Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Triggering Nuclear Development

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

(This is a price per megawatt-hour difference of about 10 percent, holding all else equal.)

Under electric utility rate-of-return regulation, price risk was reduced by giving electric utilities price increases to cover increases in reasonable costs of operation and capital. In deregulated markets, price risk is shared between the owner-operator and the electricity consumer. Further research should determine the willingness-to-pay of electricity consumers for firm power under very long-term contracts.

A related question concerns output risk (because risk-mitigating measures to control price risk require the delivery of firm power). The owner-operator must backup committed output with either: (1) financial instruments or contracts for purchases on the spot market; or (2) physical assets, such as natural gas peaking units. The owner-operator should be willing to pay up to $500/kWe to eliminate both output and price risk. Future research should consider alternative real asset and financial portfolios to best mitigate these two forms of risk simultaneously for new nuclear power plants.

The remaining risk to the investor is cost risk, which could be eliminated through contracting. For example, nuclear fuel (which has an asset life of decades) could be leased at a fixed price for a finite period and returned to the lessor. Also, an operations management company could operate the plant under contract. But the transaction cost of monitoring an operating contract is likely to be prohibitive. Therefore, cost risk should be assigned to the party best able to mitigate cost risk on a day-to-day basis-the owner-operator. Future research should consider how much cost risk can be mitigated and how much equity in the project might be required of the owner-operator to create optimal incentives to deliver cheap, reliable, and safe electricity.

Three risks influence annual net revenues (revenues before payments on construction expenditures) from operating nuclear plants: output risk, price risk, and cost risk. Currently operating nuclear power plants were built under rate-of-return regulation. Future nuclear power plants likely will be built in deregulated environments. These environments put competitive pressure on nuclear power plant suppliers to lower new nuclear power plant construction cost and to develop a new business model for new plants. Future research should examine risk-mitigating components of this new business model. Until a new business model is created and implemented, it is unlikely that there will be new orders for nuclear power plants in Texas (or anywhere in the United States).

Endnotes

  1. A more detailed explanation of the techniques used here can be found in Geoffrey Rothwell, "What Construction Cost Might Trigger New Nuclear Power Plant Orders?" (March 2004) at http://siepr.stanford.edu/papers. On deregulated electricity markets, see Geoffrey Rothwell and Tomas Gomez, (2003, IEEE Press with John Wiley).
  2. Two ABWRs have been operating in Japan since 1997 and four units are under construction in Japan and Chinese Taipei. The ABWR has been certified by the U.S. Nuclear Regulatory Commission for construction in the United States.
  3. See Nuclear Energy Agency. Reduction of Capital Costs in Nuclear Power Plants (2000, Paris: OECD): pp. 96-99. In their 2003 edition Brealey and Myers dropped their discussion of "Misusing Simulations" (part of which is