Sustainable Development and the Application of Discounting to the Calculation of the Levelised Costs of Electricity

Transcription

1 Organisation for Economic Co-operation and Development NEA/NDC/R(2018)1 English - Or. English NUCLEAR ENERGY AGENCY COMMITTEE FOR TECHNICAL AND ECONOMIC STUDIES ON NUCLEAR ENERGY DEVELOPMENT AND FUEL CYCLE 22 June 2018 Sustainable Development and the Application of Discounting to the Calculation of the Levelised Costs of Electricity This report was produced by the Division of Nuclear Technology Development and Economics as part of Output 4.7 of the NDC Programme of Work Options for Complementing the LCOE Methodology for Estimating the Costs of Electricity Generation Technologies in Markets with Significant Shares of Variable Renewables. This report is only available in pdf. format. JT This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

2 2 NEA/NDC/R(2018)1 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 35 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. NUCLEAR ENERGY AGENCY The OECD Nuclear Energy Agency (NEA) was established on 1 February Current NEA membership consists of 33 countries: Argentina, Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Norway, Poland, Portugal, Romania, Russia, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission also takes part in the work of the Agency. The mission of the NEA is: to assist its member countries in maintaining and further developing, through international co-operation, the scientific, technological and legal bases required for a safe, environmentally sound and economical use of nuclear energy for peaceful purposes; to provide authoritative assessments and to forge common understandings on key issues as input to government decisions on nuclear energy policy and to broader OECD analyses in areas such as energy and the sustainable development of low-carbon economies. Specific areas of competence of the NEA include the safety and regulation of nuclear activities, radioactive waste management, radiological protection, nuclear science, economic and technical analyses of the nuclear fuel cycle, nuclear law and liability, and public information. The NEA Data Bank provides nuclear data and computer program services for participating countries. This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Corrigenda to OECD publications may be found online at: OECD 2018 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of the OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to neapub@oecd-nea.org. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at info@copyright.com or the Centre français d'exploitation du droit de copie (CFC) contact@cfcopies.com.

3 NEA/NDC/R(2018)1 3 Abstract This report reproduces the spreadsheets used in Projected Costs of Generating Electricity: 2015 Edition, to calculate the levelised costs of electricity (LCOE) for those participating countries that provided cost information for both nuclear power plants and onshore wind turbines. It calculates these LCOEs using discount rates of 3%, 5%, 7%, and 10% over the life of the generator. It then calculates LCOEs using the 3%, social discount rate, to discount revenues, operating expenses and decommissioning and waste management funds. The report finds that both nuclear power and onshore wind costs are much lower when the total capital investment costs are refinanced at 3% after construction. Further, because of the long lifetimes of nuclear power plants, onshore wind is not competitive with nuclear power when electricity for future generations is accounted for in present decision making. Foreword A series of working papers (R-series reports) are being prepared in advance of the first meeting of the Expert Group on Electricity Generating Costs (ECG) by the Division of Nuclear Technology Development and Economics (NTE), the Working Party on Nuclear Economics (WPNE) and the Committee for Technical and Economic Studies on Nuclear Energy Development and the Fuel Cycle (NDC) in advance of the writing of the Projected Costs of Generating Electricity: 2020 Update a joint publication with the International Energy Agency. This report is the first in this series of reports. It addresses the issue of the appropriate discount rate considering sustainable development. Acknowledgements This report was prepared by Dr Geoffrey Rothwell, Principal Economist at the NEA. Special thanks are due to the members of the Division of Nuclear Technology and Economics (NTE), to the Working Party on Nuclear Economics (WPNE), to the Committee for Technical and Economic Studies on Nuclear Energy Development and the Fuel Cycle (NDC), and to NEA staff who reviewed the report and gave comments and suggestions for improvement.

4 4 NEA/NDC/R(2018)1 List of abbreviations and acronyms ABWR ALWR APR-1400 D&D EGC EPR FEMP Gen III IAEA IDC IEA kwe LCOE LWR MWh NEA O&M OECD OMB PWR SDGs TIPS USD VVER-1200 WACC WCED Advanced Boiling Water Reactor (General Electric-Hitachi) Advanced Light Water Reactor Korean Advanced Pressurised water Reactor Decontamination and dismantling Expert Group of Electricity Generation Costs (NEA) European Pressurised water Reactor Federal Energy Management Program, US Department of Energy Generic Generation III light water reactor International Atomic Energy Agency Interest during construction International Energy Agency Kilowatt-electric Levelised costs of electricity Light Water Reactor (Generation II) Megawatt-hour Nuclear Energy Agency Operations and maintenance Organisation for Economic Co-operation and Development Office of Management and Budget, US Generic Pressurised Water Reactor Sustainable development goals Treasury inflation-protected securities United States dollar Water moderated and water cooled pressurised electricity reactor (Russia) Weighted average cost of capital World Commission on Environment and Development

