Progress in Nuclear Energy 73 (2014) 153e161

Contents lists available at ScienceDirect

Progress in Nuclear Energy

journal homepage: www.elsevier.com/locate/pnucene

Review

The costs of generating electricity and the competitiveness of nuclear

power
Carlo Mari*
Department of Management and Business Administration, G.dAnnunzio University of Chieti-Pescara, Viale Pindaro 42, 65127 Pescara, Italy

a r t i c l e i n f o

a b s t r a c t

Article history:
Received 2 August 2013
Received in revised form
26 November 2013
Accepted 2 February 2014

This paper provides an analysis on the costs of generating electricity from nuclear and fossil sources (coal
and natural gas) based on the most recent technical data available in literature. The aim is to discuss the
competitiveness of nuclear power in a liberalized market context by considering the impact on the
generating costs of the main factors affecting the viability of the nuclear option. Particular attention will
be devoted to study the variability of the generating costs regarding the level of risk perceived by investors through a sensitivity analysis of the generating costs with respect to the cost of capital and the
debt fraction of initial investment. The impact of environment policies is also considered by including a
tax on carbon emissions. The analysis reveals that nuclear power could have ample potentiality also in
a competitive market, particularly if the level of risk perceived by the investors keeps standing low. For
low values of the cost of capital, nuclear power seems to be the most viable solution. Uncertainty about
environmental policies and unpredictability of carbon emissions costs might offer further margins of
competitiveness.
2014 Elsevier Ltd. All rights reserved.

JEL code:
Q40
G31
G32
L94
M21
Keywords:
Levelized cost of electricity
Cost of capital
Nuclear power

1. Introduction
Several countries all around the world are showing a renewed
interest in the nuclear energy mainly due to environmental policies
supporting low-carbon technologies and strategic reasons connected to the reduction of the dependence on fossil fuels (Ahearne,
2011). The nuclear power is, in fact, as a well-established technology: (a) to produce large amount of electricity without emissions of
carbon and other climate-relevant gases; (b) to reduce the volatility
of electricity prices (Mari, 2014); (c) to increase the security of
energy supply. In An Energy Policy for Europe (EC, 2007), the
European Commission underlined the role of nuclear energy to
assure low carbon emissions, competitiveness, and stable prices.1
The importance of nuclear power can be also stressed in the socalled hydrogen economy: the use of hydrogen in the transportation sector will benet the environment only if it is produced
* Tel.: 39 (0)85 4537530; fax: 39 (0)85 4537096.
E-mail address: c.mari@unich.it.
1
Last October, EdF Group and the UK Government have reached an agreement to
guarantee investments in new nuclear capacity. The agreement aims to offer stable
and predictable prices through a contract for difference: if wholesale prices rise
above an agreed price consumers will not pay extra; if prices fall below the agreed
price, the producer will receive a top-up payment.
http://dx.doi.org/10.1016/j.pnucene.2014.02.005
0149-1970/ 2014 Elsevier Ltd. All rights reserved.

by low carbon sources as renewable or nuclear primary energy

sources (Duffey, 2005).
In the debate on costs and benets, the economics of nuclear
energy plays a central role (Kessides, 2010). The liberalization of the
electricity sector, in fact, imposes that the electricity produced by
nuclear power plants must be competitive in a free market context
(Thomas, 2010). The main risks are related to the high costs supported in the construction period of new nuclear power plants: the
uncertainties about the forecasts of construction costs and construction time can make investments in nuclear power very risky.
Large amount of debt must be issued in addition to equity capital,
and high rate of return are demanded by investors for nancing
similar projects. The cumulative effect is an increasing of the generation costs and, if wholesale prices of electricity fall below the
level needed to repay costs for more than a short period, losses will
accumulate in a very rapid way.
This paper investigates the competitiveness of nuclear power in
a liberalized market providing a quantitative analysis on the impact
of main factors affecting the viability of this option. Particular
attention will be devoted to study the variability of the generating
costs regarding the level of risk perceived by investors through a
sensitivity analysis of LCOE with respect to the cost of capital and
the debt fraction of initial investment.

