Economics (Sustainability Assessment)

INPRO Economic Basic Principle (BP) - Energy and related products and services from nuclear energy systems shall be affordable and available.

UR1 (Cost of energy)

The definition of UR1 is: The cost of energy supplied by nuclear energy systems, taking all relevant costs and credits into account, C_N, must be competitive with that of alternative energy sources, C_A, that are available for a given application in the same time frame and geographic region/jurisdiction.
This UR relates to the cost competitiveness of different energy sources available in a country, region, or globally. In comparing the costs of electricity (or other energy products) from a NES, C_N, and competing alternatives, C_A, discounted costs (LUEC) are used. In this comparison all relevant costs are to be included.
Depending on the jurisdiction in a country, one energy source may be burdened with costs, e.g. for waste management, while another may not. In a number of Member States, the external costs of nuclear power that are not accounted for are small, since producers are required by law to make provisions for the costs of waste management, including disposal, and decommissioning, whereas the external costs of competing (non-nuclear) energy sources that are not accounted for may be significant, e.g. CO₂ emission from fossil power plants. Ideally, all external costs should be considered and, where possible, internalized, when comparing a NES with competing energy systems, but only costs that are internalized (in the price to the consumer) should be taken into account, and other external costs should be ignored.

CR1.1: Cost competitiveness

ᅠ Indicator IN1.1: Cost of energyᅠ

The value of indicator IN1.1, i.e. costs of energy (CN and CA) of competing energy supply options to be deployed, is determined using a discounted cost (LUEC) model[8], taking into account all relevant cost determinants for both the NES and the competing energy technology. CN is, in principle, the LUEC for a complete NES, excluding FOAK cost but including external costs and credits if they are fully included in the price setting mechanism, and using contingency allowances and a discount rate that reflects the economic decision making investment environment. In practice, a technology user would compare the cost of electricity from the NPP, which would include an allowance for the back end costs for waste management and decommissioning for the NPP, with that of the alternative energy source. Costs of other components of the NES, including costs for decommissioning and managing wastes from these components, would be reflected in the cost of fuel. CA is the LUEC for the (strongest) competitor A (for power generation investment), excluding FOAK cost but including external costs and credits if they are fully included in the price setting mechanism, and using contingency allowances and the same discount rate as applied for calculating CN . Further, the competing alternative energy source is to be available for the same application in the same time frame and geographic region/jurisdiction. This is an important limitation since an NPP is usually operated at high load factors, primarily for meeting base load demand. So, usually, the competing alternative will be a fossil fuelled plant, e.g., coal, oil or a combined cycle gas turbine plant or, in some jurisdictions, a hydro plant. Further, the cost comparison should be based on costs for the relevant region/market and the time frame for the deployment of the NES.

ᅠ Acceptance limit AL1.1ᅠ

AL1.1 is defined as: CN < k*CA. $C_{N}\geqslant k\cdot C_{A}$ This means that the discounted energy cost (LUEC) of a NES to be deployed or developed should be comparable, within a factor of k, to the LUEC of an available system with a competing energy source. As mentioned above, the LUEC of a NES and of a given competing energy source can be calculated using the NEST tool). Again, the case of deployment and development are distinguished. First, the case of deployment will be considered.

UR2 (Ability to Finance)

The definition of UR2 is: The total investment required to design, construct and commission nuclear energy systems, including interest during construction, should be such that the necessary investment funds can be raised.
There are two aspects to investment, somewhat related to each another, namely, the attractiveness of the investment in terms of the financial return to be expected and the size of the investment that is required. Even if the financial indicators used to analyse return are attractive, a given utility may not have the wherewithal to raise the funds needed — neither from its own resources nor from other investors.
The total investment required to deploy a given NES, or component thereof, comprises the costs to adapt a given design to a given site, and then to construct and commission the plant, including the interest during construction. The latter depends on construction time and the time to commission. A universally applicable criterion for what constitutes an acceptable ‘size’ of investment cannot be defined a priori since this will vary with time and region and will depend on many factors, such as alternatives available, etc. But a judgment must be made that the funds required to implement a project can be raised within a given expected investment climate. Factors influencing this ability may include the overall state of the economy of a given region/country, the size of the investment relative to a utility’s annual cash flow (and hence the size of the unit relative to the size of the grid), and the size of the investment compared with that needed for alternative sources of supply.
The attractiveness of an investment may be expected to have some influence on the acceptability of the size of the investment but in the INPRO methodology the two are treated as independent. Since, however, there is some influence of attractiveness on acceptability of size, we treat attractiveness first.
The attractiveness of an investment is usually quantified by determining economic parameters called financial figures of merit. Examples of such figures are IRR, the ROI, NPV of cash flows, and payback period. IRR and NPV are more or less two sides of the same coin, as are ROI and payback time.

