Uncertainty, Policy, and the Risk of New Nuclear Build—a Real Options Approach

The United States has recently seen renewed interest in nuclear power, what is called the Nuclear Renaissance. However, the new licensing processes are untested and the new reactor designs have never been constructed on US soil. Analyzing the history of US nuclear development demonstrates that plants face considerable risk from construction uncertainties, public intervention in the licensing process, and project mismanagement. When these unknowns are coupled with the industry’s poor cost track record, the resulting set of uncertainties and risks may cause investors to be wary of pursuing new nuclear projects. Real Options valuation was used to assess how the risks associated with the uncertainties in the environment for nuclear power could impact the economics of new plants. To value a new nuclear power plant a decision model was developed incorporating construction, regulatory, and operational uncertainties along with an option to abandon project development. Various policy and uncertainty scenarios were modeled and a conservative policy goal was developed as an achievable end point for the current levels of subsidy. The results suggest that without subsidy, the first new plants in the United States are economically unattractive in liberalized electricity markets. Subsidized plants have positive investment value, but this value is still marginal. However, cost reductions from standardization and learning could add between $200 and $600 per kilowatt in project value. Additionally, alternative incentive policies and market-based greenhouse gas regulations both considerably improve the economics of new nuclear plants.