MSc in International Economic Consulting Aarhus School of Business, University of Aarhus

A New Nuclear Power Plant in Lithuania: Cost-Benefit Analysis

Author: Zivile Kazlauskaite

Academic Supervisor: Jan Brsen Bentzen Department of Economics

June 2010

Abstract
Currently Lithuania faces significant changes in its electricity generation sector caused by the closure of the old nuclear reactors. The main challenge is the overdependence on single-source gas imports and as a result diminished security of supply. In addition, Lithuania will face problems with meeting its electricity demand growth in the medium run and confront issues related to the retirement of electricity generating plants. The government has already established the plans to attract the private investor and build a new nuclear plant in order to cope with the existent challenges. Inspired by the situation in Lithuanian energy sector, this thesis performs a social cost-benefit analysis of a likely new nuclear power plant build in Lithuania relative to the situation where the investments would divert to the gas-fired electricity generation. The results show that nuclear power plant project would not be cost-effective relative to the counter-factual and result in a nuclear cost penalty in the base case. Security of supply benefits are relatively small and would not justify the nuclear case. However, it is concluded that expanding nuclear power would result in huge environmental benefits, which would offset the nuclear cost penalty. Therefore, following the net present value criterion, the nuclear project is justified under the base case assumptions. However, it is emphasized that the project justification particularly depends on the shadow price of carbon dioxide, future gas prices and nuclear construction costs. The government should also take into consideration such aspects as the disadvantage of technological lock-in in the case of nuclear plant, the drawback of accident risk, sustainability and intergenerational issues, moral hazard problems, declare the employment benefits with caution.

Contents
1. Introduction .................................................................................................................. 1 1.1 1.2 1.3 1.4 2. Lithuanian energy sector and government policy ................................................... 2 Problem statement and delimitations ..................................................................... 4 Choice of methodology ......................................................................................... 5 Structure of the thesis ............................................................................................ 5

Theoretical foundations ................................................................................................ 7 2.1 Key theoretical aspects of CBA ............................................................................. 7 Partial and general equilibrium approaches in CBA ....................................... 7 Price dynamics .............................................................................................. 9 Social Discount Rate ....................................................................................10 Investment criterion......................................................................................15

2.1.1 2.1.2 2.1.3 2.1.4 2.2

Energy economics ................................................................................................15 Cost and performance characteristics of electricity generating technologies ..15 Levelised-cost methodology .........................................................................18

2.2.1 2.2.2 3.

Analysis ......................................................................................................................21 3.1 3.2 3.3 Project description and alternatives ......................................................................21 Scope and Standing ..............................................................................................28 Identification, quantification and monetization of costs and benefits .....................29 Cost Penalty/Advantage ...............................................................................31 Accident Costs .............................................................................................47 Environmental Benefits ................................................................................49 Security of Supply ........................................................................................54 Employment benefits ....................................................................................56

3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.4 3.5 3.6 4.

Discounting procedure and NPV calculation ........................................................57 Sensitivity Analysis .............................................................................................58 Recommendation .................................................................................................61

Conclusions .................................................................................................................63

Bibliography .......................................................................................................................66 Appendices .........................................................................................................................71

List of Figures
Figure 1. Figure 2. Figure 3. Figure 4. Figure 5. Figure 6. Figure 7. Figure 8. Electricity generation in Lithuania by fuel type.................................................. 3 Analytical structure of conducting CBA ............................................................ 5 Key cost variables of power plants ...................................................................16 Projections of electricity demand in Lithuania ..................................................22 Assumed timeline of the new nuclear build project ...........................................26 Estimates of nuclear reactor overnight costs .....................................................33 Structure of electricity generation cost in the base case .....................................46 Break-even CO2 shadow prices in various sets of alternatives (LTL/tCO2) ........60

List of Tables
Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Table 13. Deriving SDR for Lithuania .............................................................................14 Representative proportions of electricity generating costs, % ............................20 Nuclear technologies under consideration .........................................................24 Identified costs and benefits of a new NPP build ..............................................30 Recent evidence on III generation nuclear reactor construction cost ..................34 IDC calculations for the base case ....................................................................37 Total construction costs for nuclear and CCGT plants in the base case ..............38 Cost to get 1 kg of uranium as UO2 reactor fuel ................................................40 Decommissioning costs of Ignalina NPP ..........................................................43 Average nuclear and gas-fired plant levelised-cost for the base case .................46 GHG emissions (kg CO2 equivalent/MWh) from nuclear fission and CCGT .....50 Net annual lifecycle CO2 equivalent and carbon emissions reduction ................51 Welfare balance of a new NPP in the base case ................................................58

Table 14. Welfare balances of a new NPP project under different gas price, nuclear construction cost and CO2 shadow price (in million Litas) ..................................................59 Table 15. Welfare balances of a new NPP project under different SDR and cost of capital combinations (in million Litas) ............................................................................................60

List of Acronyms and Abbreviations

BWR CBA CCGT CO2 EGC EPC GHG GWe IAEA IDC IEA LCOE LTL NEA NPP O&M PHWR PWR SDR STPR TWh UNIDO WNA WTP WWER Boiling Water Reactor Cost-Benefit Analysis Combined Cycle Gas Turbine Carbon Dioxide (a Greenhouse gas) Average Lifetime Levelised Electricity Generation Cost Engineering Procurement - Construction Greenhouse Gas Gigawatt electrical (power) International Atomic Energy Agency Interest During Construction International Energy Agency Levelised Cost of Energy Lithuanian Litas Nuclear Energy Agency Nuclear Power Plant Operating and Maintenance cost Pressurized Heavy Water Reactor Pressurized Water Reactor Social Discount Rate Social Time Preference Rate Terawatt hours United Nations Industrial Development Organization World Nuclear Association Willingness-to-pay Water-Water Energetic Reactor

1. Introduction
Worldwide there are 437 nuclear reactors currently in operation with a total net installed capacity of 371 GWe (IAEA, 2010). World Nuclear Association (WNA, 2010) estimates, that they supply approximately 15% of the worlds electricity. Although the volume of nuclear electricity production has been stable during the last decade, the share of the total nuclear production has been slightly falling1. Nonetheless, recently there has been an increasing interest in nuclear power across countries and IAEA (2010) states that there are 55 nuclear power reactors under construction, which will contribute to 50.9 GWe. WNA (2010) emphasizes the growth in international cooperation and commerce in the field of nuclear science and technology. The organization forecasts that the nuclear capacity will at least triple until 2060. Plenty of academic literature also shows an increasing attention to a potential renaissance of nuclear power and discusses whether we will indeed see the revival of nuclear energy in the 21st century. At the moment nuclear energy is back on the policy agendas and the advocates emphasize its advantages and opportunities. Firstly, worldwide electricity consumption is expected to double in the next two decades as a result of increasing population, industrial development and improvement in living standards. This is of a particular importance in such countries as China and India. In addition, Western world is facing a need to renew its generating stock. Nuclear energy offers superior possibilities to meet this booming electricity demand. Lately there also has been paid a lot of attention on climate change and the necessity for greenhouse gas reductions. Nuclear power generation could be an option as it is known for its relatively very low carbon emissions. Moreover, in some circumstances the use of uranium is more advantageous than fossil fuels. The supply of uranium is considered a more secure option as compared to delivery of gas or oil. In the case of deregulated markets, the use of uranium could mean higher stability of electricity price as a contrast to fossil fuels characterized with relatively intense price fluctuations. Finally, if oil and gas prices kept increasing and credit markets strengthen after the financial crisis, this
1

See Appendix 1

Section: Introduction

would lead to an increase of a relative competitiveness of nuclear energy (Lester and Rosner, 2009; WNA, 2010) However, despite the advantages the nuclear power generation faces a vast number of obstacles. Problems arise already in the primary state of the projects. For example, long licensing proceedings as well as high initial investments with occasional and significant budget overruns. There also exist high concerns about accident risk, vulnerability to terrorism and health impacts from radiation. Intergenerational problems arise because nuclear waste remains radioactive for ages and are left for our descendants. Besides that, nuclear plants also need to be decommissioned, which also may last for a considerably long time after the end of its operation (Sustainable Development Commission, 2006; Lester and Rosner, 2009). The motivation for nuclear power expansion depends on particular national circumstances. The way, how the obstacles of this development are overcome, is a subject of a particular national case as well. Therefore, this thesis seeks to investigate the case of Lithuania, where nuclear expansion is at the center of attention at the moment. 1.1 Lithuanian energy sector and government policy On December 31, 2009 Lithuania shut down the second reactor of Ignalina Nuclear Power Plant (NPP), which was inherited from the former Soviet Union. After regaining the independence in the 90s, with the help of Western countries Lithuania improved the safety standards at this plant. Nevertheless, the experts concluded that NPPs with RBMK (rus. Reaktor Bolshoy Moshchnosti Kanalniy; eng. High Power Channel-type Reactor) could not reach necessary safety standards in a long-term operation. The closure of the plant became Lithuanias obligation and condition to obtain the EU membership in 2004 (Juozaitis and Baauskas, 2007). Currently the plant is at the decommissioning stage though the process is followed by corruption scandals and large scale waste of EU funds. After the closure of Ignalina NPP Lithuanian economy confronts a major challenge because of significant changes in its energy generation (see Figure 1).
Section: Introduction

Figure 1. Electricity generation in Lithuania by fuel type

Renewab les 6%

Oil 2%

Renewab les 10% Gas 14%

Oil 3%

Gas 17%

Nuclear 78%

Nuclear 70%

2004 before Unit 1 closure

2007 before Unit 2 closure

Data source: Directorate-General for Energy and Transport (2010)

According to the EU Directorate-general for Energy and Transport (2010) data, in 2004 Lithuania produced 19.3 TWh of electricity and net exports amounted for 28%. The old nuclear plant was generating 78% in 2004. After the closure of the first nuclear reactor, the production reached 14 TWh and decreased by 27.3% in 2007. Lithuania was constrained to rely more on electricity imports and increase production by other generating technologies in order to meet its energy demand. The final shutdown in 2009 means that Lithuanian economy lost the diversity of fuels used in energy production and became over dependent on gas, which is imported from Russia through a pipeline. The other import options such as supply of liquefied natural gas (LNG) are only considered but the necessary storages are only depicted in the plans and not in the reality. After the closure, Lithuania became a net importer of electricity as well. To import electricity is physically possible only through a grid with Russia and Belarus as the only connection with the rest of EUs electricity grid
Section: Introduction

(Estlink-1) is of a limited capacity. The lost capacity is also compensated by more intensive use of the older and less efficient, more expensive and pollutant plants, which are causing the increase in electricity price (Visaginas Nuclear Power Plant Ltd., 2010).

Although the electricity demand will be met, the situation shows that Lithuanian economy is highly dependent on one dominant source of energy. Such reliance extremely diminishes security of supply and carries obvious risks in a long-term. National Energy Strategy specifies that natural gas supplied for energy production from one source should not exceed 30% of the total fuel balance. Therefore, national energy priority is to replace the old plant with alternative sources of power supply which guarantees a positive balance of electricity production and increases energy security and supply reliability. In National Energy Strategy 2007 Lithuanian government announced the necessity to continue a further development of safe nuclear energy. Despite an active public debate, the government proceeds with the preparatory work and plans to start the construction of a new NPP as soon as possible (Visaginas Nuclear Power Plant Ltd., 2010). 1.2 Problem statement and delimitations Inspired by the current situation in the Lithuanian energy sector this thesis attempts to conduct a socio-economic evaluation of investment into a new NPP in Lithuania. The purpose is to find out whether the allocation of resources into expansion of nuclear energy production would result in a net economic gain or loss for the Lithuanian society as a whole, relative to an alternative situation, where investment would divert to gas-fired generation technology. Kennedy emphasizes that such analysis is economic rather than financial, and as such, cannot be used as a basis for determining likely commercial appetite for bringing forward nuclear projects (Kennedy, 2007, p. 3701). In order to achieve the purpose, it will be necessary to determine and catalogue social costs and benefits caused by the project. In addition, it will be pursued to monetize these impacts. If it is not possible to do so, the qualitative description will not be dismissed. Moreover, the analysis will also require making numerous assumptions about these impacts and their development over a relatively very long time horizon.
Section: Introduction

Therefore, the assessment of how these assumptions contribute to the conclusions will be necessary to evaluate.

1.3 Choice of methodology A cost-benefit methodology will be applied in order to answer the main question of the analysis. The purpose of CBA is to assist social decision making. More specifically, CBA is a tool used to determine whether a project 2 contribute to the economic welfare, i.e. could they potentially be Pareto improving 3. After quantifying in monetary terms all impacts of a policy and using the net benefits criterion, it can be learnt, if making some people better off does not make anyone else worse off. Positive net benefits mean that theoretically the resources are available and could be used to compensate those who bear costs. The comparison of projects net benefits with a counter-factual is necessary in order to rank the policies. Due to this necessity, the elements of cost-effectiveness analysis (CEA) will be incorporated into the analysis (Boardman et al., 2006; European Commission, 2008). 1.4 Structure of the thesis The thesis is organized into three major sections. Section 2 describes theoretical foundations of CBA and emphasizes some important aspects of energy economics. The CBA analysis of the Lithuanian case takes place in Section 3. Because conducting CBA is a complex process, Boardman and others (2006) suggest making it more manageable by breaking it down into nine basic steps. Some steps were merged in order to make the analytical section more concentrated. Figure 2. Analytical structure of conducting CBA
1 2 3

Defining alternative projects Defining scope and standing Identifying, quantifying and monetizing costs and benefits Discounting and calculating NPV Performing sensitivity analysis

4
5 6

Deriving recommendations
Section: Introduction

Source: Own elaboration based on Boardman et al. (2006), p.8

2 3

The terms project, policy and program are used as synonyms in this paper This is known as Kaldor-Hicks decision criterion

Therefore, the analytical section is divided into steps, depicted in Figure 2. Finally, the conclusion is provided in Section 4.