5 NEA/NDC/R(2018)1 5 Introduction: Discounting in earlier editions of Projected Costs of Generating Electricity The series of Projected Costs of Generating Electricity ( Projected Costs ) reports has been produced jointly by the Nuclear Energy Agency (NEA) and the International Energy Agency (IEA) of the Organisation for Economic Co-operation and Development (OECD) every five to ten years since 1983 to evaluate the levelised costs of electricity generation for a variety of technologies and fuel sources. The reports use input data provided by representatives of participating countries in response to a survey. The levelised cost methodology has been agreed upon by nationally appointed experts from participating countries and contains many basic assumptions reflecting the changing situations in electricity generation technologies and markets. It provides projections a half-decade into the future. The first report of Projected Costs, published in 1983 by the NEA (i.e. without IEA participation), established the reference framework and methodology for calculating the levelised costs of electricity (LCOE). Particular emphasis was paid to including all direct costs incurred in association with nuclear power. The report made use of a 5% real discount rate and currency values in a common European currency unit. The sequel to the original report was published by the NEA in In this second edition, the reference monetary unit was shifted to the United States dollar (USD), and results were given in USD for the remainder of the series. Moreover, the 10% real discount rate was added for a comparison against the default 5% real assumption. The first jointly produced report was released by the NEA and the IEA in While more countries and technologies were added, the currency units and discount rates remained the same. The use of 5% and 10% continued in the 1992, 1998, 2005 and 2010 editions. The rationale for choosing an appropriate (real) discount rate has changed during the history of publishing Projected Costs. Investment costs of the generating facility include both the overnight (capital) cost and the costs of financing this capital, which depend on the duration of construction, annual construction expenditures and the cost of capital. The financing costs are calculated by the NEA/IEA Secretariat under the direction of the Expert Group of Electricity Generation Cost (EGC). For the real discount rate, the NEA/IEA (2015, p. 137) states: [T]he discount factor, (1 + r) t is implicitly assumed to be based on the electricity generator s after-tax weighted average cost of capital (WACC). However, given that this is from a social cost viewpoint, the EGC suggested using a pre-tax weighted WACC, making comparisons across countries easier. The WACC is generally defined as follows: WACC = [debt ratio] + [equity (1 ratio)], where debt is the cost of debt (interest) or bond financing, ratio is the ratio of debt to total capital (total debt plus total equity), and equity is the cost of equity financing. Here the cost of debt is the interest rate charged by banks, where debt is paid first from assets of the borrowing firm if it becomes insolvent. The rate of return on equity is assumed equal on internal equity provided out of the profits of the firm (instead of distributing them to the investors) and external equity provided by investors. (These rates can differ if there are transaction costs on securing external funds or if investors are required to pay taxes on distributed profits; however, there is a universal assumption of perfect capital markets where the after-tax rates on internal and external financing are the same). External equity providers are paid after debt providers if the firm becomes insolvent. Generally, electric utilities do not pay taxes on income distributed as interest because the interest is income to the lender who pays these taxes. Taxes reduce the value of returns to equity. Because of the different audiences, multiple discount rates have been used. The 2015 edition of Projected Costs breaks with previous editions by not calculating a 5% discount rate case. See NEA/IEA (2015, p. 26):