CR2.1: Attractiveness of investment

ᅠ Indicator IN2.1: Financial figures of merit ᅠ

Acceptance limit AL2.1: Figures of merit for investing in a NES are comparable with or better than those for competing energy technologies. Investors can look at a variety of financial indicators when evaluating investments. The financial indicators used in a given region will reflect the investment climate and requirements of a given country or region, including the source(s) of investment funds. In some countries or regions implementation of a NES will require private sector investment, e.g. in deregulated electricity markets, while in other countries or regions installment of a NES may require government investment or guarantees, e.g. in countries embarking on a nuclear power programme. Private sector investors will be attracted by a competitive IRR, provided the IRR is commensurate with their judgment of associated risks. However, the NPV of cash flows may be more suitable for government investors than private sector investors because this financial figure may facilitate taking into account other benefits such as security of energy supply and technology development. The ROI may be attractive as an indicator that is complementary to the IRR. In the end, the acceptance limit is that the values of the financial indicators chosen, for a given NES, be attractive compared with investments in competing energy technologies. To be attractive, the values for the NES must be at least comparable to values for competitive energy sources and preferably better. For indicator IN2.1, three items of financial figures of merit, namely, IRR, ROI and the NPV of cash flows are recommended as evaluation parameters (EP2.1.1 to EP2.1.3), with corresponding acceptance limits, as discussed below. IRR, ROI and NPV can be calculated using the NEST tool. ᅠ Evaluation parameter EP2.1.1: IRR ᅠ Evaluation parameter EP2.1.1 is defined as the internal rate of return (IRR) at the calculated real selling price of electricity produced by a complete NES (IRRN). A more precise definition is: The IRR produced by selling the net electricity produced by a NES at the defined real reference price per unit of electricity sold (PUES), excluding (external) costs not defined in price setting mechanisms and including costs for expected life cycle operation, decommissioning and waste management. The IRR depends on factors such as the PUES, the load factor of the plant, and the costs (LUEC) of production including amortization cost, O&M costs, fuel costs, waste management costs, etc. The IRR is obtained by calculating the NPV of the difference between incomes and expenditures. In this calculation trial discount rates are used, and adjusted in an iterative fashion to determine the value of the discount rate at which the NPV equals 0, which is the value of IRR. For consistency, the IRR needs to be calculated using a similar modelling process as chosen for calculating LUEC. So, if inflation is not included in calculating LUEC, it would not be included in calculating IRR. In this case, the IRR would be less than what would arise from a model that included inflation. The IRR would normally be calculated for the total cash flow of a single NPP. As for LUEC, the economics of fuel cycle facilities is covered within the fuel costs of the NPP. So, if it is foreseen that the price of uranium is expected to increase over the life of the NPP, such a price increase should be reflected in the fuel cost used in the analysis. Only costs and credits that are defined in the price setting mechanism should be considered. Externalities should be excluded if they are not supported by an acknowledged price calculation process. The acceptance limit AL2.1.1 for evaluation parameter EP2.1.1 reads as follows. Acceptance limit AL2.1.1: IRRN > IRRA The internal rate of return IRRN of an investment into a NES should be comparable, i.e. higher or at least equal than IRRA an investment in competing (alternative) energy technologies. In case of an investment into a planned deployment of a NPP the competing technology could be either another type of NPP or most probably a non-nuclear generating technology available and suitable for base load in the country assessed. In case of an investment into a planned development of a NFC facility/component of a NES, the competing technology would be a licensed and operating facility of an existing NES. As was discussed above, when comparing the LUEC of competing energy supply options, if energy planning has determined that there is a defined role for nuclear power within an optimized mix of generating options the comparison of IRRN to IRRA, is not, of itself a determining consideration. But if IRRN is less than IRRA, the comparison will show this explicitly and the assessor might