Section: Introduction

2. Theoretical foundations
The following part of the thesis intends to highlight the most important aspects of the chosen CBA methodology and to draw attention on some details regarding energy economics. 2.1 Key theoretical aspects of CBA Here the different approaches of performing CBA will be shortly discussed by highlighting such famous concepts as consumer and producer surplus as well as the importance of using shadow prices. Secondly, important characteristics of price dynamics will be explained. Moreover, the social discount rate will be introduced by shedding the light on its difference from the financial discount rate. As a result, a set of alternative social discount rates for the Lithuanian case is going to be derived. Finally, the investment criterion is introduced. 2.1.1 Partial and general equilibrium approaches in CBA CBA originated in the 19th century from the French engineer Jules Dupuit, who had proposed to use the concept that currently is known as consumers surplus. Later, Alfred Marshall and Cecil Pigou contributed the idea by adding the producers surplus and developed the social surplus concept (European Commission, 2008b). Today the basic conceptual foundations of CBA are provided by microeconomic theory (Boardman et al., 2006). Partial equilibrium approach, which is comprehensively discussed in Boardman et al. (2006), suggests estimating the effects of the governmental policy on different members of the society and summing them in order to arrive at the net social benefits. If the demand and supply curves of a particular market were known in the reality, it surplus4, producer surplus5 and government revenues and therefore get the results on the social welfare associated with one particular good. However, in order to get the full picture, there is a necessity to account for complementarities and substitution
4

The surplus of consumers willingness-to-pay (WTP) for the good over price of that good (European Commission, 2008b). 5 The revenue from selling the good minus the opportunity cost given up in order to produce that good (Boardman et al., 2006).

Section: Theoretical foundations

would be straightforward to measure how governmental project affects the consumer

effects, positive and negative externalities, i.e. to include the welfare effects in the secondary markets and the effects on the third parties, which are not related to the consumption or production of the good. In addition, there are even more estimation problems in such cases as informational asymmetry between producers and consumers, income effects etc. (Boardman et al., 2006; European Commission, 2008b). Another CBA framework, based on the shadow prices (or differently named as accounting prices), was suggested by some researchers from OECD, UNIDO and World Bank in the 1970s in order to facilitate the application of CBA by avoiding difficulties of distorted market analysis with partial equilibrium approach. Shadow prices are derived artificially and used to correct the market prices to better reflect the real social value (European Commission, 2008b). Market prices are conceptually correct measures to evaluate the net benefits of the project if the markets are competitive and undistorted by various regulations and taxes. As a result, in such situations market prices reflect the opportunity costs of all project inputs (Campbell and Brown, 2003). The inputs in CBA should be valued in terms of opportunity costs because once the resources are dedicated to one purpose, it is not available for the other usage. Opportunity costs are equal to the forgone value of the goods or services that would have been produced in the best alternative way (Boardman et al., 2006). Therefore, if the markets were perfect, the market prices would accuratelly determine the social costs and benefits as all the limited resources would be allocated to its highest value use and the economy would be efficient (Campbell and Brown, 2003). However, we live in the world where markets are distorted and are socially inefficient. The best examples of such situations are: monopolies and oligopolies who set the price of the good or service above its marginal cost; trade barries, which obliges the consumers to pay a higher price than they could otherwise do etc. (European Commission, 2008b). Moreover, sometimes the problem why the costs and benefits cannot be measured by using market prices is that the market simply does not exist for that good (Boardman et al., 2006). The most popular example is
Section: Theoretical foundations

environmental costs or benefits for which there is no market price (HM Treasury, 2003). Therefore, the suggested use of shadow prices allows calculating the shadow social profits of projects and as a result to find out whether the project is socially feasible. Shadow profits, or economic profits, are general equilibrium measures that are defined in such a way as to include all the direct and indirect effects, so that if you know them you do not need to sum welfare effects in each market and for each agent (European Commission, 2008b, p. 48). Nevertheless, although various shadow pricing techniques exist, Boardman et al. (2006) emphasizes that usually in practice analysts use market prices. The reasons to do so might be various. Firstly, due to the subtlety of the difference between the market price and conceptually correct measure, this might be overlooked without an intention. Secondly, data constraints exist in order to derive the appropriate shadow price and due to the time or resource constraints it is impossible to do much about it. Lastly, sometimes it is thought that the difference between the actual and the conceptually correct measures are adequately little and as a result the results of the appraisal is not significantly affected (Boardman et al., 2006). 2.1.2 Price dynamics One of the many questions that arise while doing a CBA is how to deal with the inflation. According to Boardman et al. (2006) the analyst may choose to estimate the costs and benefits either in real or nominal terms. However, the authors note that it is more natural to work in nominal terms in the private sector appraisals, while in practice public policy projects are usually assessed in real terms. According to Campbell and Brown (2003), the main reason for this is that public projects spreads
Section: Theoretical foundations

out for relatively long periods of time in the future and the forecasts of inflation for such long periods are impossible. The governmental bodies project the change in price levels only for a very short perspective. Because the inflation is an increase in general price level, it can be assumed that it will affect all costs and benefits uniformly and as a result will not have an effect on the relative returns on different projects in real sense (Campbell and Brown, 2003). Therefore, estimation of costs and

benefits in the public sector appraisal should be expressed in real terms (HM Treasury, 2003). There must be a clear distinction between project evaluation when we are looking back and project appraisal when we are looking into the future (Campbell and Brown, 2003). As the costs and benefits in the forthcoming nuclear power plant project appraisal must be expressed in this years 2010 price level, some of the historical data will be a subject to inflation, i.e. the figures from the earlier years needs to be inflated to the chosen 2010 price level. This will be done by using the historical change in construction prices in Lithuania (see Appendix 5) exceptionally for the construction costs6 and GDP deflator (see Appendix 6) for the rest of the costs and benefits. Because this is a national CBA, therefore the costs and benefits need to be expressed in national currency. The exchange rates of 2.9897 LTL/USD and LTL 3.4921 LTL/EUR are going to be used to convert some data into the national currency (see Appendix 4 for the derivation). However, after having converted all the costs and benefits to the same years price level and the same currency, there is a necessity to project how these impacts escalate over time. It is worth emphasizing that although escalation also refers to the increase in prices, it is independent and exclusive of inflation. Real escalation measures the change of the prices over or above the general inflation and may result, for example, due to the scarcity and depletion of resources, increase or decrease of the competition in the market, the origin of economies of scale in the market etc. (IAEA, 2010; HM Treasury, 2003). Due to the importance of this aspect, this will be taken into account in the further analitical part. 2.1.3 Social Discount Rate It is extremely well known that money at hand today is not worth the same the next year. As a result, the costs and benefits that occur later in the future needs to be discounted in order to arrive at present values. For this reason, appraisals, which evaluate the attractiveness of investment opportunities, are highly dependent on the
Section: Theoretical foundations

The construction input price change is used in order to better reflect the inflation in national construction sector, while the GDP deflator reflects the general change in prices.

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choice of discount rate. In general, low discount rates favor the projects with the highest total benefits regardless the time they occur. However, in the case of increasing the discount rate, there will be smaller weights applied to the costs and benefits that occur far in the future and as a result this will weaken the projects that are back-end loaded (Boardman et al., 2006). A proper social discount rate (SDR), which reflects the social point of view on how individuals are willing to give up consumption today in exchange for additional consumption in the future, must be chosen when evaluating government policies or projects. Due to the failures in financial markets the SDR may differ from the financial rate of return (Campbell and Brown, 2003; European Commission, 2008b). There are two main approaches available and widely discussed in the literature on how to derive the appropriate SDR: 1) Derive SDR from the rates observable in the market (four alternatives): o Marginal rate of return on private investments; o Social marginal rate of time preference (MRTP); o Governments real borrowing rate; o Weighted average rate of the oncoming rates. 2) Use social time preference rate (STPR) approach. Firstly, a traditional argument for using a marginal rate of return on private investments states that public investment should be competitive with private investments, i.e. public project should be at least as good as the private one (European commission, 2008b). Secondly, using a MRTP as SDR is based on the principle that individuals are willing to delay consumption today in order to receive additional governments borrowing rate as SDR as it is the rate that reflects real cost of financing (Boardman et al., 2006). As there is no official guideline existing in Lithuania which suggests the consistent use of SDR for social project evaluation, Kuodis (2009) also suggest to use governments eurobond interest rate in the Lithuanian case. The last alternative of deriving SDR from the market is simply to use the weighted average of the previously proposed rates (Boardman et al., 2006).
Section: Theoretical foundations

consumption in the future. Thirdly, many economists suggest using long-term

1 1

Finally, the other option is to obtain the SDR from forecasted long-term growth in the economy, i.e. use the so called social time preference (STPR) approach, which has an increasing consensus among the social planners. There are some instances of European countries that set SDR on the basis of STPR (European Commission, 2008b). For example, France use 4% SDR, Germany 3% and UK 3.5% (Evans, 2006). European Commission (2008b) suggests using 3.5% SDR for mature European countries and 5.5% for Cohesion countries whose economies are expected to grow at a faster phase than the old members. The formula for deriving SDR from the growth rate is the following: r = eg + p r Real social discount rate; g Growth rate of per capita consumption; e Elasticity of marginal utility of consumption; p Pure time preference.
Source: European Commission (2008b)

STPR consist of two major components: utilitarian preference (eg) and pure time preference (p). The utilitarian part estimates the utility decrease of a marginal money unit resulted by the increases in real income. This means that if per capita consumption is expected to increase over time, the future consumption will be abundant relative to today and as a result will have a lower marginal utility (HM Treasury, 2003). Individuals from a developing country will require a higher compensation for postponing current consumption than individuals from a developed country because the future consumption will be more plentiful relative to current levels (European Commission, 2008b). The other component (p) represents consumers impatience, i.e. at what rate the individuals discount future consumption over present consumption if there is no change in per capita consumption (HM Treasury, 2003). All the parameters in the above formula is specific to the individual country, in particular the growth in per capita consumption (g). Here it is intended to review the possible ranges of these parameters and derive the SDR for the Lithuanian case.
Section: Theoretical foundations

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Pure time preference (p) is affected by the life expectancy and other individual features (European Commission, 2008b). Evans (2006) takes into account all the different views on estimating this parameter and summarizes that an appropriate range should lie between 0%-2%. However, the author concludes that the safest option is to use 1% as the evidence on annual death-rate statistics provides the basis for this figure in most EU countries. In order to estimate real annual per capita growth rate in Lithuania, here it has been chosen to retrieve historical real consumption per capita and GDP per capita growth from the national statistics. The annual change in these parameters from 1992-2009 is attached in Appendix 2. The results show that on average consumption per capita grew by 5.4% and GDP per capita increased by 3.2% The elasticity of marginal utility of consumption (e) measures how quick the social marginal utility of consumption falls as the per capita consumption increases. If e is equal to zero, this means that consumption units received today is treated by society the same as the consumption units received in the future, i.e. there is no concern on intergenerational inequality. In the situation where e is equal to one, this means that the relative weight on societys consumption in each time period equals the inverse of its relative per capita consumption (Boardman et al., 2006). This component is affected by the social and individual preferences therefore the estimation of this parameter is not that obvious (European Commission, 2008b). Evans (2006) states that estimating e with behavioural approaches causes empirical problems and as a result bases the estimate of e on tax data and foreign aid contributions. The author concludes that e close to unity should be applied. HM Treasury (2003) also uses marginal utility equal to 1 and concludes that an additional consumption unit to a generation that has twice the consumption of the current generation will decrease the utility by half.
Section: Theoretical foundations

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Table 1.
Case Optimistic Base Pessimistic

Deriving SDR for Lithuania

p 0% 1% 2% e 1 1 1 g 3.2% 4.3% 5.4% SDR 3.2% 5.3% 7.4%

Data sources: estimates on p, e and g based on Evans (2006), Lithuanian Statistical Department (2010), HM Treasury (2003).

The derived SDR rates from Table 1 will be used in the appraisal of a new NPP for the base, optimistic and pessimistic cases. In the base case the SDR estimate of 5.3% is close to the European Commission (2008b) suggestion and supports the argument that SDR for a Cohesion country should be higher relative to the developed EU countries. However, there is one more issue that should be addressed here, i.e. intergenerational equity. Due to the fact that nuclear power project would disperse the costs and benefits through a considerably long period of time, it might be inferred that individuals not yet born may be affected by the project and individuals that bear some of the costs may not be alive to reap the benefits. For example, using a constant SDR implies that it is not efficient for the society to allocate even a small amount of resources today in order to avoid very costly effects in the far future. This raises an ethical dilemma and gives the basis for taking into account sustainability and intergenerational equity issues by applying a time-declining SDR. Another argument for time-declining SDR is uncertainty. The wider the future perspective, the more uncertainty there is concerning the growth rate and other aspects of the economy (Boardman et al., 2006). HM Treasury (2003) also recommends to use the approach of decreasing SDR rates depending on the project duration in order to give more weight to the costs and benefits of the project that occur far in the future. Starting from the time span of 3175 years, HM Treasury (2003) decreases the SDR by 0.5%. The same procedure will be followed in the CBA appraisal of a new NPP.
Section: Theoretical foundations

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2.1.4 Investment criterion The most widely applied investment criterion in practice is the net present value (NPV) principle. As mentioned above, the main reason for discounting future social costs and benefits is to convert them into present values, which takes into account societys impatience to consume today instead of tomorrow and allows the comparability between the project alternatives (Boardman et al., 2006). The formula for NPV calculation is:

= C0 +
=1

(Bt Ct ) 1 + SDR t

Net social benefits at time t equals to the difference between social benefits (Bt) and costs (Ct) occurring at that time. After the discounting procedure, net benefits in different time periods are converted to present values and summed (also taking into account the possible cost (Co) occurring in the beginning of the project). NPV investment criterion means that one should recommend to allocate the resources to the project if NPV of that project is positive (NPV>0). On the contrary, if NPV is negative (NPV<0) it means that the social costs of the project exceeds its benefits and therefore should be rejected as a good investment possibility. However, it is worth noticing that if NPV of a project is positive, one should not conclude that it is the most efficient time to implement the project at this moment. As additional information on project variables may arise later on, it might be an advantage to delay the project and keep the option open (Campbell and Brown, 2003). 2.2 Energy economics
Section: Theoretical foundations

This section intends to explain several concepts that are important for the later analysis. The details are given on key characteristics of electricity generating technologies and the electricity cost calculation methodology. 2.2.1 Cost and performance characteristics of electricity generating technologies The later analysis requires performing a major cost analysis of electricity generating alternatives. Comparisons of various cost components will also be performed in order

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to arrive at certain estimates and assumptions. Therefore, the data must be gathered consistently so that it is actually comparable and can facilitate the comparative analysis between different electricity generating technologies (DEA, 2005). According to Cooper (2009), some of the variability in the cost estimates is a result of comparing apples to oranges (p.17). Therefore, for the sake of clarity, it is of great importance to identify the common aspects of electricity generating technologies. The main variables of electricity generating costs are structured in Figure 3. Figure 3. Key cost variables of power plants Busbar/Levelized-cost Construction cost Overnight
Owner's cost EPC

