserves. Shown by the reluctance of the banks to support EDF with its investment in Hinkley C despite the UK govt loan guarantees for ~€20Billion. So they had to invite the Chinese to invest for 30% in Hinkley C.
While wind & solar are now at ~€50/MWh in France, the EPR’s high cost price (~€100/MWh despite the high accident and waste liability subsidies) will turn the EPR into a major loss for EDF. So EDF concentrates on life extensions of their older more dangerous models. Even that will become gradually more difficult with the predicted continued price decreases of wind & solar towards levels <€25/MWh.
Nigel West says
France will adjust no doubt to a system comprising renewables , nuclear and gas fired plants. Like the UK has done. France will protect their power industry from external competition too as they favour ‘national champions’.
BTW banks don’t like nuclear construction risk, but once a plant is commissioned it’s a different story.
France has a high level of electric heating demand more suited to constant reliable nuclear output, not renewables EDF is likely to need more CCGTs to back-up an extensive renewables build, that would increase France’s carbon emissions.
Bas Gresnigt says
Yes. France govt had an agreement with EDF to close twin reactor Fessenheim when the new EPR at Flamanville starts. Recently it was decided to close Fessenheim in 2020 before the EPR would start…
“once a plant is commissioned it’s a different story.”
That depends on the P&L and prospects. In NL the banks refused credit to our only NPP (Borssele) unless the shareholders signed for a €200mln guarantee….
When the share of wind+solar becomes >50%, they will produce more than consumption during ~3months/a (Danish prediction). So then power will be <1cnt/KWh and PtG installations become economic. Those can then produce renewable gas with efficiencies of ~80%. Storing such gas is cheap (in earth cavities, etc).
http://www.powertogas.info/power-to-gas/pilotprojekte-im-ueberblick/?no_cache=1
Helmut Frik says
Hmm I doubt the last paragraph. When electric heatings start pulling a lot of power, so at cold days, France regularily runs out of power and relys heavily on imported power. They pay every price then to get power.
one.second says
The highest risk was not discussed: The politicians or rather the public making the power plant owners fully pay for their own waste disposal and insure the plant at market prices. As with CO2 and air pollution in case of fossil fuels, external costs are all true costs that have to be paid by someone eventually.
Helmut Frik says
Both wind and solar produce power at high and low wholesale-prices (the prices which would be there when they would not roduce). And both lower the prices when they produce.
Nuclear does not correlate with load, wind and solar correlate with demand. So Wind and solar deliver preferabley at times of higher prices, and lower it.
Nuclear produces always, and lowers always the power prices.
nuclear, as it can be seen in frace, has about the same amout of curtailment at the same level of penetration in the grid with nuclear as it would be with wind and solar.
(See the low capacity usage in france especially during summer), and lowers the prices towards fuel costs during night as wind does it during strong storms (wich do not happen every night), or solar durig sunny weekend days in late spring.
French nuclear does not earn significant money during most nights in the summer half of the year.
Nigel West says
“Wind and solar correlate with demand”. No, wind and solar output correlates with the weather, which is vague and difficult to predict with any accuracy more than a few days in advance. Dispatchable demand can correlate with the weather and renewables gluts, but there is not much of that at present.
Helmut Frik says
Seems some learning about korrelation is neccesary. Human power demand also correlates with weather. People are more active with dailight, and consume more power, and at cold windy days power consumption for heating is higher than at windless warm summerdays.
Wind and solar power production might also correlate with Nigel Wests mood, the worse his mood the more power output of renewables, I could imagine. But I can also imagine the causality is from the power output to the mood, since Nigel West does not like renewable power as it seems.