ON THE PRICE CHAIN: ELECTRICITY

Generation

Nuclear power –“Belene” NPP

Publicly known cost estimated for new NPP “Belene” range from 4 to 10 billion euro. How to get them and which one is correct? The answer to these questions required to clarify in detail the algorithm in which costs are calculated. Accounting or non-accounting a number of assumptions and factors leading to differences of hundreds of millions of euros.

Initially agreed with the selected contractor costs for engineering, procurement and construction (so-called EPC-costs) are 4 billion euro. These costs are often used for comparisons between different projects and technologies and are calculated for one kilowatt installed capacity. For two designed units each of 1,000 MW, the initial EPC-costs are € 2,000 / kW.

The second major component of capital expenditure are the power plant owner’s costs for:

– Providing the infrastructure necessary for the functioning of the new power plant – grid, roads, towers, office buildings

 – Management and development of the Project

 – Licenses, acquisitions, legal services

 – Staff, trainings

 – Any accidents that may lead to burdensome of the costs

The amount of EPC – costs (80%) plus the cost of the owner (20%) is defined as an “overnight” capital costs. They give an idea how much could be the costs to build the plant if it could be built overnight, rather than a few years. This assumption helps to ignore the effects of inflation and of the financial costs, which invariably accompany the construction period and facilitates comparisons between different projects and technologies.

For comparison, one of the independent analysis of existing institutions (that of the Brattle group), capital expenditure (“overnight”) for future plants in the U.S.A. (in US dollars per kW) are assessed as follows:

 – 4038 for nuclear capacity

 – 2214 for coal capacity

 – 4037 for coal capacity with carbon capture and storage of CO2

 – 869 for gas combined-cycle capacity

 – 1558 for gas combined-cycle gas capacity and carbon capture and storage of CO2

In that standard structure (80 vs. 20 percent) above, the costs of the owner NEC for the construction of “Belene” will be in the range of 1 billion, in which total capital expenditure for new nuclear power plant without taking into account of escalation posed by inflation and financial cost will amount to 5 billion euro total. This means € 2,500, respectively $ 3,500 kW of installed capacity – an assessment similar to the above.

Because of the fact that the construction of new capacity continues for years, in calculations it is necessary to take into account also the changing value of money – the same actions taken in 2011 worth more than in 2006. It is achieved by formulas for costs escalation, which aims to eliminate the influence of the objective inflation processes.

Therefore, the third component of the capital costs are anticipated escalations leading to an increase in initial costs, depending on inflation and the duration of construction process. As much is the extension ofthe construction phase of new capacity and the inflation during this period is going up, as much more expensive will be the project than the initial estimates show.

The available public information indicates that the subject of negotiation between owner and contractor of the project “Belene” are escalating in the range of 1 to 2 billion euro. This implies that the full capital costs would escalate to reach up to 6-7 billion euro. It should be emphasized that the actual escalation will depart at plus or minus depending on the agreed objective inflation processes, which will be considered during the construction.

Due to large capital expenditures and long period of building of new nuclear power plants – between 4 and 7 years, the interest accruing during construction are an important element in the total project costs. Estimations of the University of Chicago show that a five-year construction period interest rates reached 30% of total costs. They grow to 40% if construction lasted 7 years. When funding parties added the standard risk premium rates too, financial costs become critically important for the viability of nuclear projects.

After calculating the financial costs to capital costs of a project we could reach to term “full project costs”.

Full project costs represent the amount of EPC-costs, the owner costs, the escalation of inflation accounting and financial costs.

Assuming that the “Belene” will be funded with 80% borrowed capital at favorable interest rates and that construction will be completed in 4.5 years (including six months starting period), the full project costs will reach to 8.7 – 10 billion euro. If the construction is extended to 7 years or if it can’t be achieved the most favorable interest rates (eg government guarantees), total project costs will exceed 10 billion (or € 5,000 kW of installed capacity).

As a summary, the full project costs of “Belene” represent a sum of:

 (A) Agreed with the contractor costs, etc. EPC-cost sized 4 billion euro

 (B) Project owner’s costs with an expected size of 1 billion euro

 (C) Cost escalation, eliminating inflation processes during the construction period with an expected size range between 1 and 2 billion euro

 (D) Financial expenses with an expected size of 2.7 – 3 billion euro

When new facilities are put into operation, the repayment of accrued during the construction project costs begin through revenues from the sale of electricity. Moreover, through these revenues the cost of the plant should be covered – for fuel, operation and maintenance – and they should provide a return on capital too.

Adjusted cost per kWh electricity give an idea of ??prices needed to cover both production and annual capital costs of a plant and they are used as a marker for the economic viability of projects for new capacities.

The balance of capital and production costs are different for different technologies. Nuclear plants are characterized by the highest capital and the lowest production costs – capital costs for new nuclear capacity is 60-80% of total costs. At the other extreme are plants with natural gas combined cycle, where this ratio is just the opposite – 20% capital costs to 80% costs for generation.

Fuel costs for nuclear plants decreased steadily in recent decades. For the period from the mid-eighties till now nuclear fuel costs in the U.S. dropped three times as influenced by technological advances and availability of nuclear power plants, and because of stable and dwindling prices of nuclear fuel. Furthermore, the uranium fuel prices have little impact on electricity prices because their share is only about 5% of total costs.