6 6 NEA/NDC/R(2018)1 The real discount rate r used for discounting costs and benefits is stable and does not vary during the lifetime of the project under consideration. Also, this edition uses a 3% discount rate (corresponding approximately to the social cost of capital ), a 7% discount rate (corresponding approximately to the market rate in deregulated or restructured markets), and a 10% discount rate (corresponding approximately to an investment in a high-risk environment). Nominal discount rates would be higher, reflecting inflation (see Chapter 8). These rates should not be seen as being applicable to particular projects but as a method to compare the costs of various technologies across regions. One of the most complete discussions of the appropriate discount rate can be found in NEA/IEA (1989, p. 123): Thus discount rates can be based on: i. the real costs of investment funds (frequently the interest rate on bonds for an electric utility, but can also include the dividend on equity finance) over the timescale of the project; ii. iii. iv. the opportunity cost of capital at the time of investment as determined by the income it could potentially generate in alternative uses; social time preference reflecting wider benefits and society's desire to protect the interests of future generations; some mixture of these concepts. In general the opportunity cost rate (ii) is likely to be higher than the long-term borrowing rate (i) which in turn is likely to be higher than the social time preference rate (iii). Both the borrowing rate (or dividend or composite rate) and the opportunity cost rate are likely to be higher for investments perceived to have uncertain outcomes. In analytical terms, it can be convenient to distinguish the concept of time-preference from that of risk. The risks of high or low outcomes for important items (such as the price of coal and other fuel inputs, capital costs, building times, load factors, efficiencies, availabilities, etc. for generating plant) are most clearly described by the use of suitable sensitivity ranges combined with a purely time-preference discount rate. However investors are, on balance, risk averse and seek to avoid losses in more risky projects (or companies) by seeking higher rates of return. Further, in all but the first edition, a 10% discount rate was used. In all but the 2015 edition, a 5% discount rate was used. The 1989 edition used 3% and 7% for sensitivity analysis (along with the 5% and 10% values). As pointed out in the 1992 edition (p. 24): In earlier studies generation costs were calculated at real discount rates of 5 per cent p.a. and 10 per cent p.a. with sensitivity analyses in the 1989 study at 3 per cent and 7 per cent p.a. Five per cent was previously adopted as the reference value because it was consistent with the values adopted in the majority of OECD countries. Ten per cent was included to demonstrate sensitivity and because it was consistent with the highest rate used in participating countries (including non-oecd countries) for their own analyses. In the 1992, 1998, 2005 and 2010 editions, discount rates of 5% and 10% were used exclusively. As noted in NEA/IEA (2010, p. 34), In keeping with tradition, also this edition of the Projected Costs of Generating Electricity has worked both with a 5% and a 10% discount rate. There has been a tradition of using discount rates of 5% and 10%: NEA (1986, p. 53), Capital and interest rates are particularly important in this context. For example, a doubling of the interest rate (discount rate) from 5 to 10 per cent penalises the more capital-intensive technologies such as nuclear.

7 NEA/NDC/R(2018)1 7 NEA/IEA (1998, p. 27), For the sake of simplicity and consistency, the interest during construction and the present worth of deferred back-end costs, i.e. decommissioning and radioactive waste management costs, have been calculated for this study using the appropriate discount rate as the interest rate. Although this is in line with common practice in most OECD countries, some countries adopt lower discount rates for long-term financial liabilities corresponding to a long-run real rate of return that can be confidently expected to be earned on funds set aside to meet deferred costs. The NEA study on future financial liabilities [NEA, 1996] describes the various schemes adopted by different countries in this regard. The effect on levelised costs of adopting lower discount rates for future financial liabilities is small, as shown by the results presented later in this report. NEA/IEA (2010, p. 151) Section 8.1, Social resource cost and private investment cost: the difference is uncertainty, states Social resource cost is the opportunity cost a society has to forego when it undertakes an investment in a specific technology. The key aspect here is the assumption that all risk is captured in the discount rates For the purposes of this study, it means that when using the term social resource cost we treat the investment in question as if there was no price risk. The very notion of the levelised cost methodology implies the existence of stable electricity prices over the whole lifetime of the project. Nevertheless, the two discount rates used in this study (5 and 10%) provide rough indications of different levels of intrinsic risk. This report recreates the spreadsheets (dated 14 November 2014) used to determine LCOE from the survey data using 3%, 5%, 7%, and 10% real. With these recreated spreadsheets, an experiment is being undertaken. LCOE calculations are made at each discount rate (some of the results may not correspond with the results published in the 2015 edition as a result of logistical problems that arose during the production process. The experiment is to let the discount rate vary from 3% to 10% during construction, but to refinance total capital investment costs at a discount rate of 3% at the end of construction, sometimes known as the social discount rate, and discount expenses and revenues at 3% after construction. (This is not a policy prescription that all electricity cost estimators should use, but it is simply an experiment). Before discussing the calculation of LCOE, some clarification should be made between nominal and real discount rates, where nominal rates include expected inflation and real rates exclude expected inflation. In fact, real discount rates are difficult to determine, unless data on expected inflation are available to distinguish between real and nominal interest rates or rates of return on equity. One of the few sources of data is the difference between nominal and real yields on US government bonds, as shown in Figure 1 from the date of the first meeting of the ECG convened for Projected Costs (2015) on 24 October 2014 to the discussion on planning of Projected Costs (2020) at the WPNE on 31 January If the key question is whether these rates will remain low going forward, consider investor expectations regarding yields on 30-year bonds (similar to 30-year mortgages). The nominal rate for US government 30-year bonds had yields between 2-3% nominal, although in the first month of 2018, there was some indication that the US Federal Reserve might let interest rates rise in 2018 (possibly choking off inflationary growth). At the same time, the US Treasury offered 30-year bonds that had inflation guarantees (Treasury Inflation-Protected Securities, TIPS), i.e. that the return on the bond would not vary with changes in the value of the US dollar. Hence, the difference between these two market-driven rates (the US Treasury selling 30-year bonds to raise revenues to pay federal obligations and, generally, institutional investors buying 30-year bonds to diversify their portfolios), is equal to the expected inflation of the investors in this market. TIPS yielded between 0.5% and 1.5%. Hence, expected inflation was between 1.5% and 2% per year over the current 30-year horizon.

