Economics of New Nuclear Power Plants - Capital Costs

Capital Costs

"One of the big problems with nuclear power is the enormous upfront cost. These reactors are extremely expensive to build. While the returns may be very great, they're also very slow. It can sometimes take decades to recoup initial costs. Since many investors have a short attention span, they don't like to wait that long for their investment to pay off."

Because of the large capital costs for nuclear power, and the relatively long construction period before revenue is returned, servicing the capital costs of a nuclear power plant is the most important factor determining the economic competitiveness of nuclear energy. The investment can contribute about 70% to 80% of the costs of electricity. The discount rate chosen to cost a nuclear power plant's capital over its lifetime is arguably the most sensitive parameter to overall costs.

The recent liberalization of the electricity market in many countries has made the economics of nuclear power generation less attractive. Previously a monopolistic provider could guarantee output requirements decades into the future. Private generating companies now have to accept shorter output contracts and the risks of future lower-cost competition, so they desire a shorter return on investment period. This favours generation plant types with lower capital costs even if associated fuel costs are higher. A further difficulty is that due to the large sunk costs but unpredictable future income from the liberalized electricity market, private capital is unlikely to be available on favourable terms, which is particularly significant for nuclear as it is capital-intensive. Industry consensus is that a 5% discount rate is appropriate for plants operating in a regulated utility environment where revenues are guaranteed by captive markets, and 10% discount rate is appropriate for a competitive deregulated or merchant plant environment; however the independent MIT study (2003) which used a more sophisticated finance model distinguishing equity and debt capital had a higher 11.5% average discount rate.

Another consideration is that even though consumer demand is not guaranteed, nuclear is placed among the lowest operating cost options. Once the plant is built, it has a distinct advantage over coal, gas, and other fuel based generation types in winning the momentary supply auctions, thereby resulting in operations at full reactor capacity. In this regard, typical present value (PV) calculations for risk-adjusted discount should be applied carefully, possibly approaching the guaranteed, captive market levels.

Currently the smallest nuclear power plant that can be built is usually larger than other power plants, making it possible for a utility to build the other plants in smaller increments, or in areas of low power consumption.

As states are declining to finance nuclear power plants, the sector is now much more reliant on the commercial banking sector. According to research done by Dutch banking research group Profundo, commissioned by BankTrack, in 2008 private banks almost invested € 176 billion in the nuclear sector. Champions were BNP Paribas, with more than € 13,5 billion in nuclear investments and Citigroup and Barclays on par with both over € 11,4 billion in investments. Profundo added up investments in eighty companies in over 800 financial relationships with 124 banks in the following sectors: construction, electricity, mining, the nuclear fuel cycle and "other".