July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Triggering Nuclear Development
What construction cost might prompt orders for new nuclear power plants in Texas?
Electricity generation deregulation has opened U.S. wholesale electricity markets to unregulated power producers. In this uncertain environment, how should a generating company evaluate the risk of investing in new capacity? 1
Building upon the calculations in the sidebar (see p. 51) we can calculate the price trigger for new nuclear power capacity by considering the option of building an advanced boiling water reactor (ABWR) in Texas coming into commercial operation in 2010. 2 This article: (1) provides a technique for estimating the mean and variance of net revenues from the power plant; (2) calculates the variance of net revenues; (3) determines a price trigger, or K*, that might trigger new orders for the current generation of nuclear power plants; and (4) discusses how to mitigate net revenue uncertainties in the form of controlling price risk, output risk, and cost risk.
ABWR Construction, Investment, Price, Output, and Cost
As an application of the real options approach to evaluating new nuclear power plants, public data is available to estimate construction cost, electricity prices, megawatt-hours generated, and operating costs for an ABWR in Texas. First, Table 1 (see p. 50) presents the average construction capital cost of a dual-unit ABWR built in the United States. 3 The following summarizes the reactor supplier's statement regarding Table 1:
"The ABWR plant can be constructed in just four years for US$1,600/kWe and suppliers are willing to undertake a project on a fixed price, fixed schedule basis. As a result, the ABWR nuclear plant has proven itself in Japan and Chinese Taipei to be economically competitive with other power generation options and estimates indicate that it can be economic in other countries as well."
Let the construction cost (K) of the ABWR be $1,600/kWe (including financing charges) for a dual-unit 2,800-MW (gross) capacity plant (with 2,700 MW net). The plant could generate 23.65 M MWh each year at full capacity. The total investment, I, would be about $4,500 million (M).
Second, to forecast electricity prices over the life of the plant, consider energy sold in the Texas electricity market. The Texas market is unique in the U.S. because of its separation from the rest of the country into its own reliability region, known as ERCOT, the Electric Reliability Council of Texas. (Although all of ERCOT is in Texas, not all of Texas is in ERCOT.) Figure 1 shows Texas monthly electricity prices and natural gas prices from 1990 to 2003. Since the price spikes in 2000, the price of electricity (for example, "Type B Electric Energy" in ERCOT) has been higher and is likely to remain higher for the foreseeable future.
Figure 2 presents prices from 1990 to 2003 and simulated prices from 2004 to 2050. These simulated prices represent one of 1,000 Monte Carlo trials. In these trials, average price follows the parameters given in Figure 2. For each year there is a random draw from a normal distribution that adds variance to electricity prices. (The standard deviation of this normal distribution is $1.69.) In