3. Nuclear plant construction investment project appraisal

This section of the report will evaluate the cost and benefits associated with the nuclear plant as a new UK government investment in electricity generation, with the private sector participation in commercial investment decisions to invest in the new project. From the previous section of the project, the scope for adding a relatively small nuclear capacity by 2025 is a viable project. The new nuclear capacity is aimed at meeting the growing demand for renewable energy.

Investing in a new nuclear capability can be economically justified as an additional source in the current UK national grid. A new plant adds to a new nuclear capacity that would help in reducing the forecasted green gas emissions and reduce fossil gas consumption, which mainly come from imports. New nuclear seems to be a cost-effective means for meeting greenhouse gases emission reduction targets. A new nuclear capacity will not preclude investments in other low carbon generation forms. The investment is also aimed at reducing the cost of carbon abatement, thus offsetting the nuclear cost penalty in a centralised gas price scenario to gas-fired plants. A new nuclear power station will also mitigate risks associated with over-dependence on imported gas, though partially, by reducing risks associated with fuel import interruptions, and add gas storage capacity.

Having an open mind on investing on a new nuclear capability, the government will be opting for a low-risk option from the economic perspective. The financial liability for the government is limited under the assumption that new projects are delivered on a commercial basis. The government will attach more weight to the benefits of additional nuclear capacity in a high gas price sector, rather tan expense in a little gas price field. A reduced carbon emission is one of the governments’ key objectives. With an increasing risk of increasing green gas emissions, the government is most likely to meet the set UNEP targets. Through a designed regulatory framework through the regulatory framework design and rationalised planning process, the high cost of nuclear plant construction can be limited.

This new nuclear power station investment appraisal is not exhaustively financial but rather, it is an economic analysis that will only cover the cost and benefits. This analysis may not monetize the expected accident costs although these may be significantly minute to change the study results. The investment appraisal technique employed in this project attempts to examine the range of benefits vs. the cost and their association with the investment in the construction of a 3.2GW nuclear generation capacity. Theoretically, when the cost exceeds the benefit, the project is considered not viable; otherwise, the project would be a good idea for the government to invest.

However, the potential benefits of keeping doors open for this project can be explained better by conducting a financial analysis that determines the likely commercial benefits for caring on with the project. Amid this limitation, with costs and benefits fully accounted for, the study will consider the cost of resources associated with nuclear reactor plant for power generation purposes. The interested private sector will, therefore, be obliged to carry out a financial analysis for the sake of projects due diligence and complete the plan accordingly.

The existing nuclear power stations in the UK have a 3.5 GW capacity and are scheduled to close between the years, 2018 and 2025. By introducing a 3.2GW new nuclear plant will raise the current capacity to 6.7GW. The closure of the existing facilities translates to a deficit in production capacity as compared to the current demand for electricity. This shortfall translates to a need for construction of an additional nuclear power station with the same capacity before 2025. There is a need to replace the retiring 6GW with new nuclear capacity. Thus, such a project comes at a time when it is needed most. Although it will be the responsibility of the private sector to determine how many more nuclear plants should be constructed between now and 2025 to compensate for the deficit, there is an urge to add up to 8GW of new nuclear capacity to meet the growing demand in the period between 2018 and 2025.

From the table, it is also indicated that 8.3GW from coal-fired plants is due to retire at the end of the year. Apparently, the facility has opted for a retrofitting equipment to control the emissions of Sulphur dioxide as per the LCPD regulations. However, it is unlikely that the capacity may be replaced by a nuclear power plant, although plans to invest in one at a time like now are an advisable venture to be pursued. Although there are possibilities of the retiring plant being exempted from LCPD restrictions, deciding on whether to construct a new plant to compensate for the retiring capacity should not assume such an exemption.