154

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

Numerous studies on the costs of generating electricity from

fossil fuels, nuclear and renewable sources have been published
in recent years. Among the most accurate publications in their
methodological approaches and data, we can mention: The
Future of Nuclear Power (2003) (MIT, 2003) by the Massachusetts Institute of Technology (MIT) and its lately update Update
of the MIT, 2003 e Future of Nuclear Power (MIT, 2009; Du and
Parsons, 2009), published in 2009 as a result of the sharp increase
in the cost of raw materials and generating technologies occurred
between 2004 and 2008. Several institutions in the USA provided
detailed technical studies on the same subject as, among the
others, The Economic Future of Nuclear Power (2004) by Chicago University (University of Chicago (2004)) and Nuclear
Powers Role in Generating Electricity by the Congressional
Budget Ofce - CBO (CBO, 2008). Furthermore, it is worth to cite
for the completeness of the analysis Levelised Unit Electricity
Cost Comparison of Alternate Technologies for Baseload Generation in Ontario (2004), conducted by Canadian Energy Research
Insititute (CERI) (CERI, 2004) and the detailed study Nuclear
Feasibility (2009), by Auckland University (Wilson, 2009), which
also contains the Matlab numerical code used for the simulations.
In addition to these, we must mention the comprehensive studies
Projected Costs of Generating Electricity (2005 and 2010) (IEANEA, 2005; IEA-NEA, 2010), jointly performed by the International Energy Agency (IEA) and the Nuclear Energy Agency (NEA),
providing main technical information and results about the costs
of generating electricity in OECD countries. There are many other
remarkable scientic articles offering similar methodological
analysis, and some of them are included in the nal Bibliography
(Tarjanne and Luostarinen, 2003; RAE, 2004; DTI, 2006; EPRI,
2008; EC, 2008; DGEC, 2008).
Generating costs are assessed according to the Levelized Cost of
Electricity (LCOE). It represents the minimum selling price of the
electricity produced by a specic technology, assumed constant in
real money units, that would be necessary to cover all operating
expenses, interest and principal repayment obligations on debt,
taxes and providing to investors the adequate market return for the
assumed risk. It is calculated as the real price of the electricity that
makes the present value of the revenues resulting from the sale of
the electricity equal to the present value of all costs met during the
plant life-cycle. LCOE is a very important parameter that offers the
break-even selling price and it allows to compare generating costs
of alternative technologies. Furthermore, LCOE plays a crucial role
in a free market context, thus allowing to incorporate market uncertainties and risks in the value of the cost of capital used to discount cash-ows. From this point of view, particularly useful
appear the possibility to decompose the LCOE into various cost item
in order to study the sensitivity of such a parameter to different
sources of risk.
Even though the literature on this subject is very wide, it is
possible to categorize all the studies according to the adopted
assessment methodologies. In some cases, the approach aims at
determining the social generating cost into the logic of public
nancing investments, in an attempt to include all the costs and
benets for the community that could come from the adoption of a
specic technology (Jun et al., 2010). Or in other cases, the assessment relates to the logics of the free market, including technical
analysis which emphasize the risks of the investments within an
operative merchant nancing approach. Especially in the last case,
there are further aspects which can make the subject more
complicated: taxation effects, the role of the debt, and the proper
evaluation of the cash-ow risk. Both the IEA-NEA studies (2005e
2010) fall into the rst category; the remaining ones fall into the
second case, with the exception of CERI report (2004) that includes
both the assessments. It is important to consider well these

distinctions for not comparing inhomogeneous values, such as

generating costs obtained from different hypotheses.
There is a further categorizing which pertains to the economic
setting and the nancial techniques used to determine generating
costs. There exist, indeed, three different methods to determine
LCOE, all originating from well established corporate nance approaches: the Adjusted Present Value (APV) method; the Flow To
Equity (FTE) method, and the Weighted Average Cost of Capital
(WACC) method (Mari, 2010). Despite the differences, they all
belong to a unique theoretical framework, and, if properly applied,
they all must provide the same results. Although the FTE and WACC
methods are widely used, the APV approach seems to be more
exible to account for market risks of investments and to perform
sensitivity analysis of LCOE with respect to the main variables
which inuence the costs of generating electricity, as the cost of
capital and the debt fraction of initial investment, specially in cases
in which repayments make time varying the outstanding debt. The
sensitivity of LCOE value with respect to these variable aims to
assess the variability of generating costs regarding the risk level
perceived by investors, and to emphasize critical features and potentialities of alternative technologies in a merchant nancing
context. In this paper, the analysis will be performed by using the
APV method.
Amongst the most used approaches in the literature, the FTE
method has been well patronized due to its application in the early
reports published by prestigious American universities and institutions (MIT, 2003, Chicago University, 2004, CBO, 2008).
Although the FTE method has been followed in the rst report by
MIT, in the 2009 update the analysis has been performed by using
the WACC method. It is worth to note that great attention must be
paid whenever different approaches are used. Anomalous results,
due to improper applications of the various calculation methods,
can modify in a substantial way the economic analysis. In fact, LCOE
values published in MIT report (2009), as a result of the increased
costs of raw materials and generating technologies occurred from
2004 to 2008, seem to be anomalous if compared with those obtained in the previous MIT report issued in 2003. Section 2 is
devoted to put into some evidence the origin of such an anomaly
and to provide an explanation of the conicting results. Furthermore, in the same Section, a coherent analysis is then presented
and more realistic values are obtained. The costs of generating
electricity, specially those from nuclear source, appear to be higher
when compared to LCOE values presented in the updated study
issued in 2009 (108$-2007 versus 84$-2007 for one MWh in the
nuclear case). In order to explore the inuence of the main risk
factors affecting the viability of the nuclear option, this Section
provides also a decomposition of the LCOE into various cost items.
Section 3 deals with the competitiveness of nuclear power in a
merchant nancing context, providing an empirical analysis based
on MIT (2009) technical data integrated with new estimates of
fossil fuels market prices available in the Annual Energy Outlook
2012 (AEO 2012) (EIA, 2012) to account for the reduction of the
market price of natural gas due to the low cost of unconventional
gas (shale gas) available in the USA. Due to its exibility, the APV
method has been used to study the sensitivity of LCOE with respect
to the cost of capital and the debt fraction of initial investment. The
aim is to simulate the variability of the generating costs regarding
the level of risk perceived by investors and to put into evidence the
main factors affecting the economic viability of nuclear power in a
merchant nancing context. Uncertainty about environmental
policies is also considered by including a tax on carbon emissions.
The analysis tends to evaluate the impact of a carbon charge on the
competitiveness of the nuclear option. The obtained results show
that LCOE values are higher in comparison with the costs of
generating electricity from fossil fuels (from natural gas in

