A Real Options Approach to Evaluating New Nuclear Power Plants

Rothwell, Geoffrey

doi:10.5547/issn0195-6574-ej-vol27-no1-3

Cited by 89 publications

(60 citation statements)

References 29 publications

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“…Maribu and Fleten (2005) use Monte Carlo simulation to analyze the value of combined heat and power system under uncertainty in electricity and natural gas prices. There are also several examples of real options models for nuclear plants for electricity generation, for instance in Graber and Rothwell (2005) and Rothwell (2006). However, we are not aware of applications of real options theory for analyzing investments specifically in nuclear hydrogen technologies.…”

Section: Investment Under Uncertainty and Real Optionsmentioning

confidence: 99%

The market viability of nuclear hydrogen technologies.

Botterud¹,

Conzelmann²,

Petri³

et al. 2007

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SummaryThe Department of Energy Office of Nuclear Energy is supporting system studies to gain a better understanding of nuclear power's potential role in a hydrogen economy and what hydrogen production technologies show the most promise. This assessment includes identifying commercial hydrogen applications and their requirements, comparing the characteristics of nuclear hydrogen systems to those market requirements, evaluating nuclear hydrogen configuration options within a given market, and identifying the key drivers and thresholds for market viability of nuclear hydrogen options. One of the objectives of the current analysis phase is to determine how nuclear hydrogen technologies could evolve under a number of different futures. The outputs of our work will eventually be used in a larger hydrogen infrastructure and market analysis conducted for DOE-EE using a system-level market simulation tool now underway.This report expands on our previous work by moving beyond simple levelized cost calculations and looking at profitability, risk, and uncertainty from an investor's perspective. We analyze a number of technologies and quantify the value of certain technology and operating characteristics. In the initial analysis reported here, we evaluate the following technologies: High Temperature Steam Electrolysis, HTEOur model to assess the profitability of the above technologies is based on Real Options Theory and calculates the discounted profits from investing in each of the production facilities. We use Monte-Carlo simulations to represent the uncertainty in hydrogen and electricity prices. The model computes both the expected value and the distribution of discounted profits from a production plant. We also quantify the value of the option to switch between hydrogen and electricity production in order to maximize investor profits. Uncertainty in electricity and hydrogen prices can be represented with two different stochastic processes: Geometric Brownian Motion (GBM) and Mean Reversion (MR). The Market Viability of Nuclear Hydrogen TechnologiesPage ii Summary Our analysis finds that the flexibility to switch between hydrogen and electricity leads to significantly different results in regards to the relative profitability of the different technologies and configurations. This is the case both with a deterministic and a stochastic analysis, as shown in the tables below. The flexibility in output products clearly adds substantial value to the HPE-ALWR and HTE-HTGR plants. In fact, under the GBM assumption for prices, the HTE-HTGR plant becomes more profitable than the SI-HTGR configuration, although SI-HTGR has a much lower levelized cost. For the HTE-HTGR plant it is also profitable to invest in additional electric turbine capacity (Case b) in order to fully utilize the heat from the nuclear reactor for electricity production when this is more profitable than producing hydrogen.

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Section: Investment Under Uncertainty and Real Optionsmentioning

confidence: 99%

The market viability of nuclear hydrogen technologies.

Botterud¹,

Conzelmann²,

Petri³

et al. 2007

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show abstract

“…One of the fundamental problems underlying the debate on the potential role of nuclear power in meeting the future global energy needs relates to the continuing lack of consensus on what will be the costs of new nuclear-generating plants-and this is only likely to be resolved with accumulating information about the full costs of new nuclear build (Rothwell 1992).…”

Section: The Economics Of Nuclear Powermentioning

confidence: 99%

“…33 Nuclear power could, therefore, offer a hedge to an electric utility against the uncertainty and volatility and risk of oil, gas, and carbon prices. This hedging and the flexibility to choose between nuclear power and other generating technologies, as new information emerges about fossil-fuel supply conditions and evidence accumulates on global warming, creates an option value for nuclear power (Graber and Rothwell 2006;Rothwell 2006;Rothwell 2007). This hedging value cannot be adequately taken into account in the context of the standard levelized life-cycle cost methodology.…”

