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Triggering Nuclear Development

What construction cost might prompt orders for new nuclear power plants in Texas?
Fortnightly Magazine - May 2004

the particular simulation presented in Figure 2 the mean electricity price was $40.13 and the standard deviation was $1.62.

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 the particular simulation presented in Figure 2 the mean electricity price was $40.13 and the standard deviation was $1.62.

Third, during the 1980s and 1990s, capacity factors at U.S. nuclear power units improved dramatically. Figure 3 presents capacity factors from 1990 to 2002 at: (1) dual-unit BWRs in the U.S. that came into commercial operation after 1982; and (2) the Japanese ABWR that came into full commercial operation in 1997. Data for General Electric BWRs larger than 1,100 MW are used to simulate capacity factors at ABWRs operating in the United States. Ordinary Least Squares parameters were estimated with this sample of capacity factors. The estimated trend line is identified in Figure 3. Assuming ABWRs follow the same trend, the expected lifetime capacity factor would be about 86 percent. Using estimated parameters, a Monte Carlo simulation of capacity factors for a dual-unit ABWR is presented in Figure 4. (This is from the same simulation as in Figure 2.)

Fourth, Figure 5 presents C (operating cost at full capacity) for dual-unit BWRs in commercial operation in the United States after 1982 for the years 1990 to 2000 (inflated to mid-2001 dollars). Assuming ABWRs follow the same trend, Figure 6 presents a Monte Carlo simulation of variable expenses. In this simulation, the mean C is $16.38, with a standard deviation of $1.58. To summarize, expected net revenues might be (R is at the mean of the 1,000 Monte Carlo trials):

R = (($40.13/MWh . 86%) - $16.38/MWh) . 23.65M MWh/year = $430M/year.

The Value of a Dual-Unit ABWR in Texas

With a real discount rate of 7 percent, the capital recovery factor (d) is 0.0772 for 40 years. The NPV in 2010 (assuming both units are completed in 2010) is

NPV = (R / d )- I = ( $430M / 0.0772 ) - $4,500M = $1,100 M.

The NPV is positive, so the investor-generator would build the ABWR under traditional investment criteria.

However, net revenues are uncertain. Simulations of the electricity prices, generation output, and input costs can be combined to determine the probability distribution of net revenues. Figure 7 presents a simulation of revenues for each year from 2010 to 2050, based on the particular simulation in Figures 2, 4, and 6. Figure 8 presents a histogram of 1,000 simulations of NPV. Average NPV is $740M with a standard deviation of $160M. Underlying this NPV are average net revenues of $430M per year. How might an investor-generator evaluate this probability distribution for NPV?

Following the real options analysis, the variance of percentage changes in net revenues was 4.2