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

particular), at least for high levels of the discounting rate. Nuclear

power could have ample potentiality in a competitive market
context if the perceived level of risk is sufciently restrained and if
environmental policies impose strict limitations on CO2 emissions.
The reduction of the market risk is therefore an important target
that could allow the nuclear energy to become a very important
alternative to fossil fuels in the future.
2. The costs of generating electricity and the MIT anomaly
The Levelized Cost of Electricity (LCOE), as an indicator of the
cost of generating electricity, is dened as the price of the electricity produced by a specic technology that, assumed constant
in real money units, makes the present value of the revenues
resulting from the selling of the electricity equal to the present
value of all the expenses met during the plant life-cycle (investment costs, operating costs, incremental capital costs,
decommissioning costs and possibly carbon charges). LCOE describes the generating costs at the plant level (busbar costs) and
it does not include transmission and distribution costs and
possibly all the network infrastructures adjustments. LCOE value,
determined on the basis of the equality between proceeds and
costs, also guarantees the electricity break-even sale price,
allowing to compare the costs of generating electricity by alternative technologies. This paper will focus on the baseload production of electricity obtained from nuclear and fossil sources
(coal and natural gas).
The Future of Nuclear Power (2003) by the Massachusetts
Institute of Technology and its lately update Update on the Cost of
Nuclear Power, published in 2009 offer a comprehensive
description of the costs of generating technologies, and provide a
detailed analysis of the LCOE valuation. The update was necessary
as a result of the sharp increase in the cost of raw materials and
technologies occurred between 2004 and 2008. In Tables 1e3 have
been synoptically reported both technical and cost data for nuclear
and fossil fuels (natural gas and coal) technologies, according to the
MIT studies (cost values are denominated in USA dollars referred to
the base year).
In the last years the natural gas market has changed signicantly. That was due to the low cost of unconventional gas
available in the USA and the high cost of gas in Europe. AEO 2012
(EIA, 2012) provides new estimates of market prices and trends of
fossil fuels. We use in this Section, we will use MIT (2009) data for
comparative purposes and, in the next Section, we will use the
estimates of fossil fuels prices available in AEO 2012 to investigate
the competitiveness of nuclear energy.

Table 1
Nuclear source, technical assumptions. Kilowatthour (kWh) refers to the electricity
output of the power plant.
Units

Base year
Capacity factor
Overnight cost
Incremental capital costs
Fixed O&M costs
Variable O&M costs
Fuel costs
Waste fee
Decommissioning cost
O&M real escalation rate
Fuel real escalation
Construction period
Plant life

$/kW
$/kW/year
$/kW/year
$ mills/kWh
$ mills/kWh
$/kWh
$ million

Years
Years

MIT

MIT

2003

2009

2002
85%
2000
20
63
0.47
4.888
0.001
350
1.0%
0.5%
5
40

2007
85%
4000
40
56
0.42
6.968
0.001
700
1.0%
0.5%
5
40

155

Table 2
Conventional coal: technical assumptions. Kilowatthour (kWh) refers to the electricity output of the power plant.
Units

Base year
Capacity factor
Overnight cost
Incremental capital costs
Fixed O&M costs
Variable O&M costs
Fuel costs
Waste fee
Decommissioning cost
Fuels carbon intensity
O&M real escalation rate
Fuel real escalation
Construction period
Plant life

$/kW
$/kW/year
$/kW/year
$ mills/kWh
$ mills/kWh
$/kWh
$
kg-C/kWh

Years
Years

MIT

MIT

2003

2009

2002
85%
1300
15
23
3.38
11.16
e
e
0.240
1.0%
0.5%
4
40

2007
85%
2300
27
24
3.57
23.06
e
e
0.229
1.0%
0.5%
4
40

Table 4 describes the economic and the nancial assumptions;

further calculation hypotheses are given in Appendix A.
Owing to the sharp increase of raw materials and technologies
occurred between 2004 and 2008, overnight costs have considerably increased. It is noticeable that, among all the sources, the
nuclear one has been mostly inuenced by the increases in cost,
with a 73% overnight cost increase versus 53% for coal and 47% for
natural gas (taking as reference a 3% ination rate). LCOE values, as
given in the MIT reports, are shown in Table 5.
Although the economic and the nancial assumptions are
essentially the same, the costs of generating electricity published in
MIT (2009) seem to be anomalous in comparison with the results
obtained in MIT (2003), mainly for nuclear energy, whereas LCOE
value suffered an extremely restrained increase (8%) in comparison
with the sharp increase (73%) of the overnight cost. In this Section
we provide a complete decomposition of LCOE with respect the
various cost items in order to study the variability of this parameter
regarding various sources of risk. In particular, we analyze the
dependence of LCOE on overnight costs, representing, specially in
the nuclear case, the most important source of uncertainty and risk
in a merchant nancing context. The obtained results are relevant
to deal with the MIT anomaly and to provide an explanation of the
conicting results. Then, a generating costs analysis based is performed, and more realistic LCOE values are presented and
discussed.
In the rst MIT report, issued in 2003, the LCOE valuation has
been performed using the FTE method. According to this approach,

