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Nuclear and Coal: Rebirth on the Horizon?

An analysis of the business opportunities behind coal and nuclear plant expansion.
Fortnightly Magazine - November 1 2001

utilize Powder River Basin coal.

Finding the Answers:
The Key Questions for Nuclear and Coal Development

How strong are the financial and economic drivers for expanded development of coal-fired generation and the reintroduction of nuclear? Under what circumstances are new nuclear and coal plants likely to be financially competitive with new gas-fired combined cycle plants? From the developer and financial community perspectives, taking relative risks into account, under what circumstances would there be a preference for nuclear or coal rather than gas? The key questions include:

1. What envelope of initial capital costs and ongoing fixed operation and maintenance costs must new nuclear plants and new coal plants stay within in order to be financially competitive with new combined cycle plants? Nuclear costs should include allowances for a decommissioning sinking fund and ongoing nuclear waste disposal costs. Coal plant costs should include meeting environmental requirements.

2. How does this cost envelope shift under alternative scenarios of natural gas price trajectories?

3. How does wholesale power market structure affect competitiveness?

4. Are some generation markets more attractive than others for new nuclear or coal plants in the 2006 through 2011 time frame?

5. How will financial risk premiums that investors are likely to demand for new nuclear and coal plants impact on competitiveness?

6. New coal-fired generation is experiencing a stronger rebirth at this time than nuclear plants. Since gas may not be the only competitor, how competitive are new nuclear plants in a scenario of widespread new coal plants?

7. What is the impact of alternative environmental regulation scenarios for coal plants? Under what scenarios would nuclear be clearly preferable economically and financially?

For nuclear, increasing the fixed O&M costs (including capital additions) from $65 per kilowatt year to $100 per kilowatt year reduces the parity capital cost by about $260 per kilowatt. This illustrates both the importance of controlling O&M costs and the financial risk of future O&M cost flyups due to new regulatory requirements and/or equipment replacement needs.

The base case financial parameters used in this study are summarized in Figure 1. The base cases assume that these parameters would be the same for gas-fired combined cycle, coal, and nuclear.

It seems reasonable to expect higher financing costs for coal because of financial risks associated with future environmental regulations. Higher financing costs in terms of a 10-percentage point increase in equity (vs. debt) requirement, and half a percentage point increase in debt cost reduces the parity capital costs by $80-100 per kilowatt, depending on the scenario. It seems reasonable to expect even higher financing costs for nuclear because of financial risks associated with new NRC requirements that may be triggered by events at the subject plant or even at another plant having a different owner, by equipment performance and replacement needs, and with public acceptance shifts. Higher financing costs in terms of a 20-percentage point increase in equity (vs. debt) requirements and a full percentage point increase in debt cost reduce parity capital costs by about $165-212 per kilowatt, depending on the scenario.

Making the Numbers Work: What are the