set out the benefits and explanations of why the difference is acceptable to the investor in the circumstances. ᅠ Evaluation parameter EP2.1.2: ROI ᅠ Evaluation parameter EP2.1.2 is defined as: The life cycle plant average ROI of a complete NES (ROIN). It can be even more precisely defined: The ROI calculated for the average life cycle total plant invested capital and life cycle average operating net income produced from the sale of electricity. The return on investment, ROI, of an investment into a NES — also like IRR — depends on the price of electricity, the load factor and production costs. The ROI is calculated from the average net annual income, i.e. the total income from the sale of the output (electricity or heat) produced by the plant over its lifetime less O&M and fuel costs and other costs such as waste management and decommissioning costs over its lifetime, expressed as a fraction of the capital invested in the NES. Due to the simplicity of ROI, even for a complex NES with several plants of different type, a single ROI for a NES consisting of several plants to be deployed could be calculated using the average net income and investment per plant. On the other hand, for a technology user evaluating the use of nuclear power as an option, the INPRO methodology recommends that the ROI be calculated for a single NPP. So, in this case, the ROI is the ratio of the net annual income to the capital investment averaged over the lifetime of the plant. In addition, only the investment in the generating plant is included and the investment in the necessary fuel cycle facilities is not explicitly included; however, that investment would be reflected in the fuel costs used to calculate net income, and thus is ultimately accounted for. ROI is not a levelized parameter. Thus, it is not sensitive to discount rate as is the case for LUEC. So, in the case where a high discount rate is used in calculating LUEC, the income from the production of electricity over the lifetime of the plant contributes to the ROI. In this way, the evaluation of ROI complements the evaluation of LUEC to present a more comprehensive economic picture. Life cycle plant investment means that all the investments, including back fitting and major refurbishments, are taken into account, if it is foreseen that such investments are needed during the operating lifetime of the plant, and they may be accounted for by an annual charge and become in effect an annual operating cost. If this is done, then the ROI would be based on annual net income and the initial capital investment. Under these circumstances, INPRO would recommend that IDC be included in calculating the ROI when considering a single NPP. If, however, investments in foreseen costs are considered explicitly, as a capital investment, INPRO would recommend not including IDC. Life cycle average operating income covers the situation that there could be some fluctuations in the operating income during lifetime, e.g. due to a low load factor during a back fitting period, or during the first operating years. The acceptance limit AL2.1.2 for evaluation parameter EP2.1.2 is as follows: Acceptance limit AL2.1.2: ROIN > ROIA This means that ROI for a planned NES (ROIN) should be comparable with the return of investment in a competing energy technology (ROIA). In case of an investment into a planned construction of an NPP, the competing technology would be a non-nuclear generating technology available and suitable for base load in the country being assessed. In case of an investment into a planned development of another nuclear fuel cycle (NFC) facility of a NES, the competing technology would be a licensed and operating NFC facility of an existing NES. As was discussed above, if energy planning has determined that there is a defined role for nuclear power within an optimized mix of generating options the comparison of ROIN to ROIA, is not, of itself a determining consideration. But if ROIN is less than ROIA, the comparison will show this explicitly and the assessor might set out the benefits and explanation of why the difference is acceptable in the circumstances. In any case, actual performance needs to be tracked and be taken into account in ongoing energy optimization planning studies. ᅠ Evaluation parameter EP2.1.3: NPV ᅠ NPV analysis is a useful tool for looking at project cash flows and the recovery of investments. In principle, one can use actual investments and incomes, expressed in the actual values. Such an analysis would not account for the time values of money and so in INPRO methodology discounted values are used, namely the NPVs of the cash flows. So, for a given project investment, the cash flow starts out as a negative value at the start of a project, and the cash flows and their integrated