Table 3
Natural gas: technical assumptions. Kilowatthour (kWh) refers to the electricity
output of the power plant.
Units

Base year
Capacity factor
Overnight cost
Incremental capital costs
Fixed O&M costs
Variable O&M costs
Fuel costs
Waste fee
Decommissioning cost
Fuels carbon intensity
O&M real escalation rate
Fuel real escalation
Construction period
Plant life

$/kW
$/kW/year
$/kW/year
$ mills/kWh
$ mills/kWh
$/kWh
$
kg-C/kWh

Years
Years

MIT

MIT

2003

2009

2002
85%
500
6
16
0.52
25.2
e
e
0.104
1.0%
1.5%
2
40

2007
85%
850
10
13
0.41
47.6
e
e
0.099
1.0%
0.5%
2
40

156

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

Table 4
Economical assumptions. Values between parentheses refer to fossil sources.
Depreciation is developed according to the MACRS (Modied Accelerated Cost Recovery System) scheme described in Appendix A. The depreciation schedule is of the
type MACRS, 20 for coal plants only. Annual constant payments are assumed to meet
debt obligation.

Ination rate
Tax rate
Debt fraction
Debt term (years)
Debt rate
Equity (levered) rate
WACC
Depreciation schedule

MIT

MIT

2003

2009

3%
38%
50% (60%)
10
8%
15% (12%)

3%
37%
50% (60%)
e
8%
15% (12%)
10.0% (7.8%)
MACRS,15

MACRS,15

Table 5
LCOE values.

Nuclear
Coal
Gas

MIT (2003)

MIT (2009)

$-2002

$-2007

67
43
41

84
62
65

the LCOE is calculated by considering all the expenses which are

incurred throughout the whole life of the plant (construction
period, operational lifetime and decommissioning) including the
debt service, as given by the following formula:

 S
Pm 
D
S
t1 Ct Tt Xt  Tc k Dt1 F0;t I0
LCOE
;
Pm
tt0 S
Q t1 1 i
F0;t

LCOE

Initial investment
Taxes
Subtotal
O&M
Fuel
Decommissioning
Total

1 kS

t ;

Gas

43

41

53.53%
17.34%
70.87%
18.63%
9.13%
1.37%
100.00%

39.48%
11.08%
50.56%
21.74%
27.70%
0.00%
100.00%

14.74%
3.15%
17.89%
9.23%
72.88%
0.00%
100.00%

(4)

where t0 is the base year, Q stands for the expected amount of

electricity produced during one year,3 and i is the expected ination
rate. Tc is the marginal corporate income tax rate. Equation (1) accounts also for external debt: Xt is the debt service and TckDDt1 is
the tax shield due to interest payments, where kD is the debt rate
and Dt1 is the outstanding debt at time t  1. I0S is the initial equity
investment, determined as reported in Appendix A.
According to the FTE method, the LCOE decomposition with
respect to various cost items can be obtained from Equation (1),

 S
Pm 
D
t1 Tt  Tc k Dt1 F0;t

Pm

S
t1 Ct F0;t

LCOE

N
P
m
S
I0S t1 Xt F0;t
N

N
;

(5)

where

N Q

(2)

is the discounting factor, and kS is the leveraged rate (levered rate in

the following) which is assumed constant for the whole project life.
The levered rate remunerates equity capital and it is the rate
demanded by investors for similar risky projects. Ct denotes expected operating expenses and include operating and maintenance
costs (xed and variable ones, as labour costs, insurance costs and
royalties), fuel costs, radioactive wastes management costs (in the
case of nuclear source), decommissioning funds and, eventually,
carbon costs in the case of fossil sources. Incremental capital costs
are treated as operating expenses.2 Tables 1e3 give a complete
description of all costs included in the analysis. The corporate tax
liability is calculated according to the following relationship:

Tt Tc Rt  Ct  dept ;

Coal

67

Rt LCOE  Q 1 itt0 ;

m
X
t1

Nuclear

(1)

where

S
F0;t


Table 6
LCOE decompositions by costs using MIT (2003) data. Incremental capital costs are
included in O&M costs.

(3)

obtained by subtracting costs, Ct, and asset depreciation, dept, from

revenues Rt stemming from the selling of the produced electricity,

2
As pointed out in (MIT, 2003), treating incremental capital costs as operating
expenses instead of additions to the depreciable base is a simplication to avoid
having to specify additional depreciation schedules. Because such expenditures are
assumed to occur every year, the error introduced is negligible.