There is a 3.6GW existing nuclear capacity that is scheduled to retire between the year 2018 and 2025. An additional 3.2 GW to the national grid will replace a reliable 87.5% of the retired capacity. Other plants to produce a further 2.9GW will be required for an aggressive counteraction of the gone capacity. The figures of the retiring capacity whose life may be extended by nine years have risen between the years 2021 and 2025. Thus, there is a need for an aggressive action to further invest more on nuclear power and pump in at least 6GW of the existing plant before the end of 2021. Life extension is considered economically viable due to the low marginal generation cost that is cost about the current electricity price. With the life extensions not officially granted, and putting the safety case into consideration, investing in a new plant becomes economically inevitable.

With the 20GW of the existing coal plant opting for compliance with LCPD, the fact that the plants are over 35 years of age, and the cost of investing for a compliance certificate, investing in rehabilitation and life extensions is economically unlikely. The economic analysis, therefore, considers the fact that the scope of an additional nuclear capacity most viable to meet the growing demand for electric energy.

One of the most amicable solutions would be to add a nuclear plant to accommodate increasing demand. The added capacity will only be useful in meeting the growing peak demand and very unlikely to economically operate a nuclear plant as a non-base load. The most feasible option would be to add a nuclear plant and switch the existing gas-fired plant to peak operation right from a base load. The choice is not only attractive but also economically feasible in the thermal perspective efficiency of the existing gas-fired plants that are declining with time.

The capital breakdown

The table below shows an approximation of cost distribution that will be used in construction of the nuclear plant.

Key cost element Cost in ‘000,000,000£
Equipment and construction labor 7.17

Site specific cost

1.05
Engineering and construction management 1.13
Owners cost 1.56
Total overnight cost 1.07
AFUDS 12
Escalation 6.12
Total 21.09

The project to construct a new 3.2 GW nuclear plant at a cost of 21 billion is quite within the fiscal allocation range. This cost of initial capital in inclusive of cost of the new assets, net book value of the already existing assets that are likely to be useful in the project, the capitalised R&D expenditure, and the investment in working capital. From the estimated construction cost for a new nuclear plant by the French programme at around £900/kW serves as the low limit of a unit cost while the Finnish Olkiluoto project at £1050/kW (IFAC, 2012) serves as the higher reference price of the current projects under construction inclusive of the contingency cost.

Including the reserve cost in the initial capital cost estimate puts the chances of the project completion without political interference due to legal actions. An example of a project that was started at a slightly lower cost of £18bn only to later announce a 15% contingency cost to be added to the initial capital budget (GCR, 2016). The project is at risk of being stopped if the new threat of legal action by Greenpeace the environmental campaign group and Ecotricity, a wind energy company. This was after the French government promised to increase the financial support of the EDF Company.

The uncertainty level on costs is not unbounded. This is because the designs of the new reactors are modified from the earlier designs, with innovations incorporated to reduce capital costs due to the simplified designs requiring an increased volume, and less equipment to exploit scale economies potential. However, new designs are evolutionary. Hence, they provide a reasonable basis for cost forecasts. Approval of the budget allocation may be modified and expected price increases included on agreed modifications. Such amendments should be accepted in the pre-development stage of the implementation, rather than during the actual project construction.

Other factors that may result in changes include wage convergence due to the increasing labor market integration in Europe. This integration implies that the cost estimates in other European nations are also relevant in the context of the United Kingdom. A continued convergence is more likely to occur throughout the period within which new nuclear plant construction is commenced. This uncertainty implies that cost methodology should be adequately conducted.

Net present value

In the current policy documents, the UK government relies upon a central estimate of overnight cost or the construction cost with no inclusion of the financing cost. The current overnight cost for a new nuclear power plant stands at £3,742/kw and an associated levelised cost of £95MWh based on assumptions that the escalating construction cost phase of the new program is at 1.5%, the construction phase lasts for six years, and that the technical specifications of the nuclear reactor plant load factors and operating lifetime. The cost of construction for a new power plant is currently estimated at between £18 and £22 (IFAC, 2012). The £21 estimated cost therefore lays within the UK policy guidelines.