Operating costs IDC O&M Fuel Cycle cost

Front-End Back-End

Overnight construction cost sometimes is called as instant costs, which are dedicated to construction of the plant. It comprises of Engineering-ProcurementConstruction (EPC) and owners cost. EPC means bare plant costs, for example, in a case of nuclear power plant, these costs would be dedicated to purchase turbine and steam generators, reactor vessel and other necessary materials, compensating for construction workers etc. Whereas, owners cost depends on whether the project is a Greenfield investment or replaces the old plant. Therefore, it might comprise of buying a land and cooling infrastructure, administrating site works and constructing associated buildings, managing the project, acquiring licenses etc. (Cooper, 2009; WNA, 2010). Construction Cost is "all-in" or installed costs, which sums overnight construction cost and interest during construction (IDC). IDC is largely dependent on country specific economic context, the form of financing the project, construction cost and time. Due to the inclusion of financing cost, total construction costs are very sensitive to the building delays (Thomas, 2005). Non-fuel operating and maintenance costs (O&M) are dedicated to controlling and running the utility, repairing it. In the case of nuclear power plant, O&M costs are
Section: Theoretical foundations

1 6

mostly fixed, i.e. independent of the plant capacity factor and contain of labor cost, expenditure on outside support services, moderator and coolant makeup, nuclear liability insurance etc. (IAEA, 1984). Fuel cycle cost is buying all materials and services associated with fuel. Cost analysis of gas, oil or coal fuel cycle is less complicated than that of uranium, because conventional fuels are consumed instantaneously whereas nuclear fuel is used in a reactor for several years (IAEA, 1984). Nuclear fuel cycle includes steps from uranium acquisition to waste disposal and is divided into the front-end and back-end. Front-End costs is uranium supply cost, which includes mining of natural uranium ore, conversion, enrichment and delivering already fabricated fuel to the reactor. As these costs are mostly associated with services of processing uranium, the volatility of the price is much smaller than that of commodity prices (NEA et al., 2005). BackEnd costs are relevant to all power plants that use fuel, but in practice are of great importance only for nuclear power plants (Sustainable Development Commission, 2006). In the case of nuclear power, back-end costs are dedicated to waste disposal and plant decommissioning. Decommissioning cost is inquired while dismantling plants. It also can be entitled as a scrap or horizon value. These costs arise very far in the future, when operational period is complete. Therefore, they have little effect on the overall economics after discounting procedure. Usually the owner of the plant is required to collect the decommissioning fund and collecting schemes are provided to ensure that the money is available after the plant is finished its operation (Thomas, 2005). As seen in Figure 3, busbar or levelised cost involves all-in, O&M and fuel cycle
Section: Theoretical foundations

costs. Using cost of capital as a discount rate, the price of producing electricity is derived. According to Koomey and Hultman (2007) these costs are defined as total discounted cost of conveying electricity from a production unit to the point of interconnection with electricity grid. Therefore, these costs represent cost of producing electricity and addition of transmission and distribution costs results in a price, which consumers pay for the electricity7 (Cooper, 2009).

More on this levelised-cost estimation methodology is discussed in section 2.2.2.

1 7

It is also important to mention one more parameter in energy economics, i.e. plant load factor, also called capacity factor in the US. This parameter is very important because it measures the operating performance and reliability of energy generating unit. Thomas (2005) defines it as output in a given period of time expressed as a percentage of the output that would have been produced if the unit had operated uninterrupted at its full-design output level throughout the period concerned (Thomas, 2005, p.20). IAEA (1984) provides the following formula: % = () 8 ()

This difference between the actual and theoretical maximum arises because of planned maintenance, forced outages, other circumstances when a plant lacks of load or the nuclear power is more expensive than other energy (Kaplan, 2008). The factor can be denominated on annual or lifetime basis. Plant operators are especially concerned about this variable, because the higher output produced means the lower generating cost per unit, i.e. capital costs are divided over more units (Sustainable Development Commission, 2006). 2.2.2 Levelised-cost methodology One of the major parts in the forthcoming analytical section is going to be numerous cost estimations of a new nuclear power plant and a comparison with the other electricity generating alternative. This will require application of levelised-cost methodology, which is standardized, conventionally accepted and widely used in a range of literature. The rationale of levelised-cost approach is to quantify various costs of different
Section: Theoretical foundations

electricity generation options throughout their economic lifetime and estimate busbar cost of generating electricity. This is done by dividing these lifetime expenses from expected outputs and applying discounting procedure (NEA et al., 2005). The following formula, provided by NEA et al. (2005), will be applied in further calculations:
8

Important distinction between capacity and energy terms. Capacity measured in watts and means a potential output of a unit, while energy is denominated in watt-hours and measures the actual amount of electricity generated during a time period (Kaplan, 2008).

1 8

= I0 +
=1

It + Mt + Ft / 1+r t
=1

Et 1+r

EGC average lifetime levelised electricity generation cost; It Capital investment in year t; Mt Operating and maintenance cost in the year t; Ft Fuel cycle cost in the year t; Et Electricity output in year t (Et = 87609*Plant Capacity*Load Factor); r Cost of capital (post tax real WACC); n Economic life of a plant. The methodology to be applied is applied by electricity generating utilities, governmental agencies and international organizations in order to provide economic assessments of alternative generation options (NEA, 2008). However, the levelised costs excludes environmental or other social costs and indicate the average price that consumers will have to pay for the plant operators and investors in order to offset the expenditure they incur and to repay a proper amount of return (NEA et al. 2005). This cost will be quoted in terms of LTL/MWh10. In order to picture separate contributions of cost variables to the EGC, UKs Sustainable Development Commission (2006) provides typical cost proportions for the most popular electricity generating alternatives, assuming 10% real cost of capital (see Table 2).

10

There are 8760 hours per year (365*24=8670) LTL is an abbreviation for Litas the national currency of Lithuania.

1 9

Section: Theoretical foundations

Table 2.
Variable

Representative proportions of electricity generating costs, %

Nuclear 60-75 5-10 8-15 * CCGT11 30-40 50-60 5-10 0 Renewable (wind) 85-90 0 5-15 0

Construction or capital (including IDC) Fuel O&M Back-End

Source: Sustainable Development Commission (2006), p.7

Generally, it is seen that nuclear and wind power generation is highly capital intensive process relative to gas-fired plants. On the other hand, for CCGTs it is typical to have relatively high expenditures on fuel. As mentioned before, back-end fuel costs are only relevant in the case of nuclear, but they are highly uncertain. In the paper of Sustainable Development Commission (2006) it is explained that this is so, primarily because the cost depends on the waste management decisions, i.e. whether reprocessing of spent fuel is made. Secondly, there is little commercial experience concerning decommissioning and waste management. Nevertheless, as these costs can stretch over hundreds of years, the paper concludes that these costs are expected to be only a small proportion of average lifetime levelised electricity generation cost. Of course, these proportions is just a generalization and separate variables depend, firstly, on the type of a plant and, moreover, on the country specific context (Sustainable Development Commission, 2006).

11

Combined Cycle Gas Turbine plant

2 0

Section: Theoretical foundations

3. Analysis
The analytical part of the thesis begins with a description of the project and, as mentioned in the introduction, later follows six major steps12. The steps followed are described in detail when they are applied.

3.1 Project description and alternatives

After the shutdown of Ignalina NPP, the government declared that the major task in the energy sector is to ensure reliable and secure supply of electricity in Lithuania. One of the options to reach this goal is to construct a new NPP. Therefore, the subject of this analysis is to conduct an economic assessment of investment into a new NPP in Lithuania. This alternative has been considered already for a while. In the late 2006 a summary of a nuclear build feasibility study was provided to the public, picturing nuclear power expansion in a good light. A number of actions were also taken in order to make a project become a reality. The collaboration acts were signed with the neighboring EU countries, Environmental Impact Assessment of the site was completed, the Parliament approved a construction of a new NPP in the Lithuanian Republic and the law of Nuclear power station was issued. Today Lithuania is at the milestone of negotiating the proposals received from the potential investors and signing the partnership agreement (Visaginas Nuclear Power Plant Ltd., 2010). Despite this considerable effort, there has not been many decisions made concerning the details of the project. Lithuanias Ministry of Energy (2010) claims that, after the selection of strategic investor in 2010, the final decisions on the number of reactors and optimal capacity, the type and design of reactor will be done. However, the specifications of a project are vital in this analysis. Because the construction of a new NPP can vary in many aspects and create numerous potential alternatives, the set of scenarios will be created taking into account the proposed features of the project. The CBA appraisal will be based on the base case scenario and some of the most important
Section: Analysis

12

See Figure 2 in the introduction section

21

assumptions of pesimistic and optimistic scenarios will be tested in the sensitivity analysis. Site of a project A new NPP is planned to be built near the borders with Latvia and Belarus, on the south bank of Drkiai Lake, where the old Ignalina NPP is situated13. The plant is called under the name of adjacent town Visaginas (Visaginas Nuclear Power Plant Ltd., 2010). This particular site is chosen because of the obvious benefits of existing infrastructure. As this is not a Greenfield investment, it will have considerable effect on the upfront investment size. Capacity demanded The operator of Lithuanian transmission system claims that current Lithuanian generating capacities will be sufficient to meet the national demand until 2013. A new NPP should replace the old reactors in Ignalina, which had a capacity of 1300 MWe each, and add capacity of maximum 3400 MWe. (Lietuvos Energija, 2007). This number would translate into approximatelly 27 TWh of electricity output per year. Whereas, according to Lithuanian Statistical Department (2010) Lithuania consumed around 9 TWh in 2008. In addition, Figure 4 depicts possible scenarios of electricity demand growth in Lithuania. Figure 4. Projections of electricity demand in Lithuania
18 Electricity demand, TWh 16 14 12 10 8 6 2010 2015 Year Data Source: International Atomic Energy Agency (2007), p.111
13

Slow economic growth scenario Basic Scenario Fast economic growth scenario

2020

2025

See Appendix 3 for the map

22

Section: Analysis

As seen from Figure 4, the electricity output of 27 TWh would exceed the demand even in the scenario of fast economic growth. Therefore, as Wenisch and Mraz (2008) claim this would be more than a simple replacement of the old reactors. It has to be emphasized that a new capacity should be added only in two cases, i.e. replacing the existing capacity due to retirement and meeting demand growth. Otherwise, a new investment would result in excessive cost, displace other investments and would be economically unjustified (Kennedy, 2007). It can be concluded that, from a national perspective, there is a capacity only for 800-1600MWe14 plant, which would produce approximately 6.312.6 TWh of electricity. This conclusion can be also supported by Lithuanian experts opinion, which states that to satisfy current national demand it is enough capacity of around 1000MWe (Visaginas Nuclear Power Plant Ltd., 2010). Hereby, in the base case scenario it is assumed a 1000MWe capacity, pessimistic scenario 800MWe and optimistic 1600MWe. Reactor type There also has not been much discussion about the type of a reactor expected to be built in Lithuania although according to Thomas (2005) it is clear that the most relevant designs for the future orders will be advanced reactors - Generation III or Generation III+ designs. Juozaitis (2006) provides information on the nuclear technologies under consideration in Lithuania. The following Table 3 lists a wide range of technical alternatives, i.e. boiling water (BWR), pressurized water (PWR) and pressurized heavy water (PHWR) reactors.

14

These figures were considered in the primary plan and stated in the summary of a feasibility study, provided by Lietuvos Energija (2006)

23

Section: Analysis

Table 3. Nuclear technologies under consideration

Technologies V-392 V-448 ABWR ESBWR SWR-1000 ACR-1000 EC-6 APWR AP-1000 AP-600 EPR Type WWER (PWR) WWER (PWR) BWR BWR BWR PHWR PHWR PWR PWR PWR PWR Size, MWe 1006 1500 1300 1535 1254 1085 700 1700 1000 600 1600 Supplier AtomStroyExport AtomStroyExport Hitachi (General Electric) General Electric AREVA Nuclear Power Atomic Energy of Canada Limited Atomic Energy of Canada Limited Mitsubishi Heavy Industries Westinghouse Westinghouse AREVA Nuclear Power

Source: Juozaitis (2006), slide 18; WNA (2010)

Using information provided in the British Sustainable Development Commissions (2006) report, the assumption on the reactor likely to be built in Lithuania can be arrived at. According to the report, WWER is a type of Russian PWR design similar to Chernobyl, which is currently ordered by China and India. Here it can be assumed that Lithuania would align with Western Europe practice, where only a little possibility exist that Russian designs would be attempted to license. A Japanese ABWR and APWR are also unlikely to be built in Lithuania, because so far these suppliers have not ever tried to export these designs to the West and it is not likely to change (Thomas, 2005). The other BWRs tend to produce higher operator doses than other reactor types (Sustainable Development Commission, 2006, p.10). Therefore, it is assumed that the other technologies are superior relative to BWRs. The Canadian PHWRs could be an alternative, but the British report stresses out that the licensing process is significantly longer then for PWRs (Sustainable Development Commission, 2006). Finally, the options of PWRs are left. Therefore, for the purpose of this appraisal it is assumed that it is likely that the PWRs supplied by Westinghouse or
Section: Analysis

AREVA will be ordered in Lithuania.