S
1 itt0 F0;t
:

(6)

The rst term of the right hand side of Equation (5) accounts for
O&M costs (xed and variable), incremental capital costs, fuels
costs (including waste management in the nuclear case) and
decommissioning costs; the second term refers to the tax liability
once interest payments are deducted, and the third one accounts
for the initial investment. To investigate the variability of LCOE with
respect to the overnight cost, we must point out that such cost
affects the tax component too. To see this, a more suitable
decomposition can be obtained by substituting Equation (3) into (5)
to get:

Pm
LCOE

S
t1 Ct F0;t

I0S

 S
Pm 
D
t1 Xt  Tc k Dt1  Tc dept F0;t
N1  Tc

:
(7)

The above decomposition allows to study the variability of LCOE

with respect to independent items of cost, including the overnight
cost, and Table 6 provides the results of our simulations obtained
using MIT (2003) data.
By comparing Equations (5) and (7), it is straightforward to
verify that the second term in Equation (7) is equal to the sum of the
tax component, i.e. the second term in Equation (5), and of the
initial investment component. This sum is reported in Table 6 at the
Subtotal line. Since the initial investment is proportional to the

3
Q W  8760  CF, where W is the power of the plant and CF the Capacity
Factor.

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

overnight cost, the sensitivity of LCOE with respect to overnight

cost variations can be obtained by the percentages reported in that
line. For nuclear energy, Table 6 shows that the total impact is about
70%; therefore, an increasing of 73% of the overnight cost implies an
LCOE increase of about 50%, thus pushing the generating cost towards up to the 100$-2007/MWh. Economic and nancial reasons
which can explain such differences need to be deepened. As
mentioned before, in MIT (2003), LCOE values have been determined by using the FTE method, adopting a discounting rate equal
to the value of the equity rate reported in Table 4, assumed constant
for the complete project life. Even though, normally, the levered
rate is a decreasing function of time as a consequence of the debt
reduction, in MIT (2003) the equity rate value was supposed as the
average rate demanded by investors for similar risky projects. In the
lately update the WACC method has been applied. Within this
approach, the LCOE is calculated by considering all the expenses
which are incurred throughout the whole life of the plant without
the debt service, as the plant was all-equity nanced. Such a value is
determined according to the following formula:

Pm
LCOE

W
W
t1 Ct Tt F0;t I0
Pm
W
Q t1 1 itt0 F0;t

(8)

where
W
F0;t

1
1 WACCt

(9)

is the discounting factor, and WACC is the discounting rate, kept

constant for the whole life project. I0W is the initial investment as
dened in Appendix A. The WACC rate was calculated on the basis
of the initial debt fraction, the debt rate, and the equity rate, and
obtained values are reported in Table 4. The discounting was then
performed by keeping constant the WACC rate for the complete life
project, regardless of the progressive reduction of the debt level.
Both methods, if applied as previously described, provide of course
inconsistent results. Table 7 shows our simulations of LCOE by using
the same technical data submitted in MIT (2009) and the FTE
method as in MIT (2003), discounting at a constant equity rate
equal to 15% for nuclear source and equal to 12% for fossil fuels
sources.
If we consider the nuclear and the coal sources, that is the
technologies with the highest overnights costs, there are very
remarkable differences. The value of 108$-2007/MWh for the
electricity produced by nuclear source is much higher than the
LCOE value obtained in the MIT report (2009), and it is perfectly
consistent with the overnight cost increase. The same happens in
the case of the coal source: 72$-2007/MWh versus 62$-2007/MWh.
To explain the origin of such an anomaly, let us recall that WACC
rates can be expressed as a linear combination of equity and debt
rates according to (Mari, 2010),

WACCt

St S Dt
k 1  Tc kD :
Vt
Vt

(10)

The above equation clearly shows that also in the case in which
equity rates are assumed to be constant, the WACC rates must be

Table 7
LCOE values ($-2007). WACC and unlevered rates are also reported.

Nuclear
Coal
Gas

LCOE

WACC

kU

108
72
67

12.5%
10.1%
9.7%

13.1%
10.8%
10.7%

157

increasing in time as a consequence of the progressive debt

reduction, until to coincide with the value of the equity rate
(kS 15% for the nuclear case and kS 12% for fossil fuels generation) at the end of the debt term, i.e. after ten years. The hypothesis
to adopt a cost of equity equal to kS 15%, constant for the whole
investment duration, cannot be therefore nancially equivalent to a
constant 10.0% WACC value for all the project life. Similarly for fossil
fuels, a constant kS 12% is not equivalent to a 7.8% WACC. It is
possible to verify that the average WACC rates and the average
unlevered rates which held constant for the complete project life,
reproduce LCOE values obtained in our simulations, are those reported in the last two columns of the Table 7. On the basis of MIT
(2009) data, the LCOE decomposition regarding various cost
items is reported in Table 8.
Uncertainty in overnight costs is the main source of risk in the
cases of nuclear and coal sources. Unpredictable variations of such
costs affects electricity prices in a formidable way, specially in the
case of nuclear energy. The possibility of structuring nancial operations appealing at project nancing techniques allows to reduce
the typical risks occurring in this phase by contractually transposing themselves to the trading partners. This also constitutes an
efcient way to share risks among contractors on the bases of
expertise and responsibilities for everyone, aiming at assuring the
duty of the investments programs. On the other side, uncertainty in
fuel cost is the main source of risk in the case of natural gas source.
Derivative commodity markets offer the possibility to hedge this
kind of risk in a very efcient way (Geman, 2005).
3. On the competitiveness of nuclear power
To determine the competitiveness of a specic technology, this
one should always be assessed in reference to well dened economic and environmental context policies. Undoubtedly, generating technologies using fossil fuels are the most favorable options
in absence of environmental constraints, but they might be not so
protable in an environmental context with strict limitations
involving CO2 emissions (Budzianowski, 2012), (Budzianowski,
2011). At the same time, uncertainty about energy policies may
rule out some technologies for the high remuneration rates
required by investors to compensate the high level of perceived
risk. In this Section we propose a sensitivity analysis to simulate the
variability of the costs of generating electricity regarding both, the
cost of capital, i.e. the rate of return required by investors for
similarly risky projects, and the debt fraction of initial investment.
Such an analysis is conducted on MIT technical data (2009) integrated with the new estimates of fossil fuels market prices and
trends available in AEO 2012 (EIA, 2012). Such new data are reported in Table 9.
The purpose is to describe the variability of LCOE with respect to
the level of risk perceived by investors and to put into evidence the
main factors affecting the economic viability of nuclear power in a