values, the NPV of the total cash flow, continues to be negative as cash flows out during construction. Once construction ends and cash starts to flow in from the sale of energy (electricity), annual cash flows turn positive, as does the slope of the NPV. With a positive slope from net revenues the NPV increases over time, rising towards zero, and then turning positive. The NPV will then continue to increase until the end of plant life, at which point it would be expected to decrease as money is spent on plant shutdown and decommissioning. Overall, the NPV should remain positive once decommissioning is complete if the project is to return a net benefit to the investor; the greater the NPV the greater the net benefit. In INPRO methodology, NPV can be used as an evaluation parameter for measuring the net financial benefit of a project investment. In principle, such a parameter can be used for looking at a complex mix of projects involving a variety of project investments and revenues. In practice, however, it is recommended to limit the time horizon for estimating NPV to a few decades — no more than 4 and preferably 3 or less. Evaluation parameter EP2.1.3 is defined as the NPV at the calculated real selling price of electricity produced by a complete NES (NPVN). A more precise definition is: the NPV produced by selling the net electricity produced by a NES at the defined real referencePUES, excluding (external) costs not defined in price setting mechanisms and including costs for expected life cycle operation, decommissioning and waste management. The NPV depends on factors such as the total plant investment, the PUES, the load factor of the plant, and the costs of production including, O&M costs, fuel costs, waste management costs, etc. NPV is obtained by calculating the NPV of the difference between incomes and expenditures, discounted to a reference point in time. The NPV would normally be calculated (using the NEST tool, see Appendix II) for the total cash flow of a single NPP. In this case, the NPV would be calculated using a similar modelling process as chosen for calculating LUEC for the NPP (Recall that LUEC is the price that results in an NPV of 0.). So the reference time for discounting purposes would be the start of plant electricity generation, and if inflation were not included in calculating LUEC, it would not be included in calculating NPV. In this case, the NPV would be less than what would arise from a model that included inflation. Since the NPV is based on the actual selling price of electricity, which would be expected to be higher than the LUEC, the NPV would be expected to be a positive number. Since it represents the total net value of the investment, discounted to time 0, its absolute value will depend on the size of the investment. For this reason INPRO recommends that the NPV be normalized to the initial (discounted) capital investment made up to the start of plant operation or to the power output of the plant. As for LUEC, the economics of fuel cycle facilities is covered within the fuel costs of the NPP. So, for example, if it is foreseen that the price of uranium is expected to increase over the life of the NPP, such a price increase should be reflected in the fuel cost used in the analysis. The acceptance limit AL2.1.3 for evaluation parameter EP2.1.3 reads as follows: Acceptance limit AL2.1.1: NPVN > NPVA The (normalized) NPVN of an investment in a NES should be comparable, ideally greater, than the NPVA for an investment in competing energy technologies. In the case of an investment in a planned NPP, the competing technology would be a non-nuclear generating technology available and suitable for base load in the country being assessed. In the case of an investment into a planned development of an NFC facility/component of a NES, the competing technology would be a licensed and operating facility of an existing NES. As has been discussed several times, if energy planning has determined that there is a defined role for nuclear power within an optimized mix of generating options, the comparison of NPVN to NPVA is not of itself a determining consideration. But if the NPVN is less than NPVA, the comparison will show this explicitly and the assessor might set out the benefits and explanations of why the difference is acceptable to the investor in the circumstances. In any case, the actual performance needs to be tracked and be taken into account in ongoing energy optimization planning studies. For final assessment of acceptance limit AL2.1: Acceptance limit AL2.1: Data for investing in a NES are comparable with or better than those for competing energy technologies. The acceptance limit AL2.1 of CR2.1 is met if the financial figures of merit selected by the assessor meet their corresponding limit.

