Economics of Nuclear Power Plant Investment: Monte Carlo Simulations of Generation III/III+ Investment Projects

33 Pages Posted: 27 Nov 2019

See all articles by Ben Wealer

Ben Wealer

German Institute for Economic Research (DIW Berlin)

Simon Bauer

Darmstadt University of Technology - Department of Political Science

Leonard Göke

RWTH Aachen University

Christian von Hirschhausen

German Institute for Economic Research (DIW Berlin) - Department of International Economics

Claudia Kemfert

DIW Deutsches Institut für Wirtschaftsforschung

Date Written: November 2019

Abstract

This paper analyzes nuclear power plant investments using Monte Carlo simulations of economic indicators such as net present value (NPV) and levelized cost of electricity (LCOE). In times of liberalized electricity markets, largescale decarbonization and climate change considerations, this topic is gaining momentum and requires fundamental analysis of cost drivers. We adopt the private investors’ perspective and ask: What are the investors’ economics of nuclear power, or - stated differently - would a private investor consider nuclear power as an investment option in the context of a competitive power market? By focusing on the perspective of an investor, we leave aside the public policy perspective, such as externalities, cost-benefit analysis, proliferation issues, etc. Instead, we apply a conventional economic perspective, such as proposed by Rothwell (2016) to calculate NPV and LCOE. We base our analysis on a stochastic Monte Carlo simulation to nuclear power plant investments of generation III/III+, i.e. available technologies with some experience and an extensive scrutiny of cost data. We define and estimate the main drivers of our model, i.e. overnight construction costs, wholesale electricity prices, and weighted average cost of capital, and discuss reasonable ranges and distributions of those parameters. We apply the model to recent and ongoing investment projects in the Western world, i.e. Europe and the United States; cases in non-market economies such as China and Russia, and other non-established technologies (Generation IV reactors and small modular reactors) are excluded from the analysis due to data issues. Model runs suggest that investing in nuclear power plants is not profitable, i.e. expected net present values are highly negative, mainly driven by high construction costs, including capital costs, and uncertain and low revenues. Even extending reactor lifetimes from currently 40 years to 60 years does not improve the results significantly. We conclude that the economics of nuclear power plants are not favorable to future investments, even though additional costs (decommissioning, long-term storage) and the social costs of accidents are not even considered.

Keywords: nuclear power, nuclear financing, investment, levelized cost of electricity, Monte Carlo simulation, uncertainty

JEL Classification: Q40,D24,G00

Suggested Citation

Wealer, Ben and Bauer, Simon and Göke, Leonard and von Hirschhausen, Christian and Kemfert, Claudia, Economics of Nuclear Power Plant Investment: Monte Carlo Simulations of Generation III/III+ Investment Projects (November 2019). DIW Berlin Discussion Paper No. 1833, Available at SSRN: https://ssrn.com/abstract=3494247 or http://dx.doi.org/10.2139/ssrn.3494247

Ben Wealer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Simon Bauer

Darmstadt University of Technology - Department of Political Science ( email )

Residential Palace
Darmstadt, 64283
Germany

Leonard Göke

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Christian Von Hirschhausen

German Institute for Economic Research (DIW Berlin) - Department of International Economics ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49-30-89789-343 (Phone)
+49/30/897 89 -200 (Fax)

Claudia Kemfert (Contact Author)

DIW Deutsches Institut für Wirtschaftsforschung ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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