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

Values in 1O-10
Figure A6.5 – Distribution of discounted net present values:
electricity prices uncertain, output and operating costs fixed
3
Note: Standard deviation is USD 2.31 billion.
10 th and 90 th percentile values are USD -1.9 and USD 3.1 billion.
2
1
0
-5 0 5
10 15
Net present values (Billion of USD)
It is interesting to note that the 10 th percentile cash flows are also much more negative when operating
costs are fixed than when they are variable (-1.9 billion USD versus -9 billion USD, respectively). When
prices are very low, it is economic to operate a plant when all the operating costs are fixed (unavoidable)
and incur very large operating losses. However, when the operating costs are partly variable, some of the
costs can be “avoided” by reducing output. This would suggest that the economics of the technology with
very low variable operating costs may be more sensitive to price changes – i.e. with everything else being
equal, the risks for this technology are greater. Indeed, this very point was stressed in British Energy’s
Prospectus when they were privatised in 1996, and this was one of the reasons for their financial problems
in 2002.
However, as for fuel price risk, full incorporation of power price risk into investment analyses are still
under development.
Optionality and real options
The impracticality of storing electricity and the inelasticity of electricity demand relative to price make
the flexibility of the power generation supply system very valuable. In turn, the use of flexible supply
sources that offer such flexibility adds to the value of a power plant. In addition to flexibility in operation,
the ease of which new capacity can be added for a particular technology also can add value to the technology.
A power plant that can be built quickly just as the anticipated increase in demand occurs entails
less risk.
Traditional investment analyses place limited emphasis on the timing of the investment versus market
conditions. In these approaches, the value of developing a single large plant is considered rather than a
series of smaller plants, although the smaller plant strategy might have an advantage, e.g. if the growth in
demand for electricity turned out to be lower than expected. Without a method to quantify the value of
this flexibility, the economies of scale evident in larger power plants (in terms of installed cost per kW)
trump any concern about risks of adding capacity in larger units.
The “real options” approach extends the traditional investment appraisal methodology by assisting in
the valuation of additional options. Some of the most common options that cannot be captured by traditional
analysis are the option to delay, the option to expand and the option to abandon.
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