CR2.2: Affordability of investment

Indicator IN2.2 is defined as: The highest single plant total investment up to commissioning the reactor within a complete NES.
Acceptance limit AL2.2: The total investment required should be compatible with the ability to raise capital in a given market climate.

ᅠ Indicator IN2.2: Total investment ᅠ

The total investment consists of the overnight capital, the interest during construction (the size of which depends on construction and commissioning times), contingency allowances, owners cost and (if not considered in the O&M cost) the capital needed for (foreseen) back fitting and decommissioning. It can be calculated using the NEST tool. This indicator has been formulated in a general sense to cover investments in the different facilities of a NES, such as one or more NPPs, fuel cycle facilities and waste management facilities. For simplicity, it is recommended that an initial assessment focus on the investment needed for an NPP, since this is the energy machine and has to be made if a given country is to benefit from the energy produced by nuclear power. Of course, in a given country, there may be interest in investing in front end fuel cycle facilities, such as mines or fuel manufacturing facilities, but in general the investment in an NPP is more challenging. And, if this investment is made and nuclear power becomes/continues as part of a balanced portfolio of generating plants, the revenue from the NPPs can be used to finance the associated waste management activities and facilities. And investments in front end facilities can be evaluated taking into account the status of nuclear power in the country and worldwide. Consequently, in the discussion below only the issue of investing in the NPP is considered. FOAK costs, together with R&D costs, would in general not be explicitly included in this indicator because such costs are different from simple electricity oriented fundraising mechanisms and are more related to R&D investment policies used by governments and/or private investors. FOAK and R&D costs born by the developer would be expected to be reflected in prices quoted by a vendor/developer, and so such costs would be implicitly included. But should a company (utility) consider the purchase of a FOAK reactor, requiring significant FOAK investment by the purchaser, the company would have to take this investment into account in one way or another. It might simply accept the cost and include it in its analyses. But, generally, such a company would be expected to negotiate for some additional benefit. For example, it could negotiate with the supplier to secure price reductions for future orders, or even to share in the profit from future sales of the reactor to other utilities. In such cases, FOAK investment might be analysed using different variables/parameters. Nonetheless, the total investment required for the project would need to be raised and so in this circumstance the additional FOAK investment would need to be included. Acceptance limit AL2.2: InvestmentN < InvestmentLIMIT InvestmentLIMIT is the maximum level of capital that could be raised by a potential investor in the market climate. To meet this limit the investment needed for installing an NPP investmentN must be equal or lower than the maximum capital that can be raised by a potential investor. The limit is strongly dependent on the investment environment in which an NPP is to be deployed, above all on the nature of the organization making the investment — a private sector commercial enterprise operating in a deregulated market, a private sector enterprise operating in a regulated market, or a State owned company. In case a private company (utility) is planning to install an NPP, the maximum investment it can raise for this purpose (making a sound business case) will depend on the total size of the national electricity market, the utility’s share of the total market, and its profit margin. A simplified example how to determine the maximum reasonable investment of a private investor is available in the NEST tool. The source of funds — whether the utility obtains funds from external investors (see Refs [9, 10]), or are drawn from the utility’s own capital reserves (equity) or some combination of the two sources will influence this limit. For example, if only reserves are used the size of the reserves will establish an upper limit, taking into account that the utility would probably not want to draw down all its reserves. If external investors are involved they would want to be assured that the utility’s cash flows will be sufficient to pay back the investment while also covering all other costs to which that the utility is exposed, including total operating and maintenance costs, payback of earlier investments etc. As noted in Section 3.3 the IAEA offers support to Member States on how to determine the economic viability of investing in an expansion of an energy system or in a single power plant. The Excel based tool to be offered is called FINPLAN [4], which helps to analyse the impact of a planned investment on the financial health of a utility planning to invest. In case a government is planning to install a NES, the investment limit could be defined by the budget available for the national nuclear power programme. A variety of additional factors could influence the available budget, including the following: A State oriented approach might establish a limit for any given project at some fraction of the total investment budget to be used in the energy sector. The limit could be influenced by issues related to the currencies that are required for debt servicing. In effect, the acceptance limit for deployment of the first few NPPs in a country is that the total investment required should be compatible with the ability to raise the necessary capital in the country at the time of committing to construction of the NPP. And for the deployment of additional units of the same basic type of NPP, the acceptance limit is that the total investment required is compatible with the ability to raise the necessary capital in the country at the time of committing to construction of the additional units, taking into account actual performance and costs for nuclear power in the country. In case of an investment into a planned (or ongoing) development of a NES (or component thereof), the investment limit could be defined by the available budget of the organization involved.

	[ + ] Assessment Methodology
Areas of INPRO Sustainability Assessment Overview • Economics • Safety (Nuclear Reactors) • Safety (NFCF) • Waste management • Environmental Impact on Stressors • Environmental Impact from Depletion of Resources • Infrastructure Requirements Basic Principle • User requirements • Criteria