Time taken to make it financial

In this case, it is estimated that a 130MWe nuclear reactor will produce 1300×24 MWh of electricity per day upon completion. Considering the cost of a MWh at £80 in UK today the plant will generate £2.5million per day less the operation cost from labor, fuel, maintenances among others at £1.5 million per day, the plant will make roughly £1million per day (National Archives, 2015). Also, the cash flow per day for the day can be said to be £2.5million hence making total cash flow of £912.5million per year (£2.5 X 365) with an assumption that it will operate 7 days a week, 24 hours a day without any downtime. Using the annual cash flow and the initial investment the duration of return or payback period can be calculated as;

Payback = initial investment / annual cash flow

= £21090 million / £912.5

=23.11 years

To break even, the plant will take 23.11 years.

Conclusion

A new plant adds to a new nuclear capacity that would help in reducing the forecasted green gas emissions and reduce fossil gas consumption, which mainly come from imports. New nuclear seems to be a cost-effective means of meeting greenhouse gases emission reduction targets. The financial liability for the government is limited under the assumption that new projects are delivered on a commercial basis. The government will attach more weight to the benefits of additional nuclear capacity in a high gas price sector, rather than expense in a low gas price field. This new nuclear plant investment appraisal is not exhaustively financial but rather, it is an economic analysis that will only cover the cost and benefits. The potential benefits of keeping doors open for this project can be explained better by conducting a financial analysis that determines the likely commercial benefits for caring on with the project. An additional 3.2 GW to the national grid will replace a substantial 87.5% of the retired capacity. Additional plants to produce a further 2.9GW will be required for an aggressive counteraction of the gone capacity.

References list

EDF. (2010). Hinkley Point C EIA Scoping Report. Available: http://infrastructure.independent.gov.uk/wp-content/uploads/2010/01/HinkleyPoint-C-EIA-Scoping-Report.pdf. Last accessed 3rd March 2016.

EDF Energy. (2011). Radioactive Substances Regulations and Environmental Permit. (Online) Available: file:///C:/Users/ciaran/Downloads/Radioactive%20Substances%20Regulation%20Permit%20Submission%20Summary.pdf. Last accessed [28th February 2016].

GCR, 2016. More delays and threat of legal action beset UK’s new nuclear plant. [Online]

Available at: http://www.globalconstructionreview.com/news/more-delays-and-threat-legal-a7ction-b7eset-u7ks/

[Accessed 14 May 2016].

IFAC, 2012. PAIB-IGPG-ED-Project-and-Investment-Appraisal-for-Sustainable-Value-Creation_. [Online]

Available at: http://www.ifac.org/system/files/publications/files/PAIB-IGPG-ED-Project-and-Investment-Appraisal-for-Sustainable-Value-Creation_0.pdf

[Accessed 14 May 2016].

National Grid. (2013). Environmental Impact Assessment Scoping Report. Available: http://infrastructure.planninginspectorate.gov.uk/wpcontent/ipc/uploads/projects/EN020001/1.%20PreSubmission/EIA/Scoping/Scoping%20Request/Scoping%20Report%20and%20appendices.pdf. Last accessed 3rd March 2016.

National Grid. (2014). Environmental Statement HPC Regulation 5. (Online) Available: http://infrastructure.planninginspectorate.gov.uk/wp-content/ipc/uploads/projects/EN020001/2.%20Post- Submission/Application%20Documents/Environmental%20Statement/5.2.2.1%20ES%20Project%20Need%20and%20. Last accessed [28th February 2016].

National Archives, 2015. Nuclear Power Generation Cost Benefit Analysis. [Online]

Available at: http://webarchive.nationalarchives.gov.uk/+/http:/www.dti.gov.uk/files/file31938.pdf

[Accessed 14 May 2016].

World Nuclear Organisation. (2016). Nuclear Power Reactors.Available: http://world-nuclear.org/information-library/nuclear-fuelcycle/nuclear-power-reactors/nuclear-power-reactors.aspx. Last accessed 8th March 2016.

powerproject_file_zoomed (1)West Somerset Council . (2009). Planning Application Approvals. (Online) Available: https://www.westsomerset.gov.uk/online- applications/applicationDetails.do?activeTab=constraints&keyVal=_WSC_DCAPR_21109. [Last accessed 28th Feburary 2016]

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