Construction strategies and lifetime uncertainties for nuclear projects: A real option analysis

Highlights

• Real options can be used to value flexibility of modular reactors.

• Value of NPPs increases with implementation of long term cost reductions.

• Levels of uncertainties affect the choice between projects.

Abstract

Small and medium sized reactors, SMRs (according to IAEA, ‘small’ are reactors with power less than 300 MWe, and ‘medium’ with power less than 700 MWe) are considered as an attractive option for investment in nuclear power plants. SMRs may benefit from flexibility of investment, reduced upfront expenditure, and easy integration with small sized grids. Large reactors on the other hand have been an attractive option due to economy of scale. In this paper we focus on the advantages of flexibility due to modular construction of SMRs. Using real option analysis (ROA) we help a utility determine the value of sequential modular SMRs. Numerical results under different considerations, like possibility of rare events, learning, uncertain lifetimes are reported for a single large unit and modular SMRs.

Introduction

Deregulation of the electricity market has been driven by the belief in increased cost-efficiency of competitive markets, but also leads to increased uncertainties in the market. There is a need for valuation methods to make economic decisions for investment in power plants in these uncertain environments. Kessides (2010) emphasizes the use of real options analysis (ROA) to estimate the option value that arises from the flexibility to wait and choose between further investment in a power plant and other generating technologies as new information emerges about energy market conditions.

The real options approach for making investment decisions in projects with uncertainties, pioneered by Arrow and Fischer, 1974, Henry, 1974, Brennan and Schwartz, 1985 and McDonald and Siegel (1986) became accepted in the past decade. Dixit and Pindyck (1994) and Trigeorgis (1996) comprehensively describe the real options approach for investment in projects with uncertain future cash flows. Using real options enables us to value the option to delay, expand or abandon a project with uncertainties, when such decisions are made following an optimal policy.

ROA has been applied to value real assets like mines (Brennan and Schwartz, 1985), oil leases (Paddock et al., 1988), patents and R&D (Schwartz, 2003). Pindyck (1993) uses real options to analyse the decisions to start, continue or abandon the construction of nuclear power plants in the 1980s. He considers uncertain costs of a reactor rather than expected cash flows for making the optimal decisions. Rothwell (2006) uses ROA to compute the critical electricity price at which a new advanced boiling water reactor should be ordered in Texas.

In this paper we focus on the inherent value of flexibility that arises in construction scenarios of nuclear power plants (NPPs). We use the Stochastic Grid Bundling Method (SGBM) (Jain and Oosterlee, 2013) for the valuation of the real option of investing in NPPs for different construction scenarios. The method has been validated for valuing flexibility that arises during the modular construction of nuclear reactors in Jain et al. (2013). In Section 2 we state the context of different construction strategies for nuclear power plants and its corresponding mathematical forumaltion. Section 3 deals in detail with the real option analysis of projects under different construction strategies, while Section 4 describes the effect of a stochastic life time of operation for nuclear plants. Finally, Section 5 gives some concluding remarks.