24

Operating performance Having assumed that a likely reactor is an advanced one, the operating performance can be discussed. Thomas (2005) summarizes that historically the assumptions on load factor provided by vendors and other technology promoters were somewhat misleading. While the load factors of nuclear plants were projected to reach 85-90%, the reality showed that worldwide average load factor was only around 60%. The importance of this inaccuracy can be illustrated by a simple example. If the load factor is assumed 90% and fixed costs represent two-thirds of the overall nuclear generation cost, 60% load factor would mean the overall cost to increase by a one-third. In 2005, only 7 out of 414 reactors showed a lifetime load factor higher than 90% and only 100 plants more than 80% (Thomas, 2005). While a number of sources provide higher effectiveness of new generation plants relative to the ones already in operation, there is little confidence about the operating effectiveness and reliability based on the historical evidence. AREVA, the supplier of European Pressurized Reactors (EPRs) which are likely to be built in Lithuania, claims the average load factor of 93% over the entire service life of the plant (AREVA, 2010). However, European Commission (2008a) assumes the EPRs load factor only of 85%. Thomas (2005) also provides and argument about the teething problems, which mean that the performance of the advanced plant during the first years of operation might be poorer than expected. In addition, the decline in performance during the operating life is expected to decline as the equipment and machines tends to wear out and needs to be replaced. Nonetheless, this decline may be of a lesser importance relative to the teething problems because the replacements would take place further in the future and discounting procedure would assign smaller weight (Thomas, 2005). Taking the discussed details this into account, the load factor of the nuclear alternative is assumed to be 85% in the first 5 years of operation and afterwards increase to 90%.
Section: Analysis

Timeframe of the project AREVA and Westinghouse assure to be able to build a nuclear reactor in 3 years (CitiGroup, 2009). However, the most recent examples of Finish Olkiluoto and French

25

Flamanville EPRs show that a new nuclear construction is a subject of significant construction delays. International Energy Agency (2007) projects the construction time to equal 60 months. European Commission (2008) suggests assuming a 6-year construction period, while Lietuvos Energija (2006) assumes the same. This is not overoptimistic and is considered to be reasonable. Therefore, this will be assumed in the analysis. The implementation company of Visaginas project declares that the expected generation starting date is 2019-2020 (Visaginas Nuclear Power Plant Ltd., 2010). Having in mind that the preparations for construction is not finished yet though initiated, a construction starting date is assumed to be the beginning of 2014. Another important aspect in the analysis is the economic lifetime of a plant. The 3rd generation plants are considered to have a longer accounting life relative to their predecessors (Thomas, 2005). According to AREVA (2010), their reactors are designed for 60 years life service. Again to avoid optimism bias, here it is assumed the operational life of 40 years as suggested by International Energy Agency (2007) and European Commission (2008). The assumed timeframe of the project is summarized in the Figure 5. Figure 5. Assumed timeline of the new nuclear build project

Although the decision to build a nuclear plant was made in 2006, the analysis will take into account impacts of a project from 2010 as costs already occurred are considered as sunk costs and should not be a subject in the analysis. Regarding the cost and benefit occurrence over the course of a year, Boardman et al. (2006) suggest to treat these impacts as if they are experienced in the middle of a year. However, this would complicate the calculations and would not improve the analysis greatly. Therefore, it is assumed that benefits and costs of the project are accumulated immediately in the beginning of the project (t=0) and later at the end of the year (t=1,2,,n).
Section: Analysis

26

The details on the decommissioning period will be discussed separately in the later part of the analysis. The counter-factual the other technological alternative After the description of a potential project, a CBA appraisal also needs to identify the so called counter-factual, i.e. a project which would be displaced or crowded out if a potential investment takes place. This is so because CBA requires comparing net benefits of a potential policy to the net benefits of policys best alternative. (Boardman et al, 2006). According to Boardman and others (2006), usually the potential project is compared to the do-nothing situation. However, this is not the case here. Lithuanias goal of eliminating electricity supply-demand gap can be also achieved by investing into other technologies. Renewable electricity generation could be a good alternative, which would increase a fuel diversification. On the other hand, it is not likely that investments would expand into this particular option as it is considered to be a volatile and unpredictable way of electricity production in Lithuania. On the contrary, gasfired electricity generation is likely to expand if the nuclear plant cannot be built. Although the dependency on gas imports would not be eliminated and a fragile security of supply would further exist, it is considered to be a more predictable and less volatile alternative relative to the renewable power generation (Visaginas Nuclear Power Plant Ltd., 2010). Taking this information into account, the assumption here is that a new NPP build would divert investment from a gas-fired plant. Currently in Lithuania couple of the old and inefficient blocks of the gas-fired plant is being replaced with a brand new combined cycle gas turbine (CCGT). Therefore, the assumptions on the parameters of a gas-fired plant will be based on the recent data and figures, explicitly characteristic to Lithuanian context. Construction of a new CCGT is expected to take approximately twice as little relative
Section: Analysis

to the nuclear plant. Lietuvos Elektrin (2009) claims that it will take 39 months to build this block. This is a first of its kind project and it is likely that the later construction would shorten because of accumulating experience and learning by doing.

27

Hereby, it is assumed that a possibly diverted project would have a construcion period of 3 years. This assumption is consistent with the information provided by other organizations such as NEA, IEA and OECD. They estimated that gas-fired power plants are built rapidly and the expense schedules reported show that in most cases expenditures are spread over two to three years (NEA et al., 2005, p.12). The exploitation period of a gas-fired plant is also shorter as compared to a nuclear plant. The expected operational life varies between 25-35 years according to various sources. Lietuvos Elektrin (2009) projects the operating life of not less than 30 years. Hence, this figure will be used in the following calculations. Concerning the operating performance of the CCGT Lithuanian Plant expects to reach the load factor of 90% and thermal efficiency of 58.4% (Lietuvos Elektrin, 2009). 3.2 Scope and Standing The second step in the CBA appraisal is to define whose costs and benefits should be included. More precisely, one should define whose welfare counts in the aggregation of the net benefits (European Commission, 2008b, p.31). The analysis can be approached from various perspectives, i.e. local, provincial, national, regional or even global (Boardman et al., 2006; Jensen and Bakker, 2006). There has been chosen to limit the analysis to the national standpoint. This is so because Lithuanian government firstly seeks to implement its individual national energy policy, i.e. to secure the supply of electricity to Lithuanian inhabitants. However, adding a nuclear power plant could have an impact on the whole Baltic region and actors from Poland, Latvia, Estonia and Russia could be affected as well. This is so because the plant is an integrated part of the whole Baltic energy system and it might significantly affect the market supply which in turn might result in changes of the electricity market price (European Commission, 2008b; Campbel and Brown, 2003). Besides this possible effect, adding a NPP into the system and displacing investment into a gas-fired plant would also capture significant effects on climate
Section: Analysis

change, which fundamentally is of global concern (European Commission, 2008b).

28

3.3 Identification, quantification and monetization of costs and benefits The next step is ultimate in this appraisal as it covers the identification of costs and benefits to be estimated, specifies the measurement indicators, forecasts the development of costs and benefits over the life of the project and puts the money value to them if it is possible to do so. Boardman and others (2006) stress out that while listing the impacts caused by the policy it is very important to take into account only those which affect the utility of individuals and leave out those which have no value to the human beings. The impact identification requires defining the cause-and-effect relationship between the outcome of the policy and the utility of individuals. This is often forgotten by politicians, who tend to generalize the impacts (Boardman et al., 2006). For example, Lithuanian government states that an economic stimulus from a new Visaginas NPP is expected to be large; the use of local supply chain will benefit the Lithuanian economy etc. (Visaginas Nuclear Power Plant Ltd., 2010). Thus, from the first sight a straightforward task can become a complex one. Using the examples of Kennedy (2007), Jensen and Bakker (2006), information from British Sustainable Development Commission (2006) and many other articles on electricity generation cost, there has been identified the impacts to be discussed and evaluated in this CBA appraisal (see Table 4).

29

Section: Analysis

Table 4. Identified costs and benefits of a new NPP build

COSTS Pre-development cost Investment cost O&M Front-End Fuel cost Waste management cost Decommissioning cost Accident costs Risk of a major accident, which would result in an increase of radiation Nuclear Cost Penalty/Advantage Comments As the nuclear generating costs are evaluated, the comparisons are made to that of gas-fired technological expansion. This might in turn result into nuclear cost penalty or advantage (cost or benefit). Eventually the cost-effectiveness of nuclear expansion is evaluated.

BENEFITS Environmental benefits Reduction of greenhouse gases - value difference between gas-fired lifecycle emissions and nuclear lifecycle emissions Avoided gas storage cost The government claims there will be significant employment benefits from building a new NPP

Security of Supply Employment Benefits

Sources: Sustainable Development Commission (2006), Kennedy (2007), Jensen and Bakker (2006), Thomas (2005)

The costs and benefits listed in Table 4 are thoroughly analyzed, various literature and numerous data are reviewed and necessary assumptions are made in the forthcoming part of the thesis. Although conducting a CBA requires quantifying and monetizing all the costs and benefits related to the policy, due to the complexity, some of the identified costs and benefits cannot be estimated in this appraisal. Boardman and others (2006) suggest making qualitative estimates in order to emphasize a relative importance of these impacts against the estimated ones. Thus, some of the impacts are described rather than estimated here. As it has been discussed in Section 3.1, it is most likely that the counter factual is a conventional gas-fired electricity generation. As a result, the identified costs and
Section: Analysis

30

benefits of nuclear expansion are compared in regard with that of gas-fired electricity generation. Together with identification of costs and benefits it is necessary to specify the measurement indicators, which is mostly straightforward (Boardman et al., 2006). There are numerous electricity generation costs to be evaluated and they mostly depend on the capacity of the plant (MW) or the electricity output produced (MWh). Consequently, most of the costs will be expressed as Litas per MW (LTL/MW) or Litas per MWh (LTL/MWh). The benefit of greenhouse gas reduction is measured as Litas saved by reducing a ton of CO2 annually (LTL/t CO2 eq.) and the security of supply benefit is expressed as expenditures saved from renting a gas storage and buying additional gas (LTL/m3). The extensive explanation of the details on identified costs and benefits is given in the following part and discussed individually. 3.3.1 Cost Penalty/Advantage The choice of electricity generation technology mainly depends on its cost. The following approach used by Kennedy (2007) has been chosen to be employed in the appraisal. The costs of generating electricity with nuclear and gas-fired plants will be estimated and necessary assumptions will be made to reflect the situation in the Lithuanian market as close as possible. In order to allow the comparability of cost magnitudes between these options, levelised costs of each alternative will be estimated (using private investment cost of capital). Subsequently, nuclear levelised-cost will be deducted from gas-fired levelised-cost and there will be arrived at levelised-cost differences, which will be located within the assumed operational life of the nuclear power plant and multiplied by the assumed annual electricity output. This will lead to nuclear cost penalty or cost advantage social cost or benefit. According to Kennedy (2007), this procedure will allow to evaluate the opportunity cost of capital and take into account a commercial view of risks associated with electricity generation investments.
Section: Analysis

31

Pre-development costs of nuclear and gas-fired plants Pre-development costs will not be included in the appraisal partly due to the fact that the preparation of building a NPP in Lithuania already began and some money has already been spent. Various pre-development related stages are completed: environmental impact analysis is prepared, other consultancy services are used, and geological research on the site is performed etc. Decisions about these costs cannot be made anymore and they should be considered as sunk cost; therefore, they should not be a subject in the analysis. Pre-development costs still expected to be incurred are uncertain and are considered relatively small. It is assumed that not involving these costs for nuclear and gas-fired electricity generation technologies will not distort results significantly. Nuclear investment cost The major variable in the economics of nuclear power plants is investment cost, which receives the most attention in the appraisals. This is so, primarily because it usually accounts for approximately 60-70 percent of nuclear generation costs, i.e. costs that will be inquired whether or not the plant starts its operation (Thomas, 2005; Linares and Conchado, 2009). The magnitude of the initial investment critically diminishes the competiveness of nuclear power as compared to the other forms of power generation. Conversely, the other forms of electricity generation such as gas-fired plants contains of significantly greater operational costs related to the purchase of expensive fuel (Sustainable Development Commission, 2006). The fact that investment costs of nuclear power plants are very uncertain is well known and widely disputed in the literature. The main reasons, why construction costs are difficult to forecast, could be summarized in two points. Firstly, the controversy occurs as a result of a necessity to estimate costs based on the past data, which might be unreliable (Cooper, 2009). On the other hand, the difficulty arises due to the nature of the project (Thomas, 2005).
Section: Analysis

Thomas (2005) argues that cost estimates provided by bodies with a concern in the technology should be treated with skepticism. A large pool of such actors can be mentioned, i.e. promotional bodies, plant vendors, nuclear utilities, international

32

agencies and governments. The last eight years overnight cost estimates15, collected from various studies and summarized by Copper (2009), supports the argument. Figure 6. Estimates of nuclear reactor overnight costs
Overnight Construction cost, Lt/kW (in 2010 prices) 20,000

18,000
16,000 14,000

12,000
10,000 8,000 6,000 4,000 2,000 2000 2002 2004 2006 2008 2010
Lithuanian estimate

Date of Estimate Data source: LietuvosEnergija (2006), Cooper (2009), p. 23

Cooper (2009) states, that low cost estimates during 2001-2005 was provided by technology vendors and academics based on earlier bandwagon market in the 1970s. Followed by favorable governments support, this led to formation of nuclear renaissance. Starting with 2007, nuclear utilities already provided almost doubled overnight construction figures. However, this was only the lower part of the range and independent energy analysts estimated the construction costs even higher (Cooper, 2009). Therefore, the evidence suggests that evaluation of nuclear construction costs should be treated with high level of cautiousness. As mentioned before, the other reason why it is difficult to forecast nuclear construction costs is the nature of the project. Thomas (2005) explains that such large scale projects as building a nuclear power plant demands a large amount of on-site engineering and this causes difficulties to manage and control costs. The third generation nuclear reactors are expected to have lower construction costs as compared to ancestors due to learning, economies of scale and new technology. However, today this is not the case and recent constructions experience significant time delays and
15

Original data is provided in Appendix 7

33

Section: Analysis

result in enormous cost overruns. These construction costs cannot be locked-in because nuclear power plants are not sold on turnkey terms, i.e. vendor cannot assure a fixed construction price due to the complexity of the project (Thomas, 2005). Recent cases provide evidence that actual nuclear construction costs are likely to overrun their primary estimates (see Table 5). Table 5. Recent evidence on III generation nuclear reactor construction cost
Overnight Construction Cost, LTL/kW (in 2010 prices) Plant Olkiluoto (Finland) Flamanville (France) San Men (China) Bellefonte (USA) (Georgia) Visaginas (Lithuania)
*IDC included Data source: Lietuvos Energija (2006) and own elaboration based on CitiGroup (2009)

Technology EPR EPR AP-1000 AP-1000

Primary estimate 8,065

Updated estimate/Actual 14,150 10,054

2,957

8,600 12,430

17,005* 7,915

CitiGroup (2009) summarizes that the developers and builders, such as AREVA and Westinghouse, assure to be able to build a nuclear reactor in 3 years. Nevertheless, Finland, France, China and the US had to update the targeted estimates due to construction delays and planning problems. Georgia already sets cost estimate to the highest level. One of the most famous examples of cost overruns is Finish Olkiluoto EPR plant, which is already 3 years behind the schedule and the construction cost estimate had to be increased by around 60% (CitiGroup, 2009). This recent data shows fragility and uncertainty of time schedules and costs of new build, but British Environmental Audit Committee (2006) concludes that this does not necessarily indicate that new nuclear power plants cannot be built as scheduled and within the budget. It means that private investors may require higher rate of return for experiencing higher risks. Lithuanian electricity transmittor Lietuvos Energija provided overnight cost estimate for a new nuclear built in 2006. As seen in Table 5, this estimate converted to 2010
Section: Analysis

