## Highlights

**A cumulative cash flow analysis is presented for nuclear power.****The large effect of discount rate on levelized costs is illustrated.****Gradual expansion of wind/solar power over the plant lifetime has only a minor negative effect because wind/solar will only force nuclear plants to ramp down when the electricity price is at its lowest, limiting the lost revenue.****Other risks like cost overruns, construction delays and early retirements also had a surprisingly small influence on expected investment returns.****However, at its current global average price point, nuclear power is not sufficiently attractive to facilitate market-driven deployment.**

## Introduction

An earlier article offered some qualitative discussions on the investment risks involved in several mainstream energy options. As a follow-up, this article will present a quantitative analysis of the risks facing nuclear power investors.

All the most influential assumptions will be clearly explained and their impact on the results will be quantified in a sensitivity analysis. This will give the reader the opportunity to clearly see the quantified impact of the risk under the assumptions they think are the most appropriate.

## Methodology

Results will be presented in the form of a discounted cash flow analysis for only 1 kW nuclear power over a five year construction period followed by a 50 year operating period. The investment is made linearly over the five year construction period, followed by the annual receipt of revenues from electricity sales and payment of fuel and operating and maintenance (O&M) costs.

Capital costs are taken as $5000/kW. This was found to be a good global average when adjusting for purchasing power parity (see previous article). O&M costs are taken as 2% of the capital cost per year and these costs are assumed to increase linearly by 1% per year. Fuel costs were taken as $9/MWh. These assumptions were derived from cost data presented in a 2015 IEA report on electricity costs.

After the initial $5000 capital investment, the annual cash flows from electricity sales at an average wholesale price of $60/MWh and a capacity factor of 90% are shown below. In addition, it was assumed that this baseload nuclear plant only earns 95% of the average wholesale price. Despite the increase in O&M costs assumed, the plant is still easily profitable after 50 years of operation.

Using this information, a cumulative cash flow curve can be constructed (below). As shown, the initial $5000 investment is recovered in year 19 when no discounting is applied (discount rate of 0%). When a discount rate of 4.2% is applied, the net return on investment is zero. In other words, this analysis would return a levelized cost of electricity of $60/MWh if the discount rate is set to 4.2%. Under a more realistic discount rate of 10%, the initial investment cannot be recovered.

Next, the effect of expanding variable renewable energy (VRE) market share over the plant lifetime is explored. Here, it is assumed that the nuclear plant can operate at its maximum capacity factor up to a VRE market share of 20%, after which the capacity factor drops by 1% for every 1% further increase in VRE market share. VRE starts to occasionally supply all required electricity at this level, forcing baseload plants to ramp down. It is assumed that VRE can expand to a maximum market share of 60%.

On the flip-side, it is assumed that the average value of the electricity sold by the nuclear power plant increases by 1% for every 1% increase in VRE deployment above 20%. Even though further VRE expansion will force nuclear power plants to ramp down, the lost electricity sales will be during the times when the price is at its lowest. Losing out on only the lowest price electricity sales will increase average sales prices.

Furthermore, it is assumed that VRE market share starts at 7% (current global average) and that it can expand up to a maximum of 60%. The annual cash flow for a VRE expansion rate of 2% per year is shown below. The revenues of the plant reduce gradually as the capacity factor drops from 90% to 50% as the VRE market share climbs from 20% to 60%. This decline is partially offset by an electricity value increase from 95% to 135% of the average wholesale price. Fuel costs also decline with the capacity factor.

The cumulative cash flow analysis shows only minor differences due to these two competing effects, although the economic performance is worsened slightly.

## Effect of the discount rate

As outlined in the previous article, a 10% discount rate is seen as the floor for prioritizing economically efficient infrastructure investments in the developing world. The effect of discount rate on the average electricity price required is shown below where several different risks related to nuclear power investment are explored.

Note that the average electricity price required is used here instead of the levelized cost of electricity to account for the value increase of nuclear with increasing VRE market share. This measure can be interpreted as the average market price over an entire year that will yield a zero return on investment with a specified discount rate.

Firstly, the large effect of the discount rate is clearly visible: levelized costs quadruple as the discount rate is increased from 0% to 15%. When the discount rate is set to higher values, the capital-intensive nature of nuclear power combined with its long construction time drive up the average electricity price required to break even.

As could be derived from the previous section, the increase of VRE market share at a rate of 2% per year had almost no influence due to the competing effects of lower sales volumes and higher average prices.

Early retirement of the plant after 30 years instead of 50 years only had a significant effect at low discount rates. When the discount rate is increased, the plant performance after 30 years of operation is strongly discounted, making the effect of early plant closure negligible.

A cost overrun to 7000/kW instead of 5000/kW had the largest effect of the different risks investigated. A significant increase in capital costs worsened the plant economic performance even more at high discount rates.

Finally, a delay in plant completion from 5 years to 7 years only showed a significant effect at high discount rates. When the time value of money is high, a significant delay in the time when the plant starts to produce revenue has a substantial effect on overall project economics.

## Quantifying the risk

Next, the four risks discussed in the previous section will be quantified in a sensitivity analysis. This quantification is done by determining the discount rate giving zero return on investment when the average electricity price is set to $60/MWh. The annualized return on investment is then quantified as the discount rate minus 2% to account for margin erosion from technological improvements of new plants that come online during the plant lifetime as well as financial/legislative costs.

As shown below, the investment return is a little over 2% when the nuclear plant construction and operation proceeds as planned with VRE market share not exceeding 20% (blue bar). The orange bars show that VRE expansion only has a minor negative effect on investment returns, depending on the rate of expansion.

Early retirement of the plant has a relatively larger effect. When the plant is retired after only 25 years of operation, the investment return becomes negative. Cost overruns also have a relatively large effect, yielding negative returns at a capital cost of 6600/kW and higher.

Finally, a construction delay had almost no effect on the investment return. When low returns are expected (as is the case here), the time value of money is low, meaning that a delay in revenues is not a problem.

In general, I was quite surprised by the low degree of sensitivity of the expected investment returns in this risk analysis. As shown in the previous articles discussing wind and solar power, the risks facing those technologies have much larger negative effects on investment returns.

## Conclusions

This article has quantified the surprisingly low impact of typical nuclear power risks on expected investment returns. That being said, the calculated annualized investment return of 2.2% in the base case is not very compelling.

Nuclear power will need to find a way to substantially reduce its costs before it can become economically attractive next to alternatives. The one nation where nuclear power costs are attractively low on a purchasing power parity basis is South Korea (about $3000/kW). At this capital cost, the expected annualized return under the base case assumptions jumps to 6.6%, which is reasonable from an investment point of view given the low risks quantified above.

Nuclear power therefore remains an interesting clean energy option, although its costs will have to decline significantly before it can present a compelling case for investment. At the current global average price point, nuclear power remains at the mercy of politicians because its economic case is not strong enough to facilitate pure market-driven deployment.