Following an analysis of the cost of electricity from Eskom’s new-coal build programme in South Africa (Medupi and Kusile coal-fired power plants), several requests have been received for a similar analysis to establish the levelised cost of electricity (LCOE) from the proposed 9,6 GW new-nuclear build programme in South Africa under various assumptions.
This article therefore provides the economic and technical assumptions used in calculating a base LCOE for the proposed new-nuclear build programme, as well as the calculation of the base LCOE itself as at May 2016.
The LCOE is then recalculated under various alternative assumptions of real weighted average cost of capital (WACC real), overnight cost per kW net output (including owner’s development costs), average annual capacity factor, average construction time, and plant economic life.
The results are tabulated to enable readers to easily determine the LCOE of the proposed new-nuclear build programme resulting from the above alternative assumptions.
Definition of LCOE
The levelised cost of electricity (LCOE) of a power generation plant is the present-day monetary cost per present-day kWh unit of electricity delivered, which when adjusted for inflation each year over the lifetime of the plant, will recover its full costs, including the initial investment, cost of capital (including dividends and interest), fuel and all other fixed and variable operating and maintenance costs.
Mathematically this can be expressed as:
where
I_{t} = investment expenditures in the year t
M_{t }= operation and maintenance expenditures in the year t
F_{t} = fuel expenditures in the year t
E_{t }= electrical energy generated in the year t
r = weighted average cost of capital (WACC)
n = expected economic lifetime of the power plant (years)
LCOE assumptions
The LCOE calculations for the new-nuclear build in South Africa use the same methodology as that used in the national Integrated Resource Plan for Electricity IRP2010-2030 and the 2013 Draft IRP Update Report.
In line with widely held expectations that Russian VVER 1200 reactors are a likely choice for the nuclear new-build programme in South Africa, the LCOE calculation is based on this reactor size and number, and expected vendor overnight costs of between US $40-billion and $50-billion for eight reactors.
Assuming a mid-value of $45-billion as the vendor overnight cost, a value of $50-billion is therefore used as the overnight cost including owner’s development costs.
For the calculation of the base LCOE, an overnight cost (including owner’s development costs) of US $5776/kW net output is calculated, or R80 869/kW net output at a rate of exchange of US $1 = R14. If a fleet with net capacity 9,6 GW was built, this would translate into R776-billion total overnight cost for the fleet (excluding interest during construction).
The WACC (real) assumed in the base LCOE calculation is 8%, with an average reactor construction time of 6 years, an associated capital spend schedule of 15%, 15%, 25%, 25%, 10% and 10% per annum, and a plant life of 60 years, all as per the 2013 Draft IRP Update Report.
Similarly, the capacity factor, fuel costs, heat rate, and fixed and variable operating and maintenance costs assumed, are taken from page 62 of the 2013 Draft IRP Update Report, and adjusted for inflation to May 2016.
In summary, the assumptions used for the calculation of base LCOE for the new nuclear-build in South Africa are:
Plant nameplate capacity (gross) | 8 x 1170 MW |
Plant net output capacity (net of parasitic house-loads) | 8 x 1082 MW |
Overnight cost (including owner’s development costs) per net kW output | US $5776/kW |
Average construction time of reactor | 6 years |
Capital spend schedule during construction | 15%, 15%, 25%, 25%, 10%, 10% |
WACC (real) | 8% |
Rate of exchange | R14,00 = $1,00 |
Economic lifetime of the plant | 60 years |
Average annual capacity factor | 92% |
Fuel cost (May 2016 rands) | R8,70/GJ |
Heat rate | 10 762 kJ/kWh |
Fixed operating and maintenance (FOM) costs (May 2016 rands) | R678/kW/annum |
Variable operating and maintenance (VOM) costs (May 2016 rands) | R37,60/MWh |
Base LCOE calculated
Based on the above assumptions, the base LCOE calculated using the same methodology as that used in the national Integrated Resource Plan for Electricity IRP2010-2030 and the 2013 Draft IRP Update Report is:
Base LCOE from 9,6 GW new-nuclear build in SA in May 2016 rands | R1,30/kWh |
Fuel portion of base LCOE | R0,093/kWh |
VOM portion of base LCOE | R0,038/kWh |
FOM portion of base LCOE | R0,084/kWh |
CAPEX portion of base LCOE | R1,085/kWh |
All costs excluding CAPEX hence make up R0,215/kWh (in May 2016 rands) of the total LCOE, when using the same assumptions used in the IRP.
Impact of Eskom’s actual Koeberg operational costs
In a recent letter published in Business Day, Eskom’s Group Executive Generation, Mr. Matshela Koko, disclosed that the “production costs” of Eskom’s Koeberg nuclear power plant was actually R433/MWh (i.e. R0,433/kWh). The assumption is that he is referring to the fuel, FOM and VOM costs, whereas the IRP assumes a figure of R0,215/kWh.
If this higher and likely more realistic figure is used, the base LCOE calculated increases by an amount of:
R0,433 – R0,215 = R0,218/kWh, to give a revised LCOE of R1,518/kWh i.e. 117% of the base LCOE.
Factors not taken into account
Tax and depreciation effects
Like the LCOE calculations in the Integrated Resource Plan for Electricity IRP2010-2030 and the 2013 Draft IRP Update Report, no tax effects have been taken into account in the calculation.
Decommissioning and long-term waste disposal costs
German nuclear owners have a cash fund of about €38,3-billion set aside to decommission the entire German nuclear fleet of 22 GW, and for the long-term disposal of the nuclear waste (i.e. about US $1900 per installed kW).
