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Nuclear Fuel Future

Nuclear power cost projections should incorporate fuel cost uncertainties.

Fortnightly Magazine - February 2008

Price volatility is not something that most people would associate with nuclear fuel, after more than twenty years of low, stable and even decreasing nuclear fuel costs. Nuclear Energy Institute (NEI) data shows nuclear fuel costs declined through the end of 2006 to about 1/2 cent per kWh (see Figure 1) .

However, spot prices for uranium, the largest component of nuclear fuel costs, increased from less than $20 a pound in mid-2004 to an all-time high (even when adjusted for inflation) of $138 per pound in mid-2007 (see Figure 2) .

This inconsistency between reported nuclear fuel costs and uranium prices is the result of nuclear fuel purchasing and accounting practices that create a several-year lag between when nuclear fuel costs are incurred and when these costs are amortized.

This lag between component prices and reported costs is not a problem in itself, but may lead to nuclear fuel cost forecasts that are too low in today’s market.

Nuclear fuel cost projections typically consist of current reported costs that are escalated at the rate of inflation. These projections usually consist of a single estimate in each year ( i.e., they don’t consider multiple scenarios). In the past, when nuclear fuel costs were low and declining, this approach was acceptable and may have even been conservative. But this approach is likely to understate projected nuclear fuel cost when nuclear fuel costs are increasing. The use of a single forecast rather than scenarios may not reflect the uncertainty and volatility in future nuclear fuel prices. This can lead to inappropriate financial decisions. In the natural gas industry, for example, reliance on forecasts that extended historical price levels led to significant over-investment in gas-fired combined cycle power plants before the natural gas markets changed in 2000.

Projections of nuclear fuel costs should, like natural gas and other fossil fuels, include price scenarios that reflect a full range of possible nuclear fuel prices.

Nuclear Fuel Amortization

Nuclear fuel costs are incurred years before fuel is fabricated and loaded and usually are capitalized, then amortized over projected plant output after the fuel is loaded in the core. This approach to accounting for nuclear fuel was developed as a mechanism for the recovery of nuclear fuel costs in regulated utility rates.

The price of uranium and other components of nuclear fuel may reflect prices that are three or more years in the past. This lag even may be longer if purchases are made under long-term contracts with pricing that is not tightly linked to current spot prices.

Amortized nuclear fuel costs are frequently compared to the fuel cost of coal- or gas-fired units, even though nuclear fuel costs are not marginal generation costs. Instead, nuclear fuel costs are fixed costs.

The historical decline in reported U.S. nuclear fuel cost (shown in Fig.1) is the result

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