Nuclear Generation Cost and Economics — Capital, O&M, Fuel and the Discount Rate Behind the LCOE

Principle and mechanism

Components of generation cost

Capital cost and carrying charges

• Overnight cost: the construction cost assuming the plant were built overnight. It consists of direct and pre-construction costs, indirect costs (engineering, management), owner's costs and contingency; the OECD default contingency for nuclear is 15 %.
• Investment cost = overnight + IDC (+ escalation in real projects). With a 7-year build and a 7 % discount rate, IDC is about 28 % of the overnight cost.
• Carrying charges: the annual fixed cost of keeping invested capital, made up of return on capital (interest, dividends), depreciation, taxes and insurance. It is the investment times the fixed charge rate (FCR); without taxes and insurance it equals the capital recovery factor CRF = r(1+r)ⁿ/[(1+r)ⁿ−1]. The interest on money tied up in fuel inventory goes by the same name.

The LCOE equation and its terms

LCOE = Σ(Iₜ + O&Mₜ + Fₜ + Cₜ + Dₜ)(1+r)^−t / Σ Eₜ(1+r)^−t

I is investment, O&M is operation and maintenance, F is fuel (including the back end), C is carbon cost, D is decommissioning, E is generation and r is the real discount rate. If construction spending is placed directly on the time axis, IDC is not added separately. The denominator is discounted because what is discounted is not the MWh itself but the value of the revenue from that MWh (OECD/NEA-IEA 2020). Decommissioning looks small in the LCOE at 0.03 USD/MWh, but only because spending 60 years in the future is discounted.

Worked example (assumptions stated)

The assumptions are one set of OECD/NEA-IEA 2020 country inputs for a new ALWR (1,377 MWe): overnight 2,157 USD/kWe (2018 USD), 7-year construction with even spending, 60-year life, 85 % capacity factor, r = 7 %, O&M 18.44 and fuel 9.33 (front end 7.00 + back end 2.33) USD/MWh.

1. Investment: mid-year spending compounded to the completion date → 2,758 USD/kWe (IDC 27.9 %)
2. CRF (7 %, 60 years) = 0.07×1.07⁶⁰/(1.07⁶⁰−1) = 0.0712
3. Annual capital cost = 2,758 × 0.0712 = 196.5 USD/kW·yr
4. Annual generation = 8,760 h × 0.85 = 7,446 kWh/kW
5. Capital cost per unit = 196.5 / 7.446 = 26.4 USD/MWh
6. LCOE ≈ 26.4 + 18.44 + 9.33 + 0.03 (decommissioning) ≈ 54.2 USD/MWh

The difference from the OECD table value of 53.3 comes from the discounting-time convention (mid-year vs end of year).

Fuel cycle cost: direct and indirect

• Direct costs: actual spending on materials and services. The nine elements of a recycle fuel cycle are (1) purchase of uranium concentrate, (2) conversion (UF₆), (3) enrichment (SWU), (4) fabrication, (5) spent fuel transport, (6) reprocessing, (7) recovered uranium conversion and credit, (8) plutonium credit (or MOX fabrication), and (9) treatment and disposal of high-level waste.
• Indirect costs: carrying charges (interest, taxes) on inventory and in-process material tied up for several years from purchase through discharge and credit recovery. The gap between spending time and burn time is reflected by discounting and compounding.
• Example (WNA, September 2021 prices): for 1 kgU of fuel, uranium 51 %, conversion 7 %, enrichment 24 % and fabrication 18 %, totalling 1,663 USD, or about 0.46 ¢/kWh at 45 GWd/t.

Influencing factors and sensitivity

Only one variable was changed at a time. The construction-time range is a lower bound that reflects IDC only (real delays also raise the unit cost), and the capacity-factor range assumes O&M is a fixed cost. Within these ranges the discount rate has the largest effect.

Choosing a power source by discount rate: the discount rate represents the cost of capital and project risk. The higher it is, the less future fuel savings are worth, and the more nuclear is disadvantaged. Plot the LCOE (or the present value of revenue requirements) of each candidate as a function of the discount rate and find the crossover discount rate r. If the project discount rate is below r, nuclear is favored; above it, fossil is favored. Then recheck by varying fuel prices, carbon prices and capacity factor. In the model above, nuclear and coal cross at about 13.9 % and nuclear and LNG combined cycle at about 15.1 % (for these assumptions only).

What it means in a plant

A market settlement price (energy price plus any capacity payments) is not a generation cost: it reflects market rules, not the plant's capital, O&M and fuel costs.

Economic factors compared with fossil fuels

On the OECD 2020 medians, new nuclear is cheaper than fossil at 3 %, and can be more expensive than fossil at 7 and 10 %. In the example inputs used here, nuclear remains the cheapest up to 10 %. Long-term operation (LTO) is at the lowest level of all sources.

External and system costs

• External costs: the EU ExternE results in €cent/kWh are nuclear 0.2–0.7, coal 2–15, gas 1–4 and wind 0.05–0.25. Accident risk and long-term waste management are partly internalized through levies, provisions and the nuclear damage compensation system.
• System costs: the LCOE is a busbar cost, so it leaves out transmission and distribution and the backup and balancing costs of variable sources. Complementary indicators such as VALCOE are used alongside it.

Methodology reference

• OECD/NEA-IEA Projected Costs of Generating Electricity 2020: LCOE methodology. It is the 9th edition since 1983, and as the series was discontinued afterwards, it is the latest.

Easily confused pairs

Key points at a glance

1. Definition: the unit price at which the present value of discounted lifetime costs equals the present value of discounted generation times that constant price.
2. Equation: LCOE = Σ(I + O&M + F + D)(1+r)^−t / Σ E(1+r)^−t.
3. Components: capital (overnight + IDC, annualized with the CRF), O&M, fuel (front + back end), decommissioning and back-end liabilities.
4. Nuclear structure: in the example inputs at 7 %, investment 48 %, O&M 35 %, fuel 18 % — capital-intensive.
5. Influencing factors: discount rate (39 → 67 USD/MWh from 3 → 10 %), construction time (IDC), capacity factor (spreading fixed costs), construction unit cost.
6. Source selection: below the crossover discount rate r* on the LCOE–discount-rate curves nuclear is favored; above it, fossil.
7. Price vs cost: a market settlement price is not a generation cost; state the assumptions behind any cost figure.
8. Limits: transmission, grid and external costs are excluded → also examine system and external costs.