8 8 NEA/NDC/R(2018)1 The inflation rate may not correspond to any future inflation rate, such as the one measured by the US Gross Domestic Product deflator. The Projected Costs series has used real rates throughout its history because inflation rates could vary from expected inflation rates and might not correspond to cost escalation in electricity generation new build. Using real rates allows the reader to escalate the real-cost estimates in Projected Costs by their expected escalation rate. However, readers should always deflate or inflate currency by official inflation rates, then use real cost-escalation rates to adjust estimated costs, i.e. they should never use nominal (construction, operation, or decommissioning) cost escalation rates to adjust costs in Projected Costs. Figure 1: Nominal and real yields on US government 30-year bonds, 23/10/2014 to 31/01/2018 Historical Treasury Rates Nominal Inflation Real Source: US Treasury (2018). Sustainability and the social discount rate How does the discount rate enter into the calculation of the LCOE? Reproduced below are the equations that define the LCOE from the 2015 edition (p. 28). With annual discounting, the LCOE calculation begins with equation (1) expressing the equality between the present value of the sum of discounted revenues and the present value of the sum of discounted costs, including payments to capital providers. The subscript t denotes the year in which the sale of production or the cost disbursement takes place. The summation extends from the start of construction preparation to the end of dismantling, which includes the discounted value at that time of future waste management costs. All variables are real, i.e. net of inflation. On the left-hand side one finds the discounted sum of benefits and on the right-hand side the discounted sum of costs: P MWh MWh t (1 + r) t = (Capital t + O&M t + Fuel t + Carbon t + D t ) (1 + r) t (1) where the different variables indicate: P MWh = The constant lifetime remuneration to the supplier for electricity MWh t = The amount of electricity produced in year t in MWh

9 NEA/NDC/R(2018)1 9 (1+r) -t = The discount factor for year t (reflecting payments to capital) Capital t = Total capital construction costs in year t O&M t = Operation and maintenance costs in year t Fuel t = Fuel costs in year t Carbon t = Carbon costs in year t D t = Decommissioning and waste management costs in year t Because P MWh is a constant over time, it can be brought out of the summation, and equation (1) can be transformed into LCOE = P MWh = (Capital t+o&m t +Fuel t +Carbon t +D t )(1+r) t MWh t (1+r) t (2) where this constant, P MWh, is defined as the levelised costs of electricity (LCOE). Thus, the discount rate is used to bring all expenditures to the start of electricity generation. This means that discounting to a forward date allows for the cost of financing during construction (known generally as Interest During Construction, IDC; but also associated in different rate-of-return regulatory regimes as either Allowance for Funds Used During Construction, AFUDC, or Construction Work in Progress, CWIP, see Rothwell, 2016, pp ). Further, it allows for the calculation of the present value of expenditures for operation, decommissioning and waste management, as well as the discounting of the value of revenue derived from the sale of electricity. As shown in Figure 2, when using a 10% discount rate, the value of electricity for future generations (after 25 years) is less than one-tenth of the value of electricity to the present generation. Further, when considering funds set aside for decommissioning and waste management, at a 10% discount rate the amounts set aside are assumed to grow at 10% per year, and thus can be much less than required when the plant must be decommissioned (where decommissioning refers to de-licensing, but generally implies decontamination and demolition and the return of the site to its original state). Given that many jurisdictions require the investment of decommissioning trust funds in risk-free instruments, such as government bonds, the real rate of return on these funds is more likely to be closer to the social discount rate, than the after-tax corporate rate-of-return on equity. Therefore, we must consider lower discount rates on decommissioning and waste management funds, and possibly on expenditures and revenues from electricity sales during the life of an electricity generating plant to reflect a renewed interest in protecting the welfare of future generations. In recent public policy debates, sustainable development has become a generally accepted requirement, i.e. public policymakers must take into account not only the costs and benefits of the current generation, but also those of future generations. Sustainable development has been defined by the World Commission on Environment and Development (WCED, 1987) in the Brundtland Commission report: Sustainable development refers to development that meets the needs of present generations without compromising the ability of future generations to meet their needs. In the context of building electricity generating capacity, this implies not indebting future generations for capacity or waste that provide no benefits to them.

