Nuclear or fossil?

26 October 2004

The right package of incentives could make new US nuclear designs competitive with fossil fuels in 2015, and carbon charges could make it the cheapest option.

Capital cost is the single most important factor determining the economic competitiveness of future nuclear energy projects, concludes a study by the University of Chicago. But it says the right assistance for the first new plants could mean that nuclear plants would become competitive with other power sources by the time the fifth plant was built.

The study, The Economic Future of Nuclear Power, analysed the competitiveness of nuclear electricity and compared it to other gas and coal-fired generation. The three sources were compared as baseload suppliers, so renewables were not considered. Hydropower, although a baseload supplier in some regions, was not considered because most viable sites have already been exploited.

The report analysed capital costs in detail, using the advanced BWR (ABWR) already built in Japan, and the AP1000, which was certified by the US Nuclear Regulatory Commission (NRC) last month. It found that undiscounted capital outlays accounted for over a third of the levelised cost of electricity (LCOE); interest costs on the overnight costs account for another quarter of the LCOE.

What is more, the overnight cost estimates varied widely: different sources placed the cost of new plants from $1000 per kWe to as much as $2300 per kWe.

The report found several factors that acted to push up the capital cost of new plants. The first was the effect of ‘first of a kind engineering’ (FOAKE): early plants in a series could expect to cost up to 35% more than later plants. For example, several hundred million dollars may be expended to complete the engineering design specifications for Generation III or III+ reactors.

FOAKE costs are a fixed cost of a particular reactor design. The report noted that some costs could be shared, and how a vendor allocates FOAKE costs across all the reactors it sells can affect the overnight cost of early reactors considerably. A vendor may be concerned about its ability to sell multiple reactors and therefore want to recover all FOAKE costs on its first plant. Alternatively part of the costs could be allocated elsewhere. Building a reactor of a particular design in one country could allow some of the engineering costs to be transferred, and joint reactor development has taken place, for example Europe’s European Pressurized Water Reactor (EPR). But partial FOAKE costs may still be incurred for the first construction in any given country.

Apart from FOAKE costs, developing expertise that can be transferred to later plants also reduces the capital cost – referred to in the study as ‘learning by doing’. The study explains that in building the early units of a new reactor design, engineers and construction workers learn how to build the plants more efficiently with each plant they build. It says that it is possible the nuclear industry will start with very little learning from previous experience when the first new nuclear construction occurs in the USA. The paucity of new nuclear construction over the past 20 years in the USA, together with the entry of new technologies and a new regulatory system, has eliminated much of the applicable US experience. On the other hand, participation in overseas construction may have given some US engineers experience that is transferable to construction at home.

The study used a range of 3-10% for future learning rates in the US nuclear construction industry, where learning rate is the percent reduction in cost resulting from doubling the number of plants built.


An important issue for potential investors in the industry is risk. The risk premium paid to bond and equity holders for financing new nuclear plants is an influential factor in the economic competitiveness of nuclear energy.

The perceived risk of investments in new nuclear facilities contributes to the risk premium on new nuclear construction. This refers not to the specific nuclear risks of operation, such as a radiological accident, but to more familiar construction risk. The principal sources of risk are the possibilities that construction delays will escalate costs and that new plants will exceed original cost estimates for other reasons. A good example in the nuclear industry is new regulations and additional safety requirements, especially if they require permissions from regulators or government bodies.

The study used guidelines from the corporate finance literature, previous nuclear studies, and opinions of investment analysts to specify likely relationships between project risk and risk premiums for corporate bonds and equity capital. It estimated that the risks associated with building a new nuclear plant would raise the rate of return on equity required by investors to 15%, compared to 12% for other types of facilities, and debt cost to rise to 10% from 7%.

The effect of these premiums can also be minimised. The study used a typical construction time of seven years – the most likely time as perceived by investors, based on both previous nuclear construction experience and new information. If actual construction times prove to be five years, investors will revise their expectations downward accordingly for subsequent plants. Overnight capital cost is clearly most important, but the two-year difference in construction period is nearly as important. If investors were convinced of the likelihood of a five-year construction period, they would estimate the generation cost of the $1800 per kWe plant to equal that of the $1500 per kWe plant built in seven years; similarly, the $1500 per kWe plant anticipated to be built in five years would have a generation cost nearly that of the $1200 per kWe plant anticipated to be built in seven years.

The report said capacity factor (load factor) exerts a significant influence on generation cost. Less important at the investment stage are other factors, such as longer plant life, because these benefits occur in the distant future and are discounted. The fuel cost was also seen to be less important: it represents less than 10% of running costs, and the price of uranium was expected to remain relatively stable.


The study considered a number of potential subsidies that would reduce the costs of the first new units. They were:

  • A loan guarantee of 50% of construction loan costs. This would reduce the nuclear LCOE for the lowest-cost reactor from $53 to $49 per MWh.
  • Accelerated depreciation. This would reduce the LCOE for the lowest-cost reactor to $47 per MWh.
  • An investment tax credit of 20%, refundable so as to be applicable as an offset to a utility’s non-nuclear activities. This would reduce the nuclear LCOE to $44 per MWh for the lowest-cost reactor.
  • A production tax credit of $18 per MWh for the first eight years (as proposed in 2004 legislation). This would reduce the LCOE of the lowest-cost reactor to $38 per MWh.

The study found that most of the individual financial policies appeared to be insufficient to enable nuclear power to enter the marketplace competitively, but the financial model indicated that a combination of policies at reasonable levels could do so. An $18 per MWh production tax credit for eight years, together with a 20% investment tax credit could bring the LCOE of the lower-cost reactors ($1200 and $1500 per kWe) within the competitive range with a seven-year anticipated construction time.

Combined with ‘aggressive assumptions’ on ‘learning by doing’, the study found that the LCOE for the fifth plant, when most learning has been achieved, is $44 per MWh for the lowest-cost nuclear reactor, assuming that for the first plant the business community anticipates a construction period of seven years and uses a 3% risk premium on debt and equity interest rates. The lowest-cost nuclear reactors have LCOEs of about $35 per MWh even under the most pessimistic learning rate.


The report considered two alternative forms of baseload generation: coal and gas. Pulverised coal combustion is the most common source of power generation in the USA. The study considered that coal prices would remain stable or show a slight decrease. Fluidised bed combustion is a cleaner alternative, but its cost competitiveness remains in question. Integrated coal gasification combined cycle, while attractive from the perspective of thermal efficiency and emissions, is likely to be too expensive to enter the US market in the near term.

For gas-generated power fuel costs are more important – generally two-thirds of the levelised cost – so a small change in fuel price or plant efficiency can significantly reduce or increase generating costs, respectively.

For both coal and gas, environmental considerations could raise generating costs considerably, because they emit pollutants and carbon dioxide.

The study said that if presently available Generation III technologies are deployed for several years beginning in 2015, significant cost reductions from their replication could extend to 2025 and beyond. Research and development on Generation III and IV designs is expected to allow commercialisation of lower-cost reactors in later years.

It also noted: “The longer the time horizon, the more likely the USA will place an increased priority on global warming, leading to an urgent need to replace coal- and gas-fired electricity generation”. In view of the time it takes to gear up the nuclear industry, the prospect of this need is one of the reasons for national concern with maintaining a nuclear energy capability. If environmental policies greatly restrict carbon emissions in the period after 2025, fossil-fired LCOEs could increase by 50-100% over current levels. Nuclear power would then acquire an unquestioned cost advantage over its gas and coal competitors.


Contributors to LCOE
Cost shares of LCOE
Fossil fuel generation LCOEs

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