Table 8
LCOE decompositions by costs using MIT (2009) data. Incremental capital costs are
included in O&M costs.
LCOE

Initial investment
Taxes
Subtotal
O&M
Fuel
Decommissioning
Total

Nuclear

Coal

Gas

108

72

67

61.24%
17.37%
78.61%
13.66%
7.60%
0.13%
100.00%

38.97%
9.63%
48.60%
16.32%
35.08%
0.00%
100.00%

14.40%
2.55%
16.95%
5.78%
77.27%
0.00%
100.00%

158

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

Table 9
Natural gas: technical assumptions.

Fuel costs
Fuel real escalation
Ination rate

Units

Coal

Gas

$ mills/kWh

18.63
0.9%
1.8%

34.00
1.4%

Pm

U
U
t1 Ct Tt F0;t I0 
Pm
U
Q t1 1 itt0 F0;t

A0

(11)

where
U
F0;t


1
1 kU

t ;

(12)

is the discounting factor, and kU is the unlevered rate, that is the

rate demanded by investors for similar all-equity nanced risky
projects. I0U is the initial investment for the all equity nanced
project, as given in Appendix A, and A0 is the tax shields value at
time t 0:

A0 Tc kD

m
X

Dj1

:
D j
j1 1 k

(13)

We assume that the unlevered capital cost is constant in time.

Such a hypothesis can be justied on the basis of the expected cashow composition which is rather time uniform and, differently
from the levered cash-ow, never changes because of the debt
reduction during lifetime. Much less justiable, if not in the case of
average rates, are the hypotheses of the constancy in time of WACC
rates and levered rates. The progressive reduction of the
outstanding debt actually reduces the risk and it forces in the use of
a decreasing levered rates structure. This observation is also valid
when employing WACC rates which, due to the progressive
reduction of the outstanding debt, results variable during lifetime
(Mari, 2010).
Tables 10e12 synoptically provide LCOE calculated at different
values of the unlevered cost of capital, in reference to an initial debt
fraction equal to 50% and to 80%. The choice of the rates range has
been made considering that from data reported in Table 7, an
unlevered rate of about 13% can be considered as the market rate

Table 10
Nuclear source: LCOE values ($-2007) in the cases of debt fractions of initial investment equal to H 50% and H 80%. Equivalent levered (kS) and WACC rates are
shown.
H 50%

H 50%
k

merchant nancing context. Emissions costs are also taken into

account to value the impact of a carbon tax on the competitiveness
of the nuclear option.
Due to its exibility, the Adjusted Present Value (APV) method is
the approach we will use in the following. Within the APV method
the LCOE is calculated by considering all the expenses which are
incurred throughout the whole life of the plant as the plant was allequity nanced including the tax shield benet according to the
following formula:

LCOE

Table 11
Conventional coal: LCOE values ($-2007) in the cases of debt fractions of initial investment equal to H 50% and H 80%. Equivalent levered (kS) and WACC rates are
shown.

9%
11%
13%
15%

H 80%
S

LCOE

66
75
86
98

9.3%
12.1%
15.0%
17.9%

WACC

LCOE

kS

WACC

8.4%
10.4%
12.3%
14.3%

64
73
84
95

9.7%
13.7%
18.2%
23.5%

8.1%
10.0%
11.9%
13.8%

demanded for nuclear plants investments in USA (MIT, 2003), (MIT,

2009). Such a value has been, indeed, obtained by a numerical
unlevering procedure from a constant market levered rate kS 15%.
The same unlevering technique, applied to fossil fuels plants investments (kS 12%), produces an unlevered rate of about 11%
which can be assumed as the market rate demanded for such investments. According to these base cases, the range of variability of
the unlevered rates has been chosen from a minimum of 9% to a
maximum of 15%. The sensitivity analysis aims therefore to
describe the behavior of LCOE regarding the level of risk perceived
by investors. The same table also reports equity rates and WACC
rates, being conceived as equivalent average rates, which assumed
constant for all investment lifetime, allow the replication of LCOE
values.
The costs of generating electricity are particularly sensitive to
the cost of capital, especially for those technologies which have
high overnight costs and long construction periods. Nuclear
source pays for both these difculties and, as shown in
Tables 10e12, LCOE values are clearly higher in comparison with
the generating costs from fossil fuels, specially for high discounting rate levels. In a free market context, the nuclear energy
competitiveness essentially depends on the risk level perceived
by the investors. For low values of the discount rate, nuclear
power shares some competitiveness with fossil fuels generation
and the amount of issued debt may have some impact on the
costs of generating electricity from nuclear plants. On the other
side, LCOE values in the case of natural gas are quite stable with
respect to both, discounting rates and debt fraction of initial
investment.
In a market context, the obtained results show that the nuclear source is not favorable in comparison with the fossil fuels
technologies under the economic standpoint, particularly if the
level of risk perceived by the investors keeps standing high
(Thomas, 2010). These risks are essentially political and social
risks, because they are strictly connected to the stability of energy policies, transparency of rules and, last but not least, to the
social acceptance of technological choices (Goodfellow et al.,
2011). In a policy framework characterized by uncertainty on
energy development programs, the returns on investments
required by the market do not allow the nuclear energy to be
economically competitive. Uncertainty about environmental
policies and unpredictability of carbon emissions costs increases