10 10 NEA/NDC/R(2018)1 Figure 2: The influence of discount rates on the value of future electricity generation 1,000 3% % % 5% 7% 10% Generation 1 Generation 2 Generation 3 Source: NEA calculations The United Nations has continued to define sustainable development through the definition of a set of Sustainable Development Goals (SDGs). The most relevant to the work here is SDG 7: Ensure access to affordable, reliable, sustainable and modern energy for all. The SDGs unfortunately do not discuss discount rates, particularly in the context of affordable modern energy (electricity). However, the IAEA has published (IAEA 2016, p. 36) a discussion of the application of the social discount rate in the context of calculating LCOEs (where [51] refers to Harrison, 2010, without mention of the terms sustain, sustainable, sustainability, sustainable development, or development ): Figure 12 shows the LCOE for 11 different groups of technologies at a discount rate of 3% (real). This can be seen as a social discount rate and represents the rate at which society is deemed willing to defer consumption. It is also of a magnitude similar to that prescribed by many OECD Governments for cost benefit analysis of government projects and policies [51] and similar to the yield on high quality corporate bonds. To help clarify these issues, Karoly (2017) presents a literature review of the social discount rate. Determining the appropriate social discount rate for discounting costs and benefits over multiple generations, such as one finds when evaluating investments in the electricity generation and distribution system, is subject to much debate. Table 1 presents appropriate rates in long-term cost-benefit evaluations by the US DOE Federal Energy Management Program (FEMP) following the Office of Management and Budget guidance for projects of varying life times. (These generally follow the investor market expectations in Figure 1 for 30-year bonds). In contrast, Table 2 presents government bond rates for a selection of countries, updating Table 8.1 in Projected Costs Government bond rates were lower in 2017 than the assumed social discount rate of 3%.

11 NEA/NDC/R(2018)1 11 Table 1: US Office of Management and Budget discounting guidelines, 2017 Nominal: OMB inflation rates: Real: 3-year 1.40% 1.90% -0.50% 5-year 1.70% 2.00% -0.30% 7-year 1.90% 1.90% 0.00% 10-year 2.10% 2.00% 0.10% 20-year 2.50% 2.00% 0.50% 30-year 2.80% 2.10% 0.70% Source: US DOE FEMP (2017) Table 2: Nominal and real yields on government bonds, 2017 Country Nominal GDP Deflator Real Standard &Poor s yield (1) for 2017 (2) Yield Rating (3) Switzerland 0.31% 0.40% -0.09% AAA France 0.69% 0.90% -0.21% AA Korea 0.43% 1.40% -0.96% AA United Kingdom -0.22% 2.20% -2.37% AA China 0.63% 4.50% -3.70% AA- Japan 0.38% -0.40% 0.78% A+ Russia -0.62% 7.70% -7.73% BB+ Brazil -1.79% 5.80% -7.17% BB Sources: 1) 2) 3) Although the consensus social discount rate appears to be 3% real, since the financial crisis of , the yield on government bonds has been closer to 3% nominal. While the 3% real could be much higher than the social discount rate over the next 30 years, it will regardless be used in the following sections to evaluate a simple change to the Projected Cost methodology, i.e. fixing the discount rate at 3% real for all expenditures and revenues after the electricity generating facility starts selling electricity into the transmission grid. This is equivalent to refinancing a construction loan at a lower rate (3%) after construction is complete, and discounting all expenditures and revenues at the social discount rate after construction. Comparing the LCOEs of nuclear power and onshore wind without and with refinancing at 3% The first step in this experiment was to reproduce the results published in Projected Costs (2015), i.e. Table 3.4, Table 3.6, Table 3.11, and Table 3.13, reproduced in the Annex. (US responses to the questionnaire gave onshore wind with capacity factors of 28 to 40%, given that the average, 34%, was 20% higher than all other responses, the capacity factor was assumed to be 28%). The sample was subsequently limited to those countries that submitted cost estimates for both nuclear power and onshore wind.