As private for-profit companies, they offered to “donate” all this money to the German government if it would take on the task of decommissioning and long-term waste disposal, including all risks and associated liabilities. The offer was declined. Thus one can assume that the cost of decommissioning and long-term waste disposal is at least $1900 per installed kW.
However, LCOE modelling shows that for plant economic lifetimes of 60 years, and a real WACC of 8%, the net cost of decommissioning and the scrap value of the plant at the end of life has little impact on the calculated LCOE. Anything spent 60 years in the future at an 8% discount rate only has 1% present value.
Decommissioning and long-term waste disposal only becomes relevant when the discount rate is low, which is what nuclear proponents argue should be the case. At a 4% discount rate, anything spent in 60 years hence has a present value of 10% of the nominal amount spent in the future.
In summary, for plant economic lifetimes of 60 years, decommissioning and long-term waste disposal costs can safely be ignored for discount rates of 8% or higher. If nuclear proponents argue that the discount rate has to be significantly lower, then decommissioning and long-term waste disposal costs would have to be brought back into the picture.
Long-term waste management, handling and storage costs
After having failed to transfer all liabilities of decommissioning and long-term waste disposal to society, German nuclear power plant owners recently reached an agreement with the German government for the transfer of €23,3-billion into a fund (i.e. about US $1200 per installed kW), and for the government to take over all risks and liabilities related to long-term nuclear waste management, handling and storage. The decommissioning liability remains with the nuclear power plant owners.
Again, because privately owned, for-profit companies made the offer to government, one can assume that the cost of long-term waste management, handling and storage is at least US $1200 per installed kW.
Life extension costs
The bulk of all nuclear power plants in service today were built in the 1970s and 1980s, and hence are between 25 and 45 years old. According to the World Nuclear Association’s Reactor Database, the oldest operational nuclear reactors came online in 1969. Hence, no nuclear plant that is operational today has experienced a lifetime of 60 years.
However, the LCOE calculations in the Integrated Resource Plan for Electricity IRP2010-2030 and the 2013 Draft IRP Update Report (and therefore in this study too) assume a plant economic life of 60 years, with no major refurbishment or overhaul capital costs factored in at midlife.
This is surely an unrealistic assumption that should be reviewed in further IRP updates, or alternatively a shorter economic life of 30 to 40 years should be assumed.
LCOE using alternative assumptions of real WACC
As previously indicated, the real WACC used to calculate the base LCOE is 8%. Using various alternative values of real WACC, with all other assumptions remaining constant, the alternative LCOE values calculated are:
WACC real |
LCOE [R/kWh] | LCOE [% of base LCOE] |
6 | 0,988 | 76,0 |
7 | 1,138 | 87,5 |
8 | 1,300 | 100,0 |
9 | 1,475 | 113,4 |
10 | 1,662 | 127,8 |
LCOE using alternative assumptions of overnight cost per kW net output
As previously indicated, the overnight cost (including owner’s development costs) per kW net output used to calculate the base LCOE is US $5776/kW net output. Using various alternative values of overnight cost, with all other assumptions remaining constant, the LCOE values calculated are:
Overnight cost |
LCOE |
LCOE |
4000 | 0,966 | 74,3 |
5000 | 1,154 | 88,8 |
5776 | 1,300 | 100,0 |
7000 | 1,530 | 117,7 |
8000 | 1,718 | 132,1 |
LCOE using alternative assumptions of average annual capacity factor
As previously indicated, the average annual capacity factor used to calculate the base LCOE is 92%. This is unrealistically high in comparison to real operating experience at both Eskom’s Koeberg and international nuclear power plants. Using various alternative values of average annual capacity factor, with all other assumptions remaining constant, the LCOE values calculated are:
Capacity factor |
LCOE |
LCOE |
92 | 1,300 | 100,0 |
90 | 1,326 | 102,0 |
88 | 1,353 | 104,1 |
85 | 1,396 | 107,4 |
LCOE using alternative assumptions of average plant construction time
As previously indicated, the average plant construction time used to calculate the base LCOE is 6 years. Using various alternative values of average plant construction time, with all other assumptions remaining constant, the LCOE values calculated are:
Construction time |
LCOE |
LCOE |
5 | 1,241 | 95,5 |
6 | 1,300 | 100,0 |
7 | 1,355 | 104,3 |
8 | 1,416 | 109,0 |
9 | 1,453 | 111,7 |
10 | 1,511 | 116,3 |
LCOE using alternative assumptions of plant economic life
As previously indicated, the plant economic life used to calculate the base LCOE is 60 years. Using various alternative values of plant economic life, with all other assumptions remaining constant, the LCOE values calculated are:
Plant economic life |
LCOE |
LCOE |
30 | 1,408 | 108,3 |
40 | 1,341 | 103,2 |
50 | 1,313 | 101,0 |
60 | 1,300 | 100,0 |
Conclusions
Using the assumptions of the Integrated Resource Plan for Electricity IRP2010-2030 and the 2013 Draft IRP Update Report, and the other assumptions detailed above, and without taking tax effects, decommissioning, long-term waste disposal, and plant life extension costs into account, an up-to-date base LCOE for the proposed new-nuclear build in South Africa would be R1,30/kWh.
This base LCOE of R1,30/kWh would rise to R1,518/kWh if the actual fuel costs, and the fixed and variable operating and maintenance costs of Eskom’s Koeberg nuclear power plant, were used instead of those assumed in the IRP.
This article enables readers to easily determine the LCOE of the proposed new-nuclear build programme resulting from alternative assumptions in real WACC, overnight cost per kW net output, average annual capacity factor, construction time and plant economic life, to those used to calculate the base LCOE of R1,30/kWh.