Section: Reducing the Costs Of Ghg Stabilization Constraintsmentioning

confidence: 99%

Nuclear Power and Sustainable Energy Policy: Promises and Perils

Kessides¹

2009

The World Bank Research Observer

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The author examines the challenges and opportunities of nuclear power in meeting the projected large absolute increase in energy demand, especially electricity, throughout the industrialized and developing world, while helping to mitigate the threat of climate change. A significant global nuclear power deployment would engender serious risks related to proliferation, safety, and waste disposal. Unlike renewable sources of energy, nuclear power is an unforgiving technology because human lapses and errors can have ecological and social impacts that are catastrophic and irreversible. However, according to some analysts, advances in the design of nuclear reactors may have reduced their associated risks and improved their performance. Moreover, while a variety of renewable energy sources (hydro, wind, modern biomass, solar) will play important roles in the transition to a low-carbon economy, some analysts perceive that nuclear power is the only proven technology for generating electricity that is both largely carbon-free, not location specific (as with wind, hydro and solar), and amenable to significant scaling up. Thus given the projections of threats from climate change, and if the considerable strain experienced by world energy markets in recent years is a harbinger of things to come, then there is a rationale for examining the pros and cons of nuclear power as a supply option within low-carbon strategies. It should be noted that despite the emerging centrality of climate change and security of supply in the energy policy debate, nuclear power is still viewed with a great deal of skepticism and in fact continues to elicit considerable opposition. Indeed the views on nuclear power in the context of sustainable energy policy are highly divergent. A thorough evaluation of all aspects of the issue is warranted. JEL codes: L52, L54, L94, L97, L98The world is facing an enormous energy challenge. Despite continuous declines in energy intensities, population growth and rising incomes in developing economies are stimulating substantial global energy demand. An adequate, secure, clean, and

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“…Flexibility has shown improvements typically ranging between 10% and 30% compared to the outcome from standard design and evaluation practice in different industries: strategic phasing of airport terminals development (de Neufville and Odoni 2003;Gil 2007), offshore platforms designed for future capacity expansion (Jablonowski, Wiboonskij-Arphakul, and Neuhold 2008), strategic investments in new nuclear plant facilities (Rothwell 2006), supply chain adaptation to fluctuating exchange rates (Nembhard, Shi, and Aktan 2005), strategic investment in innovative water technologies (Zhang and Babovic 2012), etc. Examples abound.…”

Section: Flexibility In Engineering Systems Design: Computational Chamentioning

confidence: 99%

3.1.2 Design Catalogues: An Efficient Search Approach for Improved Flexibility in Engineering Systems Design

Cardin

Neufville

2013

INCOSE International Symp

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Abstract. This paper proposes and demonstrates design catalogues as a computationally efficient method for identifying improved designs for complex technological systems. This new process significantly speeds up the analysis of systems that will operate and will be managed under various uncertainty scenarios. It enables analysts to explore the design space more fully, taking into account a greater number of design parameters and variables. It can lead to design solutions with greatly improved lifecycle performance. The design catalogue consists of a small subset of designs that collectively perform reasonably well over a range of possible scenarios. The catalogue approach contrasts with the usual approach that optimizes designs for each scenario, and thus can only afford to examine a limited number of situations. Each design in the catalogue consists of combinations of design variables, parameters, and flexibility decision rules. The set of designs in the catalogue is determined using adaptive One-Factor-At-a-Time (aOFAT) analysis. An example demonstrates the use and how it leads to improved lifecycle performance compared to a standard benchmark design.

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A Real Options Approach to Evaluating New Nuclear Power Plants

Cited by 89 publications

References 29 publications

The market viability of nuclear hydrogen technologies.

The market viability of nuclear hydrogen technologies.

Nuclear Power and Sustainable Energy Policy: Promises and Perils

3.1.2 Design Catalogues: An Efficient Search Approach for Improved Flexibility in Engineering Systems Design

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