12 12 NEA/NDC/R(2018)1 Table 3 presents nuclear power overnight costs, investment cost (overnight plus financing costs) per kwe and per MWh, front-end fuel and back-end waste costs per MWh, refurbishment plus decontamination and dismantling costs per MWh, Operation and Maintenance costs per MWh, and LCOE in USD/MWh. These have been ordered from the least expensive to the most expensive LCOE at a 3% discount rate. (Not all surveys gave decommissioning costs, so these were added as described in Chapter 2 of Projected Costs (2015), p. 33, i.e. 15% of overnight costs for nuclear power plants and 5% of overnight costs for all other technologies). Further, while there is an assumption that decommissioning requires ten years for all technologies, this was maintained for nuclear power plants, but changed to the length of the construction period for other technologies. For example, it is assumed that if an onshore wind turbine can be built in one year, it can be dismantled in one year. This has little influence on the decommissioning costs of onshore wind. Table 3: LCOE and cost components for nuclear power plants at 3% to 10% discount Country China Korea China France Belgium US Hungary Japan UK Type CPR APR AP EPR Gen III ABWR VVER ALWR PWRs Size MWe MWe Overnight Cost $/kwe $/kwe Investment cost $/kwe 3% Investment cost $/kwe 5% Investment cost $/kwe 7% Investment cost $/kwe 10% Investment cost $/MWh 3% Investment cost $/MWh 5% Investment cost $/MWh 7% Investment cost $/MWh 10% Fuel + Waste cost $/MWh Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 5% Refurbish + D&D $/MWh 7% Refurbish + D&D $/MWh 10% O&M Cost $/MWh Levelised Costs $/MWh 3% Levelised Costs $/MWh 5% Levelised Costs $/MWh 7% Levelised Costs $/MWh 10% Table 4 presents these same cost components and LCOEs when the discount rate is fixed at 3% after construction. In Table 3 refurbishment and D&D sinking funds can decline to USD 0.01/MWh~0.02/MWh for most cases, whereas in Table 4, the contribution to these funds remains the same for all cases. Paying off the capital investment costs with a 3% mortgage is much cheaper than with a 5%, a 7%, or a 10% mortgage. Because fuel, waste, and O&M are identified in the survey as constant costs per MWh (or converted into constant variable costs per MWh if the respondent provided fixed/kwe and variable/mwh costs), these do not change when the discount rate is fixed at 3%. Therefore, the changes in LCOE are primarily from a reduction in annual payments to bond and equity holders (but are slightly off-set by increases in refurbishment and D&D costs per MWh). Table 5 shows the values in Table 3 minus the values in Table 4. With a 3% refinancing, a MWe PWR (e.g. Hinkley Point C) is 77 USD less than what may appear in current cost analyses using market-based costs of capital.

13 NEA/NDC/R(2018)1 13 Table 4: LCOE and cost components for nuclear power plants at 3% after construction Country China Korea China France Belgium US Hungary Japan UK Type CPR APR AP EPR Gen III ABWR VVER ALWR PWRs Size MWe MWe Overnight Cost $/kwe $/kwe Investment cost $/kwe 3% Investment cost $/kwe 5% Investment cost $/kwe 7% Investment cost $/kwe 10% Investment cost $/MWh 3% Investment cost $/MWh 3% Investment cost $/MWh 3% Investment cost $/MWh 3% Fuel + Waste cost $/MWh 3% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% O&M Cost $/MWh 3% Levelised Cost $/MWh 3% Levelised Cost $/MWh 3% Levelised Cost $/MWh 3% Levelised Cost $/MWh 3% Table 5: Values in Table 3 minus values in Table 4 for nuclear power plants Country China Korea China France Belgium US Hungary Japan UK Type CPR APR AP EPR Gen III ABWR VVER ALWR PWRs Size MWe MWe Investment cost $/MWh 5% Investment cost $/MWh 7% Investment cost $/MWh 10% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3% Table 6 presents onshore wind overnight costs, investment cost (overnight plus financing costs) per kwe and per MWh, front-end fuel and back-end waste costs per MWh, refurbishment plus decontamination and dismantling costs per MWh, Operation and Maintenance costs per MWh, and LCOE in USD/MWh. These have been ordered corresponding to Table 3, Table 4 and Table 5, where order has been decided based on the least expensive to the most expensive LCOE nuclear power at a 3% discount rate. (This is to ease the comparison of the costs of nuclear power and onshore wind in Table 9 and Table 10). Comments on the differences between Table 6 and Table 7 parallel those regarding the differences between Table 3 and Table 4. (In the country survey, there were two onshore wind projects in China: one for 50 MW and one at MW. The larger one had a lower LCOE than the smaller one. Projected