34

prices equals 7915 LTL/kW. In the context of other studies (see Figure 6), the estimate takes place in a lower range of the interval. Here it can be argued that this estimate is overoptimistic because it is likely that the expansion of nuclear power in Lithuania is attempted to be pictured in a good light. The comparative analysis have shown that this figure is one of the lowest, therefore might be a subject to optimism bias. HM Treasury (2003) emphasizes that this is a worldwide phenomena for the appraisers to underestimate the costs and to overestimate the benefits. British CBA guidline suggests to make empirically based adjustments in order to overcome the appraisal optimism and to complement the calculations with spesific risk adjustments. This can be done by referring to the historical data and other similar examples in the other countries. As a result, here it has been chosen to adjust the Lithuanian estimate by comparing it to the most recent and technologically similar examples in Europe, i.e. Olkiluoto (Finland) and Flamanville (France). As seen in Table 5, current estimates for overnight construction costs of these plants are 14,150 LTL/kW and 10,054 LTL/kW, which were corrected recently due to various construction problems, delays and even significant design changes (CitiGroup, 2009). In addition, European Commission (2008a) suggests using a base case assumption of 9,249 LTL/kW16 on overnight construction costs for nuclear fission (optimistic case 6,798 LTL/kW; pesimistic 11,664 LTL/kW). It can be argued that overnight construction costs for the Lithuanian NPP is likely to be around 10,000 LTL/kW. Historical data shows that the lower estimates of 6,798 and 7915 LTL/kW are likely to be overoptimistic because nuclear construction process is subject to various construction problems. However, the higher estimates of 11,664 and 14,150 LTL/kW might be too high for the Lithuanian NPP due to couple of reasons. Firstly, Lithuania is a country in Eastern Europe, which is known for lower costs (especially labor costs) relative to Scandinavia or Western Europe. Moreover, building a NPP in Lithuania is not a Greenfield investment because the site of the old plant is planned to be used. As discussed earlier, this might cause the owners costs to be significantly lower because there is no need for high investments into a new infrastructure. In addition, as first-of-its-kind EPR plants in Finland and
16

Converted to 2010 prices by using annual average rates of change in construction input prices provided in Appendix 5

35

Section: Analysis

France are almost completed, the argument of learning by doing can be applied. It is likely that vendors will be more experienced by the time a 3 rd Generation reactor is ordered in Lithuania. Therefore, for the base case here it is assumed that NPP overnight construction costs are 10,000 LTL/kW. As this is a major cost component in the economics of nuclear power and is a subject to high uncertainties, for the forthcoming sensitivity analysis it is assumed that in an optimistic case the estimate is 7915 LTL/kW (provided by Lietuvos Energija in 2006) and for the pesimistic case 14,150 LTL/kW (CitiGroup, 2009). Regarding the volume of costs spent in each year, NEA et al. (2005) notes that around 90% of the construction costs are incured within the first 5 years or even less. Therefore, to account for different amounts of costs incurred in different years of construction, the fractions of expenditures were assumed (see Table 6). As mentioned before, total construction cost comprises not only of overnight construction cost but of interest during construction (IDC) as well. In order to evaluate IDC, it is assumed here that commercial banks charges 6% interest rate. The interest rate is derived from the comparison of overnight construction cost and total construction cost, which were provided by Lietuvos Energija (2006) in the summary of a potential NNP feasibility study.

36

Section: Analysis

Table 6.

IDC calculations for the base case

Overnight construction cost: 10,000,000 LTL/MW Interest rate: 6.00% Year Fraction spent during the year (1) 2014 2015 2016 2017 2018 2019 Total 10% 20% 30% 20% 10% 10% 100% 0.041852 0.067645 0.078743 0.038203 0.01236 0.006 0.244803 [(1+n)n -1]* (1) Interest amount, LTL/MW 418,519 676,451 787,431 382,032 123,600 60,000 2,448,033

n number of years between the time the resources are borrowed and the time the money is started to be paid back (start of operation). Source: The calculations are based on the approach suggested by IAEA (1984), p.551-552

It can be concluded that total construction costs of a new NPP in a base case will amount for around 12.448 billion LTL or 12,448,033 LTL/MW (see Table 6). Investment costs of a gas-fired plant According to Thomas (2005) current generation CCGT are produced in factories, which are controlled by the vendors, and requires little on-site work, therefore they are available to be bought under trunkey terms. Concequently, there is almost no risk that the construction costs will increase. Concerning the gas-fired plant investments, here it has been chosen to base the assumptions on a recent project in Lithuania. Currently a modern combined cycle gas turbine (CCGT) is being built to replace the old and retired plant blocks in Lithuanian power-station. Staniulis and Adomaitien (2009) notes that a new block of 455MW electrical capacity will cost 384.3 million Euros (2009 price level) including interest during construction. Converted to current price level it amounts for 1,322 million Litas and translates to 2,905.49 LTL/kW. Therefore, it is assumed that similar blocks are displaced if investments flow to nuclear electricity generation.
Section: Analysis

37

For the forthcoming sensitivity analysis the estimate of similar CCGT investment in neighboring Latvia is selected. EBRD (2010) publishes project description document, where it is stated that 400MWe CCGT plant will cost 400 million Euros (2009 price level). The construction cost is equal to 1,381.654 million Litas or 3,454 LTL/kW. The cost per kilowatt in the Latvian case is 26% higher than the Lithuanian estimate, consequently it is going to be used for the pesimistic case scenario. For the optimistic case, Staniulis and Adomaitien (2009) provide an estimate of 310 million Euros (2,352.367 LTL/kW). According to NEA et al. (2005) gas-fired plants are built rapidly and the majority of expenditures are incurred during the first 2-3 years of the construction. Here it is assumed that during the first and second year of construction there will be spent 40% of total expenditures each year and during the last year of the construction the remaining 20%. The results of total construction cost computation for nuclear and CCGT plants are summarized in the following table. Table 7. Total construction costs for nuclear and CCGT plants in the base case
NUCLEAR Year IDC, LTL
2010

CCGT Total construction cost, LTL2010 Construction cost, LTL2010/MW Total Construction cost, LTL2010

Overnight construction cost, LTL2010/MW

/MW

2014 2015 2016 2017 2018 2019 Total

418,519 676,451 787,431 382,032 123,600 60,000 2,448,033

1,000,000 2,000,000 3,000,000 2,000,000 1,000,000 1,000,000 10,000,000

1,418,519,112 2,676,451,155 3,787,430,880 2,382,032,000 1,123,600,000 1,060,000,000 12,448,033,147

1,162,196 1,162,196 581,098

1,162,196,000 1,162,196,000 581,098,000

2,905,490

2,905,490,000

The results show that to add 1000 MWe to the system by nuclear plant is around 4.3 times more expensive than do it with a CCGT.
Section: Analysis

38

Nuclear and gas-fired plant O&M costs Non-fuel O&M costs are mostly fixed and as a result does not depend on the electricity output (Thomas, 2005). Because these costs account for only 5-15% of the total cost of electricity17, there are fewer discussions in the literature on these variables. NEA et al. (2005) concludes that O&M costs may vary considerably across countries due to differences in wages and equipment prices. As there has not been found any relevant domestic data on O&M related to technologies representing new generation plants, it has been chosen to use data on the European level. According to European Commission (2008a) research, annualized O&M for nuclear fission technology amounts for 90 EUR2005/kW (398.853 LTL/kW in 2010 prices18) and CCGT annualized O&M costs amount for 25 EUR2005/kW (109.4 LTL/kW18), which is assumed for the base case. For the pessimistic and optimistic scenarios, the data from the same European source is used. Annual nuclear O&M range from 323.834 LTL/kW to 468.248 LTL/kW and annual CCGT O&M vary between 83.148LTL/kW to 113.78 LTL/kW (European Commission, 2008a). It is expected that both nuclear and gas-fired plants, also related equipment and machines will depreciate over time. However, depreciation is a subject of financial accounting and should not be considered in CBA appraisal. Nevertheless, this is an argument for maintenance costs to increase over time as the plants getting old might require more repairs and other improvements (IAEA, 1984). The research of NEA et al. (2005) summarizes that the majority of CCTG and nuclear plants have a modest O&M cost escalation over the operational phase. The majority of the countries that participated in the research declare O&M cost escalation of 0.5-1%. Du and Parsons (2009) projects real non-fuel O&M costs to rise at 1% for nuclear plants. As a result, here it is also assumed 1% growth in costs for nuclear and CCGT plants. The results on O&M costs for both alternatives are attached in the Appendix 8.

17 18

See Table 2 in the part of Theoretical Foundations Using average exchange rate of 3.4921 and GDP deflator listed in Appendix 6

39

Section: Analysis

Uranium supply cost As explained in the theoretical part of the thesis, uranium supply cost comprise not only from the purchases of raw uranium from the mine. In order to use uranium in a nuclear reactor, raw uranium needs to be passed through such stages as conversion, enrichment and fabrication (WNA, 2010). WNA (2010) publishes AREVAs recent evaluations of how these services contribute to the total uranium supply cost, i.e. price comprise of 51% of natural uranium purchase, only 3% are dedicated to conversion, 32% and 14% are spent on enrichment and fabrication respectively. It is also worth noticing that most uranium is purchased under long-term contracts and these commercial deals are not published to the public. The spot market price of uranium does not reflect the real price paid by the nuclear utilities (NEA, 2008). Euratom Supply Agency (2009) publishes average multiannual contract prices for natural uranium deliveries in the EU in order to demonstrate uranium price trends. The latest multiannual contract price available in Euratom Supply Agencys report (2008) is 26.72 USD/lb U3O8 (2008 price level), which converts to 58.91 USD/kg U3O8 and is considered to be a reasonable estimate of uranium purchase price in Lithuania. The organization also publishes the likely conversion price, which is equal to 10.9 USD/kg U. The enrichment and fabrication prices are taken from WNA (2010). Table 8 depicts the underlying assumptions on the cost of uranium supply cost and illustrates the obtained results. Table 8.
Fuel cycle Uranium purchase Conversion Enrichment Fabrication

Cost to get 1 kg of uranium as UO2 reactor fuel

Quantity 8.9 kg U3O8 7.5 kg U 3.7 SWU per kg Price, USD 58.9* 10.9* 164 240 Price, LTL2010 172.6 31.9 490.3 717.5 Total Cost, LTL2010 1,536.24 239.54 1,814.12 717.52 4,307.42

*in 2008 prices

obtained from Euratom Supply Agency (2009)

40

Section: Analysis

Source: calculations based on data provided by WNA (2010). Uranium purchase and conversion price is

According to WNA (2010), at 45,000 MWd/t burn-up 1 kilogram of UO2 would translate into 360,000 kWh. As a result, 4,307.42 LTL/kg UO2 would result in 11.96506 LTL/MWh. NEA et al. (2005) states that historical data have illustrated a decreasing front-end uranium cycle trends, however, the majority countries that were respondents in the research expects these costs to remain constant over time or escalate by 1% annually. Here it has been chosen to use 1% real escalation rate. Natural gas supply cost According to Lithuanian Statistical Department (2010) natural gas price prevailing for utilities that consume 0.1-1 million GJ of gas (maximum 1,062 GWh) was 26.5982 LTL/GJ in the last half of 2009 including taxes. Using the conversion rate of 1GJ = 278kWh, the price translates to 95.677 LTL/MWh in 2009 prices and 94.242 LTL/MWh in 2010 prices. Natural gas markets are significantly regionalized due to the transportation costs. Despite that natural gas prices differ greatly between the regions, they move in parallel because of the linkage to the international price of oil (NEA et al., 2005). Therefore, here it has been chosen to base the future development of the gas prices according to data provided by U.S. Department of Energy (2010). Development of natural gas price in the future is explicitly projected for the power plants whose primary business is to sell electricity. For the upcomming sensitivity analysis it is chosen to vary the gas change through the years by adding and subtracting 3% from the base case scenario. The summary of uranium and natural gas supply prices prevailing during the operational phase of nuclear and gas-fired plants are summarized in Appendix 9. Waste disposal cost of a nuclear plant During the nuclear fission process, significant radioactive wastes are produced, which needs to be safely stored in order to protect human health and environment. Although there are many strategies of how to deal with these wastes, firstly, after the usage in a fission process, spent fuel needs to be stored in cooling ponds and then moved to the off-site facilities or reprocessed and reused (Pyry Energy Oy and Lithuanian Energy
Section: Analysis

41

Institute, 2008). Costs dedicated to these high-level waste management procedures are included into electricity production costs (WNA, 2010). However, these costs are very difficult to estimate, thus the forecasts should involve a wide margin for error (Thomas, 2005). It can be expected that if a new NPP is built in Lithuania, there can be potential spillover effects from the old plant. Some storage infrastructure would be available for the use as well as accumulated knowledge in waste management would likely be beneficial (Pyry Energy Oy and Lithuanian Energy Institute, 2008). Nevertheless, it is not clear about the magnitude of these costs in Lithuania. Here, it has been chosen to base the assumption on nuclear waste disposal costs using projection of International Energy Agency (2007). The organization suggest to use 1 USD/MWh for waste disposal costs for the new generation nuclear generation plants. This translates to 3.23 LTL2010/MWh and is used in the appraisal for the base case. These costs are constant over time. Decommissioning costs of a nuclear plant Building a nuclear power plant is an example of a project, which has a continual flow of costs even though the operational phase is completed. When a nuclear plant stops producing electricity, it has to be decommissioned. These actions involve decontamination of structures and components, demolition of components and buildings, remediation of contaminated ground and disposal of the resulting waste (NEA, 2008, p.261). These actions need to be taken in order to minimize the radioactive waste and ensure public safety and health as well as to protect the environment (Co-ordination Network on Decommissioning of Nuclear Installations, 2010). Generally, there are two decommissioning strategies available, i.e. immediate or deferred dismantling. The strategy chosen depends on the individual national policy (NEA, 2003). Traditionally, the decommissioning phase is divided into three stages:
Section: Analysis

storage with surveillance, restricted site release and unrestricted site release (Coordination Network on Decommissioning of Nuclear Installations, 2010).