Table 12
Natural gas: LCOE values ($-2007) in the cases of debt fractions of initial investment
equal to H 50% and H 80%. Equivalent levered (kS) and WACC rates are shown.

H 80%

H 50%

H 80%

kU

LCOE

kS

WACC

LCOE

kS

WACC

kU

LCOE

kS

WACC

LCOE

kS

WACC

9%
11%
13%
15%

81
99
119
142

9.3%
12.1%
15.0%
18.0%

8.4%
10.4%
12.4%
14.3%

78
95
115
137

9.8%
13.8%
18.4%
23.6%

8.1%
10.0%
12.0%
14.0%

9%
11%
13%
15%

59
61
63
66

9.6%
12.6%
15.5%
18.5%

7.9%
10.0%
12.0%
13.9%

58
60
62
65

10.9%
15.6%
20.7%
26.3%

7.1%
9.3%
11.3%
13.3%

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

Table 13
LCOE values ($-2007) in the case of a debt fraction of initial investment equal to
H 50%.

159

Table 14
LCOE values ($-2007) in the case of a debt fraction of initial investment equal to
H 80%.

Coal: CO2-charge ($/tCO2)

Gas: CO2-charge ($/tCO2)

Coal: CO2-charge ($/tCO2)

Gas: CO2-charge ($/tCO2)

kU

20

30

50

20

30

50

kU

20

30

50

20

30

50

9%
11%
13%
15%

83
92
103
115

91
101
111
123

108
117
128
140

66
68
70
73

70
71
74
77

77
79
81
84

9%
11%
13%
15%

81
90
100
112

90
99
109
120

106
115
126
137

65
67
69
72

69
71
73
76

76
78
80
83

the demanded returns from investments in fossil fuels plants

and it might offer margins of competitiveness to nuclear
energy. Tables 13 and 14 provide synoptically LCOE in correspondence of different values of the unlevered rate, assuming a
carbon charge respectively equal to 20, 30 and 50$/tCO2 and a
debt fraction of initial investment respectively equal to H 50%,
and H 80%.
For natural gas technologies, trend expectations about fuel
prices more than targets on CO2 reduction policies are the crucial
features for the economic sustainability of this particular option.
As shown in Table 8, fuel costs represent, indeed, more than 70%
of LCOE. In the case of coal generation, environmental policy
targets are very important: about 25% of LCOE value depends on
the market emission costs, in the hypothesis of assuming an
emissions charge equal to 30$-2007/tCO2. But, anyway, not
directly depending on the emissions cost incidence, there is a
clear social opposition which dislikes this kind of technology and
recently many orders have been canceled in OECD countries (IEANEA, 2010). Table 15 shows the results of a sensitivity analysis of
LCOE values for the nuclear option in the case of assuming an
operational life of power plants equal to 60 years. The analysis
explores the variability of LCOE regarding different debt terms
and in correspondence of debt fraction of initial investment equal
to H 50% and H 80%.
The duration of the debt but also the amount of the issued
debt (the initial investment debt fraction) play a central role to
reduce the cost of generating electricity from nuclear source. In
fact, the last column shows that nuclear power could have ample
potentiality also in a competitive market, specially if the
perceived risk is sufciently restrained and if environmental
policies impose strict limitations on CO2 emissions.4 The reduction of the market risk decreases the market return required
from similar risky investment; on the other side, it enhances the
nancing capacity of investments, increasing the debt fraction of
initial investment and the debt term, thus establishing the relevance of the nuclear energy as a valid alternative to fossil fuels
power generation.

4. Concluding remarks
The Levelized Cost of Electricity can be used as a powerful tool
of analysis to investigate the economic competitiveness of
alternate power generating technologies. LCOE is a very exible
evaluation indicator: it offers indeed the possibility to assess the
economic and the nancial incidence of the variables affecting
the whole generating cost. The sensitivity treatment of LCOE

4
The Directive 2010/75/EU of the European Parliament and of the Council, on the
industrial emissions, due to come into force in January 2016, will impose severe
limits on NOx emissions. CO2 abatement cost will be not the only driver of negative
externalities that affect the cost of generating electricity from fossil fuels. Such
further costs may improve in a signicant way the competitiveness of nuclear
power.

