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Nuclear Power Economics and Project Structuring

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The aims of this report are twofold. Firstly, to highlight that new nuclear build is fully justified on the strength of today’s economic criteria and secondly, to identify the key risks associated with a nuclear power project and how these may be managed to support a business case for nuclear investment. It is written to promote a better understanding of these complex topics by the educated layperson, which may encourage subsequent wider discussion.

From the national viewpoint, many countries recognize the substantial role which nuclear power has played in satisfying various policy objectives, including energy security of supply, reducing import dependence and reducing greenhouse gas or polluting emissions. Nevertheless, as such considerations are far from being fully accounted for in liberalized power markets, nuclear plants must demonstrate their viability on normal commercial criteria as well as their life cycle advantages.

The research and development work that was undertaken in the early stages of nuclear power development was a challenging project for government research organizations as well as the industrial sector. The optimum technical solutions were progressively uncovered through multiple and various demonstration programmes developed in the 1950s and 1960s under government funding and, at the same time, by increasingly scaling up the reactor ratings to compete more easily with fossil fuels. Designs were mainly motivated by the search for higher thermal efficiency, lower system pressure, the ability to stay on line continuously and better utilization of uranium resources. The breakthrough in the commercialization of nuclear power was reached when unit ratings exceeded several hundreds of MWe in the mid-1960s. Since the late 1980s, on the electricity power supply side, governments have steadily moved away from direct regulation in energy markets to concentrate on establishing the framework for a competitive supply system. There are significant differences in regulatory regimes with some countries retaining a substantial regulated element. Electricity market liberalization itself comes in many guises, but the industry today recognizes that all plants must demonstrate that they are cost-effective and that this must be achieved while still maintaining very high safety and environmental standards. Safety and the best economic operation tend, in any case, to go hand in hand.

With nuclear energy’s higher capital cost and longer development and construction period, investors will focus on how risks can be managed and risk allocations optimized. The business case for nuclear will ultimately depend on the structure of risk allocation between operators, investors, suppliers and customers. Although new nuclear power plants require large capital investment, they are hardly unique by the standards of the overall energy industry, where oil platforms and liquefied natural gas (LNG) liquefaction facilities cost many billions of dollars. Projects of similar magnitude can be found in the building of new roads, bridges and other elements of infrastructure. Many of the risk-control and project management techniques developed for these projects are equally applicable to building nuclear power stations.

Risks that are specific to nuclear plants are those surrounding the management of radioactive waste and used fuel and the liability for nuclear accidents. As with many other industrial risks, public authorities must be involved in setting the regulatory framework. The combined goal must be public safety and the stable policy environment necessary for investment.

To support new-build projects, projects must be structured to share risks amongst key stakeholders in a way that is both equitable and that encourages each project participant to fulfil its responsibilities.

The information in this report is presented in the following sections –

Section 1 The above Introduction
Section 2 Highlights the excellent economic performance of current nuclear plants.
Section 3 Demonstrates the need for substantial new electricity generating capacity worldwide.
Section 4 Examines the ability of new nuclear plants to compete.
Section 5 Identifies the key risks of nuclear projects and how they may be mitigated.
Section 6 Considers project structuring and the different ways of allocating risks.
Section 7 Highlights the role of government in ensuring adequate electricity supply.
Section 8 Examines the role of financing major electricity infrastructure.
Section 9 Offers concluding remarks