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Preparing for a Nuclear Exchange

Three ways to value nuclear power plants for buyers and sellers.
Fortnightly Magazine - May 2004

(a loss of value from an external economic force) is investigated. This investigation may include a study of industry margins, spark spreads (electricity price less the product of the heat rate and the price of fuel), supply/demand relationships, competition, and return on capital. Economic obsolescence also can be derived from actual market transactions.

The next deduction is another form of functional, or operating, obsolescence caused by changes in technology. New or different technology frequently results in better control systems that increase yield, and reduced labor and energy requirements, which generally make the modern replacement plant more valuable. In a nuclear plant, operating obsolescence is calculated by comparing its operations with a CCGT plant. Nuclear plant capacity factors are lower than that of a CCGT by 5 or 10 percent, because of the longer period required for fuel replacements and maintenance. A lower capacity factor results in a lower level of electricity produced and, hence, lower revenues. Operating expenses in a nuclear plant are also higher, resulting in lower earnings.

The advantage of a nuclear plant is fuel cost. The cost of uranium is around $0.50 per million Btu (MMBtu), while the cost of natural gas, the fuel for a CCGT, is around $4.00 to $5.00/MMBtu. This is a major advantage for a nuclear plant, resulting in a form of operating obsolescence that is negative. This mathematically increases the cost indicator of value. When the appraised plant's performance is compared with the performance of the modern replacement plant, the penalty, which in the case of a nuclear plant is negative, is present-valued over the remaining life of the plant. The present value of the penalty is the adjustment in the cost approach for operating obsolescence.

The last deduction is a form of both functional and economic obsolescence that is sometimes termed a necessary capital expenditure. Such a capital expense is required by a government agency primarily for environmental reasons-in the case of a nuclear plant, it is primarily the additional contributions to the decommissioning trust fund. Additional costs could come from cooling-water environmental concerns related to fish and other water life. Again, based on the capital budget, the present value of these capital costs is deducted.

These deductions are made, and the value of the land is added after deducting any known and budgeted clean-up costs from the land value as if clean. In the case of a nuclear plant, this cost typically is zero. Nuclear plants normally do not have any environmental soil or water problems. The result is the cost indicator of value.

Correlation

The value indicated by the sales comparison approach can be a very strong indicator of value because it directly reflects the actions of buyers and sellers in the market. Using even one, two, or three sales gives the appraiser a range of value into which the subject property value should fall. Even in a market where few sales are available, the appraiser cannot ignore the market. The sold plants do not have to be exactly the same as the subject, as they will be adjusted; however, they