14 14 NEA/NDC/R(2018)1 Costs (2015) stated that both were 50 MW. This was changed in the analysis here). Comments on Table 8 parallel those made above on Table 5. Because onshore wind is even more capital intensive than nuclear power, there are huge savings if owner/operators can refinance their total capital investment costs at the beginning of operation and if policymakers discount benefits to future users at the social discount rate. Table 6: LCOE and cost components for onshore wind at 3% to 10% discount rates Country China Korea China France Belgium US Hungary Japan UK Type Wind wind Wind Wind Wind Wind Wind Wind Wind Size MWe Capacity Factor 26% 23% 26% 27% 24% 28% 25% 20% 28% Overnight Cost $/kwe $/kwe Investment cost $/kwe 3% Investment cost $/kwe 5% Investment cost $/kwe 7% Investment cost $/kwe 10% Investment cost $/MWh 3% Investment cost $/MWh 5% Investment cost $/MWh 7% Investment cost $/MWh 10% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 5% Refurbish + D&D $/MWh 7% Refurbish + D&D $/MWh 10% O&M Cost $/MWh Levelised Costs $/MWh 3% Levelised Costs $/MWh 5% Levelised Costs $/MWh 7% Levelised Costs $/MWh 10% Table 7: LCOE and cost components for onshore wind at 3% after construction Country China Korea China France Belgium US Hungary Japan UK Type Wind wind Wind Wind Wind Wind Wind Wind Wind Size MWe Capacity Factor 26% 23% 26% 27% 24% 28% 25% 20% 28% Overnight Cost $/kwe $/kwe Investment cost $/kwe 3% Investment cost $/kwe 5% Investment cost $/kwe 7% Investment cost $/kwe 10% Investment cost $/MWh 3% Investment cost $/MWh 3% Investment cost $/MWh 3% Investment cost $/MWh 3% Refurbish + D&D $/MWh 3% O&M Cost $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3%

15 Table 8: Values in Table 6 minus values in Table 7 for onshore wind NEA/NDC/R(2018)1 15 Country China Korea China France Belgium US Hungary Japan UK Type Wind wind Wind Wind Wind Wind Wind Wind Wind Size MWe Capacity Factor 26% 23% 26% 27% 24% 28% 25% 20% 28% Investment cost $/MWh 5% Investment cost $/MWh 7% Investment cost $/MWh 10% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% Refurbish + D&D $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3% Levelised Costs $/MWh 3% Finally, the difference between the LCOE of nuclear power with the LCOE of onshore wind is compared without and with 3% discounting after construction. The results in Table 9 (shown in Figure 3) are similar to those in Projected Costs 2015, i.e. that onshore wind can compete with nuclear power in NEA member countries where nuclear power plant construction costs have become high (such as in France, the United Kingdom, and the United States) or onshore wind cannot compete with nuclear power where there is not a large onshore wind fleet (such as in Japan and Korea). On the other hand, the results in Table 10 (shown in Figure 4) show that when more weight is given to the electricity generated by nuclear power plants for 60 years by using a lower discount rate, as opposed to those at wind turbines for 25 years using the same lower discount rate, nuclear power is competitive with wind. Summary and conclusions This report questions the long held assumption that one discount rate must be used throughout the life of a project to discount all costs and benefits to a specific date. The origin of this experiment was the observation that high discount rates for all expenditures and revenues at a nuclear power plant lead to de minimis contributions to decommissioning (decontamination and dismantling) and waste management funds. This is equivalent to assuming that funds accumulated during the life of an operating facility would earn a rate of return equal to the return required during construction. Hence, one assumption in the LCOE method was changed: a 3% real rate was used to discount expenditures and revenues after construction for nuclear power and onshore wind. Refinancing the total capital investment cost (overnight costs including contingency and financing costs, also known as Interest During Construction ) after the generator is producing electricity reduces the total annual payment to capital by up to two-thirds. The message is primarily directed to public policymakers in OECD/NEA member countries when thinking about the future, i.e. Investors or modellers who are trying to predict electric utility behaviour, whether state-owned, state-regulated, or deregulated facing subsidized competitors in non-competitive markets that do not reflect the social costs of delivering electricity to the consuming public, be they residential, governmental, or industrial consumers, might want to take more care in determining the exact weighted average cost of capital that each owner/operator faces when determining which technology and how much capacity to add to their electricity generating, transmitting and distributing system; see Rothwell (2016, pp ). Using the market cost of capital to determine the discount rate is inappropriate when considering sustainable development through the end of the 21 st century. Policymakers time horizons must be longer than the average term of a CEO who is seeking to recover invested capital as soon as possible if we want our children, grandchildren and great-grandchildren to live as well as we do.