Production costs of operating nuclear power plant are low and can be “defeated” only by plants that do not use fuel, such as hydro power plants. In the U.S., the average production cost of nuclear power plants are 1.72 US cents per kWh. For France – 1.4 euro cents per kWh.

The above production costs include deductions for decommissioning the plant and storage of nuclear waste. Although this specific type of nuclear power costs are impressive in absolute terms, their share in the cost per kWh is around 0.1-0.2 euro cents because they have been already calculated to cost during the entire long life of the plant.

To clarify the relationship between construction costs and adjusted costs / price of electricity we will use a simplified model in which calculations are based on the following assumptions:

 – The capital is fully drawn and is provided prior to construction

 – The operational life of the plant is 40 years

 – Installed capacity is 2 units of 1000 MW

 – The availability (use of installedcapacity for power generation) is 90%

 – Production costs are 1.3 euro cents per kWh, consistent with current levels of actual costs and include provisions for decommissioning and storage of nuclear waste

 – Capital expenditures are € 2,500 / kWh, or 5 billion euro total

Under these assumptions are calculated the adjusted costs / price per kWh (in euro cents / kWh) and their sensitivity to the duration of construction and interest conditions is shown:

The figures above lead to the following conclusions:

(A) Capital expenditures are not sufficient information to determine the price of electricity, which will produce “Belene”. At the same capital expenditures (5 billion euro) costs of electricity varies from 3.7 to 16 euro cents per kWh depending on the timing of construction and financial conditions.

(B) At the same capital costs and construction time (5 years) the price of electricity is growing twice due to the increase in interest rates of borrowed capital from 5 to 10% – from 4.2 to 8.6 euro cents.

(C) At the same capital expenditures and financial conditions (8%) the price of electricity increased by 80% in extension of the construction from 3 to 7 years – from 5 to 9 euro cents per kWh.

(D) As longer is time to build, as more noticeable is the impact of the financial costs on the price. The price for five years of construction and a 5-percent rate is twice lower than the price at 10-percent interest rate. At seven years of construction the difference is triple – from 4.9 to 16.1 euro cents per kWh.

(E) Whether and under what assumptions nuclear power will be competitive in front of the lignite power plants will depend on the trade in greenhouse gas emissions:

• If there are no emissions trading, new nuclear power will be competitive with lignite plants, if built for no more than 4 years at an interest rate not higher than 7%;

• In the emissions trading conditions and price € 20 / t CO2 new nuclear power will be competitive with lignite power if built for no more than 5 years at an interest rate not higher than 8%;

• The emissions trading and price € 40 / t CO2 new nuclear power will be competitive with new lignite power even in a period of 7 years for build an 8-percent interest rate on loans.

As it was emphasized nuclear power plants are characterized by the lowest production, but with the highest capital costs than other conventional power plants – gas and coal. The question boils down to which type of plants the combination of these two types of costs will lead to the lowest price of electricity produced.

The main advantages of nuclear power plants are economic and environmental. Economic benefits resulting from lower production costs, including low, stable and predictable fuel costs. Environmental benefits consist in practical decarbonised electricity generation, which enhances their competitive position in implementing policies to reduce emissions based on “polluter pays” principle.

Prices of fossil fuels, especially natural gas, are uncertain in the medium and long term and evaluation of gas plantsaccounted this price volatility. Due to the high share of fuel costs it leads to uncertainty of the price of electricity produced from coal and gas plants too.

Weaknesses of nuclear power lies in their large and increasing in absolute size and share capital costs. For example, the cost of AP 1000 reactors, “Westinghouse” are expected to exceed U.S. $ 3500 US / kW at an initial cost of 1,000 planned US dollars / kW and 3 years construction period. This trend is explained by objective reasons, the main ones are:

– Accidents involving nuclear facilities requiring design changes leading to increased costs and longer time to build;

– More – stringent requirements of regulatory authorities to obtain licenses and permits to start construction and subsequent commissioning. This often leads to significant delays and increased costs initially planned. For example, Shoreham Plant – Plant, based in New York and cost 5 billion dollars for 1000 US megawatt power – never received permission to operate by the competent regulatory authorities.

The history of development of nuclear power suggests that financial institutions view them as a risky investment and seek a risk premium for equity, but many of them do not fund them. This is explained by the above trends and high capital intensity of nuclear projects.

In an environment of costly financial resources and there are risks when extending the deadlines for implementing the projects with high initial capital costs, such as nuclear, are the losers in the financial estimates.

According to independent analysis (National Research Council of the US National Academy):

 – Cost per kilowatt nuclear power is expected to be in the range of 6-13 US cents depending on various factors and assumptions about financing, capital costs, capacity, fuel price and more. Prices at the low end of the range correspond to favorable financing, supported by appropriate guarantees

 – Gas power plantscould be both the cheapest and most expensive alternative for electricity generation, depending on fuel prices with cost 4 to 16 cents US / kWh

 – Coal technologies will provide a comparable range of costs from 5 to 9 cents US / kWh, but without taking into account the burden of future carbon market.