Projected Costs of Generating Electricity - OECD Nuclear Energy ...

Two US economic analyses of nuclear power, one carried out at the Massachusetts Institute of
Technology (the “MIT study”) 10 and the second for the US Department of Energy (Near Term
Deployment Group or NTDG) 11 attempt to correct for the additional risk involved with nuclear power
investment in the United States. Both studies assumed that investors in nuclear power plants in the United
States require higher returns on equity and a higher share of relatively costly equity in the capital investment
for nuclear power investment compared to natural gas.
The analysis shows that inclusion of income tax also more heavily affects the more capital intensive
technology. This observation has implications with respect to comparing the weighted average cost of
capital used in various analyses of cost of generating electricity from various technologies.
The consequence of these analyses is to increase the weighted average cost of capital for nuclear power
compared to natural gas. Table A6.2 shows the results for both analyses illustrating the impact of financing
and tax on the weighted cost of capital for the two technologies. Although precise assumptions differ
in the two cases, the financing effects alone raise the weighted cost of capital for nuclear power by around
2% as compared to natural gas. The impact of income taxes increases effective discount rates for both
technologies, but increases the gap in discount rate for nuclear versus natural gas by a further 0.6%.
Table A6.2 – Comparative financial assumptions and effect
on weighted average cost of capital for natural gas and
nuclear power plants for two US studies (in %)
DOE NTDG
MIT
2% inflation rate 3% inflation rate
Nuclear Gas Nuclear Gas
Capital structure
Equity share 40 30 50 40
Debt share 60 70 50 60
Return on equity 15 13 15 12
Interest on debt 10 9 8 8
Weighted average cost of capital (excluding tax)
Nominal 12 10.2 11.5 9.6
Real 9.8 8 8.25 6.4
Income tax rate 35 35 38 38
Weighted average cost of capital (including tax)
Nominal 15.2 12.3 16.1 12.5
Real 12.9 10.1 12.7 9.3
Source: DOE 2001, MIT 2003, Expert Group calculations.
The particular figures and the size of the gap between nuclear power and natural gas will vary by country
given the different situation with regard to perceived risk of investment in different options and the
cost of finance among other factors. For example, countries where perceived risks in nuclear power are
lower might have a much smaller gap in the weighted cost of capital between the two options.
Furthermore, a particular firm might have rather different costs of capital. For example, a state-owned
company borrowing on the sovereign guarantee with the costs of the power passed through to consumers
10. MIT, 2003.
11. DOE, 2001.
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