16 16 NEA/NDC/R(2018)1 Table 9: Differences in LCOE for nuclear and onshore wind at 3% to 10% (Table 6 minus Table 3) China Korea China France Belgium US Hungary Japan UK Levelised Costs $/MWh 3% Levelised Costs $/MWh 5% Levelised Costs $/MWh 7% Levelised Costs $/MWh 10% Figure 3: Differences in LCOE for nuclear and onshore wind in Table 9 $120 $100 $80 $60 $40 $20 3% 5% 7% 10% $0 -$20 Table 10: Differences in LCOE for nuclear and onshore wind at 3% after construction (Table 7 minus Table 5) China Korea China France Belgium US Hungary Japan UK Levelised Costs $/MWh 3% Levelised Costs $/MWh 5% Levelised Costs $/MWh 7% Levelised Costs $/MWh 10% Figure 4: Differences in LCOE for nuclear and onshore wind in Table 10 $120 $100 $80 $60 $40 $20 3% 5% 7% 10% $0 -$20

17 NEA/NDC/R(2018)1 17 References FEMP (2017), 2017 Discount Rates, (US Department of Energy, Federal Energy Management Program). Harrison, M. (2010), Valuing the Future: The Social Discount Rate in Cost-benefit Analysis. Australian Government, Productivity Commission, Canberra. IAEA (2016), Climate Change and Nuclear Power 2016, IAEA, Vienna. www-pub.iaea.org/mtcd/publications/pdf/ccanp16web pdf Karoly, L.A. (2017), The Discount Rate for Benefit-Cost Analysis in the United States, presented at Conference on the Discount Rate in the Selection of Public Investment Projects, Paris, France (29 March). NEA (1983), The Costs of Generating Electricity from Nuclear and Coal-Fired Power Stations, OECD, Paris. NEA (1986), Projected Costs of Generating Electricity from Nuclear and Coal-Fired Power Stations for commissioning in 1995, OECD, Paris. NEA (1989), Projected Costs of Generating Electricity from Power Stations for commissioning in the period , OECD, Paris. NEA (1996), Future Financial Liabilities of Nuclear Activities, OECD, Paris. NEA/IEA (1992), Projected Costs of Generating Electricity: Update 1992, OECD, Paris. NEA/IEA (1998), Projected Costs of Generating Electricity: Update 1998, OECD, Paris. NEA/IEA (2005), Projected Costs of Generating Electricity: 2005 Update, OECD, Paris. NEA/IEA (2010), Projected Costs of Generating Electricity: 2010 Edition, OECD, Paris. NEA/IEA (2015), Projected Costs of Generating Electricity: 2015 Edition, OECD, Paris. Rothwell, G. S. (2016), Economics of Nuclear Power, Routledge Publishers, Francis and Taylor Group, London and New York. United Nations, Department of Economic and Social Affairs, Division for Sustainable Development (2018), Sustainable Development Knowledge Platform. UN, New York. US Treasury (2018), Resource Center: Historic yield curve chart. World Commission for Environment and Development (1987), Our Common Future, Oxford University Press, Oxford.

18 18 NEA/NDC/R(2018)1 Annex A. Relevant tables from Projected Costs of Generating Electricity: 2015 Edition Table 3.4: Nuclear generating technologies (NEA/IEA, 2015, p. 41) Country Type Size Overnight Investment cost (USD/kWe) Investment cost (USD/MWh) Cost Capacity Factor = 85% Capacity Factor = 85% MWe $/kwe 3% 7% 10% 3% 7% 10% Belgium Gen III Finland ALWR France ALWR Hungary ALWR Japan ALWR Korea ALWR Slovak Rep. LWR UK ALWR US ALWR China ALWR China ALWR Table 3.11: Levelised costs of electricity from nuclear power plants (NEA/IEA, 2015, pp ) D&D + Refurbishment LCOE (USD/MWh) Net Capacity Factor = 85% Fuel+ O&M Capacity Factor = 85% Country Tech MWe 3% 7% 10% Waste 3% 7% 10% Belgium Gen III Finland ALWR France ALWR Hungary ALWR Japan ALWR Korea ALWR Slovak Rep. LWR UK ALWR US ALWR China ALWR China ALWR