42

Costs related to the decommissioning of the plant are extremely uncertain due to little experience in dismantling commercial large-scale plants. Very few such plants were fully decommissioned (Thomas, 2005). Common practice suggests that

decommissioning costs should not be passed for the future generations (NEA, 2008). Therefore, private owners of the nuclear plant is required to collect a segregated trust fund during the operational life of the plant, invest the annual contributions in governmental bonds and as a result assure that money is available after finishing electricity production (Sustainable Development Commission, 2006). Currently Lithuania is at the decommissioning phase of old RMBK nuclear reactors with total capacity of 2600 MWe. There are numerous estimates on these costs, however without high certainty. There has already been spent approximately 1 billion Euros and the total decommissioning costs is expected to reach around 2.5 billion Euros19 (WNA, 2010). Vilemas et al. (2009) estimates that total decomissioning costs of Ignalina NPP will reach 14.3 billion Litas (see Table 9). Table 9.
Works Preparatory works of stopping exploitation Expansion of waste storages Works of stopping exploitation Dismantling Supervision of waste storages Burial of waste Total
Source: Vilemas et al. (2009), p.19

Decommissioning costs of Ignalina NPP

Costs, million LTL 23 570 1,300 1,300 118 11,000 14,300

Therefore, the costs for a single reactor converts to 7.042 billion Litas in 2010 prices. Consorcium Pyry Energy Oy and Lithuanian Energy Institute (2008) preliminarry suggest to use estimates of 300-600 million USD in 2008 prices for the decomissioning fund of a single reactor (this translates to 0.88-1.8 billion Litas in
Section: Analysis

2010). However, the report notes that the costs are likely to be closer to a higher estimate.
19

Approximately 8.73 billion Litas

43

NEA (2003) notes that historical experience in decommissioning have shown that total costs of this phase does not directly depend on the capacity of the reactors due to the type of costs occuring. These costs are largely fixed. Taking into account this remark, it would mean that to decommission the old Ignalina reactor would cost around 4 times more than it is anticipated to impose for a new reactors decommissioning fund. It can be argued that it is more complex to decommission the old plants than the future ones. There might be available new and less expensive technologies in the future. Moreover, it can be argued that these costs differ so much because of the chosen decomissioning strategy. However, NEA (2003) have shown that overnight decommissioning costs were not significantly affected by the chosen schedule. Taking these arguments into account, here it has been chosen to use the average of 7.042 and 1.8 billion Litas for the base case, i.e. 4.421 billion Litas in order to avoid optimism bias. It is assumed that these funds has to be collected during the operational life of the plant and be available in the beginning of the decommissioning period in order to avoid a burden on future taxpayers. Consorcium Pyry Energy Oy and Lithuanian Energy Institute (2008) notes that priority is given to an immediate dismantling strategy in Lithuania, therefore it is assumed to continue for 30 years. According to Co-ordination Network on Decommissioning of Nuclear Installations (2010) this is a minimal waste storage period required to allow for a major decay of radioactivity. Lastly, as the funds collected during the operational period will be invested in the safe financial securities, it is expected that real return will equal to 2.5%. This figure is based on Kennedys (2007) suggestion. It has been calculated that a net present value of the funds required at the beginning of decommissioning period in 2060 equals 3,084,427,452 LTL. In order to accumulate such value, it is needed to contribute the decommissioning fund by 45,761,285 LTL each year while operating the plant. This translates to a levy of 6.146 LTL/MWh in the first 5 years of the operation and 5.804 LTL/MWh during the rest of the period. The results attached in Appendix 10 proves that at the assumed fund return rate there will be enough money accumulated for the decomissioning phase.
Section: Analysis

44

Cost of capital As discussed in the beginning of this part, there is a need to take into account commercial risks related to the power generation investments. During the procedure of cost levelization, the private cost of capital has to be used (Kennedy, 2007). The real rate on private investments vary accordingly to country, type of utility and the nature of electricity market (Thomas, 2005). Staniulis and Adomaitien (2009) provide cost of capital for a new CCGT plant in Lithuania. They claim that real weighted average cost of capital (WACC) in the Lithuanian case is equal to 8.7%. It might be argued that building a CCGT is a relatively less risky investment than constructing a NPP, therefore the cost of capital should be relatively smaller. However, CitiGroup (2009) also estimates that WACC of a nuclear project is likely to be around 8.5%. Thomas (2005) notes that for a publicly owned utility the real cost of capital is around 5-8%, whereas for the privately owned utility it might reach 15%. The Lithuanian NPP is planned to be privately owned and work in the liberalized market, therefore the return on the capital investments should lie in the higher range. In the base case 8.7% is assumed as commercial cost of financing for both nuclear and CCGT technologies. However, the sensitivity analysis will test the rates of 5% and 15%. Levelised-cost of electricity After the application of levelised-cost methodology, the results show that generating electricity with nuclear fission technology is more expensive relative to CCGT technology (see Table 10).

45

Section: Analysis

Table 10. Average nuclear and gas-fired plant levelised-cost for the base case
Present Value Total construction cost, LTL O&M, LTL Fuel supply cost, LTL Waste disposal cost, LTL Contributions to the decommissioning fund, LTL Total generating costs, LTL Total output, MWh Average Levelised Cost, LTL/MWh Nuclear 7,480,893,424 2,315,474,087 594,016,621 130,625,388 239,438,270 10,760,447,789 40,441,297 266 9,792,363,899 50,437,699 194 CCGT 1,950,551,690 766,250,339 7,075,561,871

Under given assumptions in the base case, nuclear technology has a 72 LTL/MWh cost penalty. In other words, nuclear electricity production cost is 72 cents per kilowatt hour higher relative to CCGT production. As mentioned before, this penalty is multiplied by the annual output of nuclear technology and distributed over the 40 years of operational life. This disadvantage of nuclear technology is considered as social cost and later is discounted by the social discount rate. Figure 7. Structure of electricity generation cost in the base case
100% 80% 60% 40% O&M 20% 0% Construction cost

Decommissionin g contributions Waste disposal Fuel supply cost

CCGT

Nuclear

supply cost. The results also show that for the nuclear alternative, the biggest

46

Section: Analysis

As depicted in Figure 7, gas-fired electricity generating costs mostly comprise of gas

contribution to the overall costs is construction cost. Decommissioning and waste disposal costs constitute only around 3.5% of the total electricity price. 3.3.2 Accident Costs The addition of a new NPP inevitably increases the risk of accidents, which in turn may result in release of radiation. From the historical perspective, major accidents related to nuclear power generation are very rare. Accidents of Three Mile Island and Chernobyl are the only two major examples in the history of civil nuclear power (WNA, 2010). Nevertheless, these incidents brought public attention to the potential vast environmental, social and economic costs that can occure due to human mistake, nuclear power vulnerability to terrorism or other circumstances (Environmental Audit Committee, 2006). WNA (2010) declares that new nuclear power plants contain significant safety improvements. The introduction of new passive systems allows increasing the reliability of nuclear reactors because the human mistake can be ruled out. This is so, because of the requirement of no human intervention in the event of major failure in the reactor (WNA, 2010). Current manufacturers also claim that their reactors are subject to a very little probability of core damage. For example, according to Westinghouse, its AP1000 design has a core damage frequency around 100 times below that of current plants and 250 times lower than United States regulator requires. Advanced reactors are also protected with substantial containment buildings, which are highly resistant to even an airliner crash. The uranium in the reactors is secured from the fire or other impacts by other structures as well (Sustainable Development Commission, 2006). Despite these considerable improvements, some experts claim that it is not possible to rule out human mistake entirely. Moreover, the reactors specifically designed to resist a commercial aircraft impact are under development process. Furthermore, although an external attack or sabotage will likely lead to a safe shut down of a reactor, it is difficult to foresee the changes in methods of operation by terrorist groups and their abilities to take advantage of design, operation or security of nuclear plants (Sustainable Development Commission, 2006). Additionally, British Environmental
Section: Analysis

47

Audit Committee (2006) emphasizes that although various organizations distinguished and passionately discussed on the above issues, they often dismiss other operational risks. In a case of an accident, radiation can be released from the spent and stored fuel or during the transportation across the country. Thus, the risk of accidents is undeniable. It should be considered as an external cost of nuclear power generation and should not be dismissed in the social decision making (Kennedy, 2007). Cooper (2009) also emphasizes the necessity to include the value of these risks as they are large, pervasive, and also mask the true cost of a nuclear reactor (Cooper, 2009, p. 17). However, although these costs are undeniable, they are usually not involved in the standard cost calculations (Sustainable Development Commission, 2006). Jensen and Bakker (2006) also supplements the above standpoints by stating that although potential accident costs should be taken into consideration while conducting any appraisal of the electricity generating alternatives, these costs are not amenable to quantification and monetization. European Commission (2005) summarizes some estimates for the severe reactor accidents and concludes that they are relatively very small. For example, the estimates range from euro cent 0.0005 - 0.000076/kWh and from euro cent 0.000340.00046/kWh depending whether the value of a life year (VOLY) or the value of a prevented fatality is chosen. Despite the available estimates it is stated that such a valuation is not proper for risks with a very high damage and a low probability of occurrence (Damocles risks) because the risk assessment of the public is not proportional to the risk. European Commission (2005) claims that there is no accepted method of how to incorporate such accident costs in the social appraisal at the moment. Consequently, the value of potential accident is not attached to the nuclear power expansion option in this appraisal. Nevertheless, still a qualitative conclusion can be drawn from the above discussion. It is clear that adding a nuclear plant to the system rather than a gas-fired plant would result in additional cost related to the potential
Section: Analysis

accident. Although advanced reactors are characterized by very low levels of risk, in the case of an incident, there would be an enormous damage done. Such circumstances as increases in the level of radiation would bring significant costs to the society.

48

3.3.3 Environmental Benefits Nuclear power is known as a low carbon technology because it releases almost no carbon dioxide (CO2). Nuclear electricity generation is environmentally friendly as it also does not release other and even more powerful20 greenhouse gases (GHGs) such as methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs), perfluoro carbons (PFCs) and sulphur hexafluoride (SF6 ) (WNA, 2010). From the perspective of a full lifecycle of nuclear power, a very small amount of GHGs is produced indirectly while mining, transporting or processing uranium and during the construction phase of a nuclear power plant (Kennedy, 2007; NEA, 2008). On the contrary, because gas-fired technology requires burning fossil fuel, it produces relatively more GHGs than during a nuclear fission process (WNA, 2010). As a result, the addition of NPP in Lithuania as compared to gas-fired electricity generation would result in a supply of a public good for the environment. Based on Kennedys (2007) suggested approach, here the environmental benefits of nuclear power are chosen to be evaluated as reduction of CO2 equivalent relative to the counter-factual case, where in the alternative situation gas-fired plant would be added to the system. Because nuclear power expansion (relative to the counter-factual) would result in the reduction of not only carbon dioxide emissions but also other GHGs as mentioned above, the information on CO2 equivalent is gathered instead of just carbon lifecycle emissions21. In practice, other GHGs can be converted to the CO2 equivalent by using the conversion factors derived by environmental researchers20. Therefore, the appraisal evaluates the net reduction of CO2 equivalents by quantifying the lifecycle CO2 equivalent emissions of nuclear and gas-fired electricity generation. The benefit is estimated by attaching a monetary value to this difference. The data on lifecycle GHG emissions for nuclear fission and CCGT technologies is gathered from the European Commissions report (2008a) and listed in Table 11.

20

According to DEFRA (2007), for example, methane is 21 times stronger GHG than carbon dioxide, nitrous oxide - 310 times, sulphur hexafluoride 23 900 times. 21 Kennedy (2007) takes into account only CO2 emissions.

49

Section: Analysis

Table 11. GHG emissions (kg CO2 equivalent/MWh) from nuclear fission and CCGT
Nuclear fission Direct (stack) emissions Indirect emissions Total lifecycle emissions
Data source: European Commission (2008a), p.4

CCGT 350 70 420

0 15 15

As seen from the Table 11, nuclear fission technology does not release any GHGs directly. Indirect emissions are produced from the fuel supply chain and plant construction (European Commission, 2008a). Through the combustion or gasification process gas-fired plant produces 28 times more of GHGs. Using these figures, the net GHG emissions reductions from the nuclear power expansion would result in 405 kg of CO2 equivalent per MWh. However, European Commission (2008a) notes that the pathways of the fuel supply and the location of power generating facilities would have a significant influence on lifecycle emissions and therefore might differ in individual cases. Taking this into account, the data on a potential CCGT plant in Lithuania was successfully obtained. Lietuvos Elektrine (2009) states that new CCGT blocks, planned to be built 22 in Lithuania, would release 326.8 kg of CO2 equivalent per MWh directly. This number is slightly lower (around 6%) relative to the European Commissions suggestion. However, it stays unclear what would be the magnitude of indirect emissions. Having assumed that in the case of gas-fired technology expansion the same turbines would be built, the figure of 326.8 kg of CO2 equivalent per MWh is used in the appraisal in order to depict a closer view on the Lithuanian case and the indirect emissions of 70 kg of CO2 equivalent per MWh are added in order to account for the whole lifecycle emissions. Having in mind nuclear fission technology, there is no available data on nuclear lifecycle GHGs emissions exceptionally for the Lithuanian case. Here it has been chosen to use the figure suggested by the European Comission (2008a). It might be
Section: Analysis

considered as a reasonable estimate because the organization considers 3rd Generation

22

The old blocks are about to retire, therefore they need to be replaced at the moment.

