The Economics of Nuclear Power

January 21, 2008

Steve Thomas

Nuclear Issues Paper No. 5
By Steve Thomas

The complete paper (44 pages, 258 KB, pdf) can be downloaded here.


The severe challenge posed by the need to reduce emissions of greenhouse gases, especially in the electricity generation sector, has led to renewed interest in the construction of new nuclear power plants. These would initially replace the ageing stock of existing reactors, then meet electricity demand growth, and eventually replace some of the fossil-fired electricity generating plants. In the longer term, the promise is that a new generation of nuclear power plants could be used to manufacture hydrogen, which would replace the use of hydrocarbons in road vehicles.

The public is likely to be understandably confused about whether nuclear power really is a cheap source of electricity. In recent years, there have been a large number of apparently authoritative studies showing nuclear economics in a good light and most utilities seem determined to run their existing plants for as long as possible. Yet utilities are clearly reluctant to build new nuclear power plants without cost and market guarantees and subsidies. Some of this apparent paradox is relatively easily explained by the difference between the running costs only of nuclear power, which is usually seen as relatively low, and the overall cost of nuclear power - including repayment of the construction cost - which is substantially higher. Thus, once a nuclear power plant has been built, it may make economic sense to keep the plant in service even if the overall cost of generation, including the construction cost, is higher than the alternatives. The cost of building the plant is a “sunk” cost that cannot be recovered and the marginal cost of generating an additional kilowatt-hour (kWh) could be small. However, much of the difference between the economics of existing plants and the forecasts for future plants is explained by detailed differences in assumptions on, for example, operating performance and running costs, which are not readily apparent in the headline figures.

The objective of this paper is to identify the key economic parameters commenting on their determining factors and to review the assumptions of main forecasts from the past five years to identify how and why these forecasts differ. It will also identify what guarantees and subsidies the government might have to take to allow nuclear plants to be ordered.