Table 15
Nuclear: LCOE values ($-2007) calculated at different debt terms, in the cases
H 50% and H 80%.
H 50%

H 80%

Debt term (years)

Debt term (years)

kU

10

20

30

40

10

20

30

40

9%
11%
13%
15%

78
97
118
141

75
93
113
136

73
90
110
132

71
89
108
130

75
93
114
136

70
87
106
128

67
83
101
122

65
80
98
118

allows to estimate the weights of various risk factors and to

detect management strategies for reducing investment risks. The
developed analysis shows that the nuclear technology could have
ample potentiality even in a competitive market context. Market
role becomes indeed basic in its prime function of allowing an
amelioration of the whole generating process, from the plant
construction phase to the operating phase, until the decommissioning stage at the end of the life-cycle. Costs met during
construction signicantly affect nuclear LCOE values. As previously mentioned, the possibility of structuring nancial operations using project nancing techniques allows to reduce the
typical risks occurring in this phase by contractually transposing
themselves to the trading partners. Even the operating phase
deserves great attention: the electric energy must be sold in a
competitive market and its price is determined by the interaction
of supply and demand (Mari and Tondini, 2010). In all deregulated markets the liberalization process has produced a signicantly increase of prices volatility (Mari, 2008). Markets give
appropriate nancial instruments to reduce the exposure to the
electricity price risk: forward, futures, power options and bilateral contracts allow planning longtime selling strategies, possibly
for the whole operational life of the plants.5
Finally, the analysis submitted in the present work could also
provide a quantitative support for detecting, directing and giving
assessments for public actions and interventions, aiming at
conciliating market logics with benets for the community: credits
acknowledgment for reducing CO2 emission, tax rules appropriate
to energy policy targets, incentives to research and development.
As the governments are the planner subjects for energy choices,
they have the duty to promote technologies which permit to get the
energy policy targets, providing clear signals to direct the investments. That is to say to create conditions in order to develop an
appropriate consensus about energy and environmental policies
which can reduce market risks. This is the way to internalize

5
The recent agreement between EdF Group and the UK Government is very
interesting to guarantee investments in new nuclear capacity. It aims to offer stable
and predictable prices through a contract for difference. Furthermore, consortium
models can be very useful in the risk management of investments in nuclear power
plants. Teollisuuden Voima Oy in Finland and Exeltium in France may constitute
illuminating examples.

160

C. Mari / Progress in Nuclear Energy 73 (2014) 153e161

positive externalities through the reduction of the cost of capital. If

the perceived level of risk is sufciently restrained, the developed
analysis shows that the nuclear technology could have ample potentiality even in a competitive market context.

Table A.2
Depreciation Schedule.

Appendix A. Further technical assumptions

In this appendix, the necessary assessments to reproduce the
results submitted in Sections 2 and 3 will be showed. Particularly,
Table A.1 reports the construction plan adopted in MIT (2003) and
MIT (2009).

Table A.1
Construction schedule.

Year
Year
Year
Year
Year
Year

5
4
3
2
1
0

Nuclear

Coal

Gas

9.5%
25.0%
31.0%
25.0%
9.5%

14.6%
35.4%
35.4%
14.6%

50%
50%

Capital investments are expressed in terms of overnight costs,

which refer to the construction costs sustained as the plant was
built instantaneously. In our nancial model the overnight costs
are allocated over the construction period according to the
schedule reported in Table A.1. Even if MIT (2003) assumed that
construction costs incur at the beginning of the reference year, in
MIT (2009) and in this paper such costs are taken at the end of
the reference year.
Denoting by Bt the fraction of the overnight cost allocated to
year t, and referring to Fig. 1, the nominal investment I t can be
expressed as:

I t 1 itt0 Bt Oc

Asset depreciation is distributed according to the MACRS system

(Modied Accelerated Cost Recovery System), submitted on
Table A.2.

t n; .; 1; 0;

(A.1)

where Oc is the overnight cost. We assume that the debt level is

determined by the hypothesis that the investment costs is nanced
both by debt capital and equity capital, according to a constant debt
fraction H. Including interests during construction, the equivalent
initial equity investment, I0S , is dened by:

n


i
h 
I0S 1  H I n 1 kS . I 1 1 kS I 0 ;

Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

MACRS,15

MACRS,20

5.00%
9.50%
8.55%
7.70%
6.93%
6.23%
5.90%
5.90%
5.91%
5.90%
5.91%
5.90%
5.91%
5.90%
5.91%
2.95%

3.750%
7.219%
6.677%
6.177%
5.713%
5.285%
4.888%
4.522%
4.462%
4.461%
4.462%
4.461%
4.462%
4.461%
4.462%
4.461%
4.462%
4.461%
4.462%
4.461%
2.231%

Pertaining to the nuclear source, further calculation assumptions are reported as following:
e In MIT (2003):
- decommissioning costs are uniformly distributed on the
whole lifecycle plant;
- costs for radioactive wastes treatment are given in real values
referred to the base year.
e In MIT (2009):
- the operating phase of the power plants is assumed to start in
2013
- decommissioning costs are paid at the last year of plant
lifetime;
- costs for radioactive wastes treatment are given in nominal
values.

(A.2)
References

and the equivalent initial debt, D0, by:

n


i
h 
D0 H I n 1 kD . I 1 1 kD I 0 :

(A.3)

The equivalent initial investment used within the WACC

approach and in the APV method, are given respectively by:

I0W I n 1 WACCn . I 1 1 WACC I 0 ;

(A.4)

and


n


I0U I n 1 kU . I 1 1 kU I 0 :

Fig. 1. Investment timeline.

(A.5)

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