50

reactors, particularly water cooled reactor such as EPR, which is likely to be ordered in Lithuania. Finally, the GHG emissions are assumed to be constant during the lifecycle of both alternatives. The calculations related to the quantity of net annual CO2 equivalent emissions reduction is given in Table 12. Table 12. Net annual lifecycle CO2 equivalent and carbon emissions reduction
Variable Annual output of gas-fired plant, MWh CCGT annual lifecycle CO2 equivalent emissions, kg CO2 (eq.) Average annual output of nuclear plant, MWh Nuclear annual lifecycle CO2 equivalent emissions, kg CO2 (eq.) Net annual lifecycle CO2 equivalent emissions reduction, t CO2 (eq.) Net annual lifecycle carbon emissions reduction, t C Quantity 7,884,000 3,128,371,200 7,818,300 117,274,500 3,011,097 821,208

Having followed the base case assumptions on the capacity added to the system and the load factors for nuclear and gas-fired plants, annual electricity outputs were estimated. The results show that adding a nuclear plant to the system would result in saving around 3 million tons of CO2 equivalent. Because carbon dioxide consists of oxygen fractions which are not considered as pollutants, sometimes these fractions are excluded and only carbon atoms (C) are estimated. Using the conversion rate of 12/44, carbon dioxide can be converted to carbon (Kennedy, 2007; DEFRA, 2007). Therefore, alternatively nuclear plant would result in net annual lifecycle carbon emissions reduction of 821,208 tons of carbon. In order to monetize and attach a social value for these annual benefits, according to DEFRA (2007) the following alternative prices can be considered: Social cost of carbon (SCC); Market price of carbon; Marginal abatement cost (MAC); Shadow price of carbon (SPC).
Section: Analysis

Social cost of carbon (SCC) is used in the social decision making as it serves in measuring the magnitude of environmental externalities, i.e. it measures the full global cost today of an incremental unit of carbon (or equivalent amount of other greenhouse gases) emitted now, summing the full global cost of the damage it imposes

51

over the whole of its time in the atmosphere (DEFRA, 2007, p.1). It means that a society should be willing to pay today in order to avoid the future damage of additional carbon emissions. However, it is worth noticing that according to the welfare economics, for the society it is optimal to save the carbon emissions only up to a certain point. Optimal stabilization goal should be set at the point where the costs incurred by reducing extra ton of carbon (marginal abatement cost) are equal the cost of damage (marginal benefit) the society expects the additional emission would cause. In this case, SCC would equal MAC (DEFRA, 2007; Jensen and Bakker, 2006). A market price of carbon reflects the value of traded carbon emissions rights to those in the market given the constraints on supply of these rights to emit imposed by current policy (DEFRA, 2007, p.2). According to DEFRA (2007), although SCC, market price of carbon and marginal emissions abatement cost (MAC) are conceptually different, using some strict assumptions in practise they could be equal at the margin. This would happen under circumstances where a carbon market is perfectly competitive. Therefore, the market price would equal the cost of reducing emissions for a given target. Moreover, these costs has to be the same to all the emitters in order to reach a particular reduction target. Finally, the target needs to be set at the point where MAC is equal to SCC (DEFRA, 2007). The estimation of SCC is very complex. It depends on the assumptions about the future policy of all countries as the stabilization trajectory in the world is a function of global emissions. Moreover, it is not quite certain that SCC related to any of the stabilization goals makes sufficient incentives to abate the carbon emissions in order to reach that goal. As a result, SCC and MAC may not equal for a given stabilization goal and using SCC in practise may result in abating too much or too little of carbon. For example, if SCC used in the appraisal is less than MAC for a given goal, then total reduction of pollutants will be smaller than it is actually required to reach the stabilization goal (DEFRA, 2007). Large uncertainties related to the estimation of SCC are depicted by Intergovernmental
Section: Analysis

Panel on Climate Change (2007). The summary of more than 100 estimates of SCC showed that the range of the estimates is from -10 USD/t C to 350 USD/t C (in 2005 prices). The average of the sample is 43 USD/t C with the standard deviation of 83

52

USD/t C. However, it is noted that the certainty exist on the growth of real SCC in the future. It is projected that SCC will increase 2-4 percent annually. DEFRA (2007) also publishes the same projections and suggest using a 2% rate in order to include the rising marginal cost over time. Because of the difficulties mentioned above, DEFRA (2007) suggest using a shadow price of carbon (SPC) rather than a simple SCC. According to the authors, the concept of SPC is more advantageous and versatile because it reflects the governments policy and technological environment of a country. As there does not exist any guidelines in Lithuania, providing possible SPC, here it has been chosen to use the SPC suggested by Salnykov and Zelenyuk (2005). The authors estimated how the societies in post-communist countries value environmental pollution by using approaches of parametric Traslog and directional distance functions. These shadow prices for individual countries can be interpreted as marginal abatement cost of pollution. The results show that shadow price of CO2 in Lithuania is equal to 174.28 USD/t CO2 (2005 prices). After application of exchange rate and accounting for inflation23, this figure converts to 653 LTL/t CO2 (2010 prices). Comparing this estimate with the DEFRA (2007) suggested shadow price of carbon for the UK, which equals to 107 LTL/ t CO2 in 2010 prices, it can be concluded that the Lithuanian estimate is extremely high and it can be inferred that Lithuanians willingness to pay for carbon abatement is around six times higher than British. This huge difference suggests that the estimate of Salnykov and Zelenyuk (2005) is a subject to a high uncertainty. However, this will be used for the base case assumption in the appraisal as it is supposed to reflect the national attitude towards GHGs abatement. For the pessimistic case, the estimate of DEFRA (2007) will be used. Moreover, as discussed above, a 2% annual increase in real SPC should also be applied in order to account for rising marginal abatement cost. The results are attached in the Appendix 11. It can be concluded that as long as there is a commitment to pollution reduction, the addition of nuclear power in the system would result in saving
Section: Analysis

the costs for reducing the GHG emissions. At the extreme case, without any commitment to reduce the pollution and no abatement activities, there would be no
23

See Appendix 6 for GDP deflator and Appendix 4 for average exchange rate

53

benefit of reducing abatement cost for nuclear electricity generation (Kennedy, 2007). The situation where no commitment to GHG reduction prevails will be tested in the sensitivity analysis. 3.3.4 Security of Supply Uranium import is considered to be more advantageous relative to gas import because it contributes to a more secure supply of energy. This is so mainly because the uranium resources geographically are distributed over more diverse and stable countries and majority of them own less than 10% of the global share. On the contrary, Iran, Qatar and the Russian Federation own 56% of the worlds currently discovered gas resources (NEA, 2008). Another major nuclear energys contribution to the security of supply is that fuel cost adds to the overall electricity generation cost only by around 5-10% in the nuclear case, thus making the nuclear electricity generation less exposed to price volatility (NEA, 2008; Sustainable Development Commission, 2006). Accordingly, expansion of nuclear power in Lithuania would offer advantage of fuel supply diversification and as a result contribute to the security of supply in the long-run. Currently Lithuania imports gas from the only foreign supplier Gazprom (Russia). Also any underground gas storage does not exist in Lithuanian territory. In order to insure against a risk of gas supply interruption Lithuania purchases the services of Latvian underground gas storage or accumulates back-up of fuel oil (F-Enprima Ltd, 2008). Consequently, in the case of expansion to gas-fired electricity generation Lithuania will be even more exposed to a substantial risk of gas supply interruption because of dependency on a single gas supplier. Here in this appraisal it has been chosen to model the security of supply benefit as the avoided cost related to mitigating the risk of a major gas supply interruption. Kennedy (2007) emphasizes that adding nuclear generation does not provide more or less security than adding gas-fired power generation with back-up. Rather, the security of supply benefit associated with nuclear investment is the avoided cost of back-up for gas-fired power generation (Kennedy, 2007, p.3714).
Section: Analysis

54

Summarizing Vilemas (2006) and Lietuvos Elektrin (2010) there are four major options available or under consideration in order to mitigate the risk of gas supply interruption in the Lithuanian context, i.e.: 1) Building a small-scale underground gas storage in Lithuania; 2) Building a liquefied natural gas (LNG) terminal in Lithuania; 3) Renting a needed capacity in Latvian Inukalns underground gas storage; 4) Buying fuel oil and keep it as a back-up in the existing storage24. Vilemas (2006) concludes that LNG import price in Lithuania might exceed natural gas price by around 56-61 USD/thousand m3 during 2010-2030. Moreover, the author estimated that fuel oil import price is 267-319 USD/t and insignificantly differs from 276-325 USD/t LNG import price. Having this information in mind, it can be concluded that keeping natural gas as a back-up would be the cheapest in the Lithuanian case. This is a strict assumption as the prices might change drastically in the long run. Furthermore, considering the alternatives between renting storage and building one, it can be assumed that renting a back-up capacity is the cheapest option. This is so due to the fact that Latvian storage has a bigger capacity than a planned small-scale storage in Lithuania and therefore Inukalns has an economy of scale advantage. Vilemas (2006) estimated that the rent price of Latvian underground gas storage is not less than 12 EUR/thousand m3 (in 2006 prices). At that time the author based the estimation on the Latvian storage O&M expenses, which was equal to 10 EUR/ thousand m3, and the gas transportation to Lithuania expenses (1.7-4.3 EUR/ thousand m3). In addition, in the situation where gas is filled through Lithuanian territory and then again brought back, the transportation expenses would rise to 14 / thousand m3 and in turn would result in price of 26 EUR/thousand m3. However, the particular prices are set during the negotiation process and more importantly the roughly estimated price does not reflect the true price of the rent as the amount of capital and the return on private investment is not known (Vilemas, 2006). Nevertheless, here it
Section: Analysis

has been chosen to use the higher estimation - rent price of 26 EUR/thousand m3 as
24

Currently in Lithuania electric plants can burn a dual fuel, i.e. natural gas and fuel oil (F-Enprima Ltd, 2008)

55

the other information is not available. Using the average exchange rate25 and taking into account the inflation26, this figure translates to 106.8 LTL/thousand m3. Currently all Lithuanian energy producing companies are required to have a minimum 60 days reserve of gas. European average is 47 days although it is expected to be raised till 90 days in the long run (F-Enprima Ltd, 2008). Therefore, this appraisal assumes that in the case of expanding gas-fired generation, there will be necessary to keep a three-month gas reserve. If a nuclear plant is added to the system, this would result in annual savings of 18,772,080 LTL rent expenditures and 183,206,448 LTL additional gas expenditures for the first input in order to save it in the storage. These benefits are spread over the assumed operational life of a nuclear plant. 3.3.5 Employment benefits Usually employment possibilities are presented as an important external benefit and are especially emphasized by the politicians in the cases of such large-scale projects (Jensen and Bakker, 2006). Clearly, a new NPP build in Lithuania would directly create various jobs related to the planning of the site, construction and operation of a plant as well as generate employment opportunities during the decommissioning process in the far future. Lietuvos Energija (2006) claims that there might be a demand for 400-500 people to operate the plant. Moreover, the Lithuanian region where the old plant is situated suffers from unemployment problems because this districts economy is highly dependent on the closure of Ignalina plant. The politicians seldom use the argument that a new NPP would provide possibilities to use the skills and knowledge accumulated by the employees of the old Ignalina plant and save the whole region from unemployment. Mainly for these reasons the government and companies, who are potentially to be involved in the project, state that this demand for a labor will create a benefit for the Lithuanian economy (Lietuvos Energija, 2006; Visaginas Nuclear Power Plant Ltd., 2010).
Section: Analysis

25 26

See Appendix 4 for the exchange rates See Appendix 6 for the price changes

56

However, despite these noteworthy employment prospects, it must be remembered that the employment opportunities also exist for the alternative electricity generation with a gas-fired plant. It should be noted that these would be replaced in the case of expanding nuclear generation. Moreover, in both cases the employment opportunities are spread across a range of industrial sectors (Sustainable Development Commission, 2006). Jensen and Bakker (2006) highlights the importance of envisaging this wider picture, i.e. there must be considerations involved on net employment impacts in the supply chain of energy transporters, input-delivering and consumer industries while estimating the possible employment benefits. Therefore, due to the fact that jobs created by the expansion of nuclear energy generation would divert job creation in other sectors, it is very complex to estimate the net impact from a new nuclear policy on employment and as a result is dismissed in this appraisal (Sustainable Development Commission, 2006). There might be some employment benefits in the medium run. During the construction period of the nuclear power plant there might be possibilities to employ people who are unemployed. At the moment the unemployment rate is high in the Lithuanian economy but it is unclear how it will develop four years ahead. In the case of a very low unemployment rate, building a nuclear power plant would result in job diversion rather than creation. 3.4 Discounting procedure and NPV calculation

After the quantification and monetization procedure, the resulting costs and benefits are ready to be a subject to discounting. The nuclear cost penalty, CO2 equivalent emissions reduction and security of supply benefits are discounted using a previously derived social discount rate. As a result, it is arrived at the present values of these social impacts. The welfare balance of a new nuclear power plant relative to the counter-factual case, where the gas-fired plant is added to the system, equals to the sum of these social impacts and is shown in the following Table 13.

57

Section: Analysis

Table 13. Welfare balance of a new NPP in the base case

Cost and benefits Nuclear cost penalty CO2 emissions reduction benefit Security of supply benefit Total NPV, LTL Present Value, LTL2010 -6,071,431,687 35,033,756,672 313,105,388 29,275,430,372

The results show that the welfare balance associated with a new NPP is positive in the base case. The nuclear cost penalty is compensated by the extremely huge benefit of reducing carbon dioxide emissions. The benefit of security of supply is relatively low and does not overweight the nuclear cost disadvantage. It can be concluded that under given base case assumptions the nuclear electricity generation in Lithuania is justified and is considered as a no regret policy. However, the results are a subject to a great uncertainty. This is so especially because the costs related to the advanced nuclear electricity generation is not yet born in reality (Kennedy, 2007). Moreover, as discussed above the results are highly dependent on the Lithuanians society willingness to pay for the carbon abatement. Consequently, accounting for uncertainty and performing a sensitivity analysis is of a crucial importance. 3.5 Sensitivity Analysis

One of the last steps in CBA appraisal is performing a sensitivity analysis. The main purpose of doing this is to identify the underlying uncertainty. It should reveal how sensitive the estimated net benefits are to the changes in the underlying assumptions. However, it is not feasible to test all the combinations of underlying assumptions as there would arise millions of different options (Boardman et al., 2006). Here it has been chosen to test the sensitivity by considering optimistic, base and pessimistic case scenarios for the most important and uncertain assumptions. Based on Kennedy (2007) and the above analysis, the assumptions on gas price development, CO2 shadow price and total nuclear construction cost has been chosen for sensitivity analysis. The results are provided in Table 14, where a positive figure represents a net benefit and a negative number means a net cost of the new NPP project.
Section: Analysis

58

Table 14. Welfare balances of a new NPP project under different gas price, nuclear construction cost and CO2 shadow price (in million Litas)
Case CO2 Shadow price, LTL/t CO2 0 Base Nuclear, Optimistic Gas Base Nuclear, Base Gas Base Nuclear, Pessimistic Gas Pessimistic Nuclear, Optimistic Gas Pessimistic Nuclear, Base Gas Pessimistic Nuclear, Pessimistic Gas Optimistic Nuclear, Optimistic Gas Optimistic Nuclear, Base Gas Optimistic Nuclear, Pessimistic Gas -10,260 -5,758 2,291 -17,582 -13,080 -5,031 -6,548 -2,047 6,002 107 -4,519 -18 8,031 -11,842 -7,340 709 -808 3,694 11,743 653 24,774 29,275 37,325 17,452 21,953 30,003 28,485 32,987 41,036

From the table it can be concluded that in the world, where Lithuanians willingness to pay for CO2 emissions abatement is 653 LTL/t CO2, the new NPP is always a no regret project independently from gas or nuclear construction cost scenarios. However, lowering the shadow price to 107 LTL/t CO2, drastically diminishes the feasibility of the project under different gas and nuclear construction cost scenarios. In this case, only four alternatives can be justified. In the world, where there is no commitment to GHGs emissions reduction, the project has a positive NPV under low/base nuclear construction cost scenario combined with high gas prices. Due to the importance of CO2 shadow price, the break-even values were calculated in order to find out under which circumstances the new NPP project is justified (see Figure 8).

59

Section: Analysis

Figure 8. Break-even CO2 shadow prices in various sets of alternatives (LTL/tCO2)

Optimistic Nuclear, Pessimistic Gas Optimistic Nuclear, Base Gas Optimistic Nuclear, Optimistic Gas Pessimistic Nuclear, Pessimistic Gas Pessimistic Nuclear, Base Gas Pessimistic Nuclear, Optimistic Gas Base Nuclear, Pessimistic Gas Base Nuclear, Base Gas Base Nuclear, Optimistic Gas no commitment 38.15 122.06 93.73 243.80 327.72 no commitment 107.33 191.24

As mentioned above, in the high gas price and optimistic/base nuclear construction cost scenario, there can be no commitment to GHGs reduction in order to justify the nuclear build. In the base case scenario (base nuclear and gas price) the shadow price of CO2 can fall to 107.33 LTL/t CO2 before the welfare balance turns to negative. The break-even values show that there is a large scope for the assumed shadow price of CO2 in the base case to decrease. However, if it turned out that Lithuanians willingness to pay for the GHGs reduction is way less than the assumed one, this would complicate the nuclear project in the majority of cases. Other important uncertainties, as mentioned before, may arise from the discount rates, i.e. nuclear cost of capital and social discount rate. Here using the same logic as above, the multiple set of alternatives has been combined and tested how they affect the welfare balance by changing discount rates while keeping the rest of the assumptions constant (see Table 15). Table 15. Welfare balances of a new NPP project under different SDR and cost of capital combinations (in million Litas)
Nuclear Cost of Capital 5% Social discount rate 7.4% 5.4% 3.2% 21,763 35,648 62,167 8.7% 17,711 29,275 51,564 15% 7,926 13,890 Section: Analysis 25,965

The results show that the welfare balance of a new NPP project does not change to negative just by varying the discount rates. However, the magnitudes in the net

60

benefits are highly affected by the choice of these variables. In the case with the highest SDR and highest cost of capital, the net benefits fall by 73% relative to the base case scenario. The worst-worst discount rates scenario would also worsen the results for the cases where the gas price is high and nuclear construction cost is in the base/optimistic scenario. In such a situation, only the highest shadow price could justify the case. 3.6 Recommendation

It can be concluded that under the base case assumptions, the allocation of resources into the expansion of nuclear energy production would result in a huge net economic gain for the Lithuanian society relative to the alternative situation, where the investment would likely divert to gas-fired electricity production. Following the net benefit investment criterion, it is recommended to adopt the nuclear project. A new NPP would be advantageous because of the GHGs reduction, economies of scale in producing electricity and contribution to the security of supply. However, it should be noted that the NPP project is not justified under all circumstances. The sensitivity analysis has shown that the economics of nuclear project is highly dependent on the CO2 shadow price as well as the nuclear construction cost and future gas prices. Moreover, it should be emphasized that engaging with the nuclear power would mean that the resources are locked in for a long time and the electricity systems becomes centralized. This would lead to a loss of flexibility in the Lithuanian electricity generating system. Under the change in circumstances, there would be no scope for the readjustment. According to Sustainable Development Commission (2006), this technological lock-in would suppress the growing potential of decentralized, smallscale technologies. The government should also consider the nuclear accident risk, which was not monetized in this appraisal. Nuclear power generation has a disadvantage relative to
Section: Analysis

the gas-fired electricity generation, as it is a subject to terrorism or human mistake, which could lead to enormous damage to the society.

61

In addition, concerns related to the sustainability and intergenerational issues arise. Sustainable Development Commission (2006) notes that a new nuclear project could generate unanticipated costs for the future generations. For example, although the decommissioning fund is collected during the operational period of a nuclear plant, it is uncertain whether these funds will be sufficient in the far future. If the funds are not sufficient, the burden of costs would lie on the generations which did not receive the benefits of the project. Moreover, our generation would consume uranium today without leaving it for the future generations. Nuclear power is also a subject to moral hazard problems. It means that potential private investors may be willing to accept higher risks relative to other investment situations because the government would be incapable to let the project fail. As a result, this can lead to forced public subsidy despite the governments initial intentions (Sustainable Development Commission, 2006). The use of a subsidy in turn causes a deadweight loss to the economy despite the fact that a subsidy itself is considered to be a transfer. Lastly, the Lithuanian governments proclaimed employment benefits related to the expansion of a new nuclear project should be treated with skepticism as it is unclear to which extent the nuclear energy expansion would divert job creation in other sectors of the economy.

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Section: Analysis

4. Conclusions
After the closure of old and unreliable nuclear plants, inherited from the Soviet times, Lithuania faces significant changes in its electricity generation sector. Currently the main challenge is the overdependence on the gas imports and as a result diminished security of supply. In addition, Lithuania will face the problems of meeting the electricity demand growth as well as the retirement of current electricity generating plants. The government has established plans to attract the private investor and build a new nuclear plant. Therefore, inspired by this situation in the Lithuanian energy sector, this thesis aimed to find out whether the allocation of resources into expansion of nuclear energy production would result in a net economic gain or loss for the Lithuanian society as a whole, relative to an alternative situation, where investment would divert to gas-fired generation technology. The cost-benefit methodology has been chosen in order to answer this question. The theoretical part of the thesis has highlighted the most important aspects of costbenefit methodology. It has been concluded that market prices sometimes may not reflect the real social value and as a result shadow prices should be used in social appraisals. However, due to various limitations the appropriate measures are not always used in practice. The issues of inflation and escalation were discussed and the methods of how to deal with them were established. Moreover, based on the academic literature and the data gathered, the social discount rate appropriate for Lithuania has been derived. In the most likely scenario, the social discount rate was estimated to equal 5.3%, which is higher relative to the developed European countries practice due to the higher expected economic growth. Further, the net present value investment criterion has been set. The second part of the theoretical foundations has identified cost and performance characteristics for electricity generating technologies in order to avoid inconsistent data gathering and misleading comparisons. Also, the levelised-cost methodology has been explained in order to
Section: Conclusions

show how the cost comparisons are made between different electricity generating technologies.

63

The analytical part was performed by following the six steps, which were defined in the introductory part. Firstly, it has been identified that the project can vary in many aspects such as the site of the plant, the capacity added to the system, the time of construction and operation, reactor type etc. It has been concluded that advanced pressurized water reactors are likely to be ordered in Lithuania. This has facilitated the analysis of the other parameters. Moreover, it has been concluded that the counter-factual of the project is likely to be gas-fired plant with combined cycle gas turbines. In the second step, although it has been mentioned that the Lithuanian energy system is an integrated part of the whole region, the analysis has been limited to the national level because the government firstly seeks to implement its own national policy. Thirdly, it has been identified that investment in a nuclear power plant can possibly result in cost advantage or penalty relative to the gas-fired electricity generation. Also, the nuclear accident cost, environmental, security of supply and employment benefits were chosen for the further analysis. After using levelised-cost methodology, the results have shown that the nuclear power plant would result in a cost penalty relative to the gas-fired electricity generation and this penalty was used as the basis for monetizing the opportunity cost of capital. Also it has been found out that to monetize the risk of nuclear accidents and the governments proclaimed employment benefits is too complicated or impossible. The results of the fourth step have shown that security of supply benefits are relatively small and only the environmental benefits can compensate the nuclear cost penalty. Under the base case assumptions, it has been concluded that the nuclear power plant project is justified and can be considered as a no regret policy. However, after performing the sensitivity analysis it was clarified that the justification of the project highly depends on the future gas price scenario, nuclear construction cost and the Lithuanian societys willingness-to-pay for the abatement of Greenhouse gasses. The conclusions state that if there is no commitment to the reduction of Greenhouse gasses, the nuclear power plant project can be justified only in the case of high future gas prices and low/base nuclear construction cost.
Section: Conclusions

64

Lastly, it has been recommended to engage in the nuclear power plant project as in the base case scenario the project will result in a large welfare gain to the Lithuanian society. However, it should be remembered that the project is justified only in certain situations. The government should also take into consideration, if building a nuclear power plant, such aspects as the disadvantage of technological lock-in, the drawback of accident risk, sustainability and intergenerational issues, moral hazard problems, treat employment benefits carefully.

65

Section: Conclusions

Bibliography

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Linares, P., Conchado, A. (2009). The economics of new nuclear power plants in liberalized electricity markets. Instituto de Investigacin Tecnolgica, Universidad Pontificia Comillas, Madrid. Lithuanian Statistical Department. (2010). Statistics (databases). Retrieved April 1, 2010, from http://www.stat.gov.lt/lt/ Lithuania's Ministry of Energy. (2010). Activity benchmarks. Retrieved April 1, 2010, from http://www.enmin.lt/en/ Little, I.M.D., Mirrlees, J.A. (1974). Project appraisal and planning for developing countries. Heinemann Educational Books, London. Mishan E. J., Quah, E. (2007). Cost-Benefit Analysis. Routhledge, New York. NEA. (2003). Decommissioning nuclear plants: policies, strategies, and costs. OECD, Paris. NEA. (2008). Nuclear Energy Outlook. OECD publishing, Paris. NEA. (1994). The economics of the nuclear fuel cycle. OECD, Paris. NEA, IEA, OECD. (2005). Projected Cost of Generating Electricity. OECD Publishing, Paris. Pyry Energy Oy, Lithuanian Energy Institute. (2008). Environmental Impact Assessment Report: New Nuclear Power Plant in Lithuania. Visagino atomin elektrin, Ltd. Salnykov M. L., Zelenyuk V. P. (2005). Estimation of Environmental Efficiencies and Shadow Prices of Pollutants: A Cross-Country Approach. Economics Education and Research Consortium: Russia and CIS, Moscow. Staniulis, R., Adomaitien, Z. (2009). Payma dl AB Lietuvos Elektrins kombinuoto ciklo duj turbinio bloko statybos investicij projekto derinimo. Retrieved March 10, 2010, from Lietuvos ilumos Tiekj Asociacija: www.lsta.lt/uploads/meetings/protokolasnrsi-110.doc Sustainable Development Commission. (2006). The role of nuclear power in a low carbon economy. Sustainable Development Commission.
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Thomas, S. (2005). Nuclear Power: Myth and Reality. Heinrich Bll Foundation. Thomas, S. (2005). The economics of nuclear power: analysis of recent studies. Public Services International Research Unit, University of Greenwich, London.

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U.S. Department of Energy. (2010). Forecasts & Analysis analysis and projections of energy information. Retrieved February 25, 2010, from Independant Statistics and Analysis: http://www.eia.doe.gov/oiaf/forecasting.html Vilemas, J. (2006). Gamtini duj atsarg sukaupimo projekt palyginimas. Lietuvos energetikos institutas, Kaunas. Vilemas, J., Mikinis, V., Galinis, A., ukauskas, V., Valentukeviius, V. (2009). Energetikos Pltots Strategija. Lietuvos Respublikos kio Ministerija, Vilnius. Visaginas Nuclear Power Plant, Ltd. (2010). Visaginas Nuclear Power Plant Project. Retrieved March 30, 2010, from http://www.vae.lt/en/ Wenisch A., Mraz, G. (2008). Environmental Impact Assessment Program: New Nuclear Power Plant in Lithuania. Osterreichisches Okologie Institut, Vienna. WNA. (2005). The new economics of nuclear power. World Nuclear Association, London. WNA. (2010). WNA Public Information Service. Retrieved February 01, 2010, from http://www.world-nuclear.org/

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Appendices
Appendix 1. Nuclear electricity production and share of total electricity production .........72 Appendix 2. Consumption per capita and GDP per capita change in 1992-2009 ................73 Appendix 3. Location of a new NPP in Lithuania .............................................................74 Appendix 4. Long-term average of exchange rates............................................................75 Appendix 5. Change in construction input prices ..............................................................76 Appendix 6. GDP deflator ................................................................................................77 Appendix 7. Estimates of nuclear reactor overnight costs .................................................78 Appendix 8. O&M costs for nuclear and CCGT in the base case .......................................79 Appendix 9. Uranium and natural gas supply cost in the base case ....................................80 Appendix 10. Appendix 11. Decommissioning fund .............................................................................82 Value of CO2 equivalents reduction in the base case .................................84

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Section: Appendices

Appendix 1. Nuclear electricity production and share of total electricity production

Source: WNA (2010)

72

Section: Appendices

Appendix 2. Consumption per capita and GDP per capita change in 1992-2009
Year Consumption, million LTL
2010

Population, individuals

Consumption per capita, Million LTL

2010

Change

GDP per capita, 2010 prices 16901.75 14229.23 12929.52

Change

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average
Prices were converted to 2010 level using GDP deflator. Data source: Lithuanian Statistical Department (2010)

-16% -9% 10% 5% 8% 7% -1% 4% 7% 7% 11% 8% 8% 8% 10% 3% -16% 3.2%

32,685.55 34,233.53 35,133.65 37,126.55 38,779.75 39,952.33 42,792.58 45,169.92 49,806.97 54,192.79 58,035.63 62,657.54 68,645.98 70,703.34 61,766.27

3,629,100 3,601,600 3,575,200 3,549,300 3,524,200 3,499,500 3,481,300 3,469,100 3,454,200 3,435,600 3,414,300 3,394,100 3,375,600 3,358,100 3,340,000

0.009007 0.009505 0.009827 0.01046 0.011004 0.011417 0.012292 0.013021 0.014419 0.015774 0.016998 0.018461 0.020336 0.021055 0.018493 6% 3% 6% 5% 4% 8% 6% 11% 9% 8% 9% 10% 4% -12% 5.4%

14206.77 14912.15 16062.7 17147.05 16977.66 17731.8 19025.15 20402.42 22589.89 24381.92 26448.2 28692.61 31594.7 32451.25 27141.38

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Section: Appendices

Appendix 3. Location of a new NPP in Lithuania

Source: Lietuvos Energija (2007), p.2

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Section: Appendices

Appendix 4. Long-term average of exchange rates LTL/USD

2000** 2001** 2002 2003 2004 2005 2006 2007 2008 2009 2010* Average 4.0064 4.0041 3.6761 3.0609 2.7802 2.7754 2.7525 2.5239 2.3582 2.4843 2.4643 2.9897

LTL/EUR
2000 2001 2002 2003** 2004** 2005** 2006** 2007** 2008** 2009** 2010* 3.7003 3.5861 3.4601 3.4625 3.4583 3.4529 3.4560 3.4589 3.4685 3.4651 3.4448 3.4921

USD/EUR
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 0.9236 0.8956 0.9456 1.1312 1.2439 1.2441 1.2556 1.3705 1.4708 1.3948 1.3979

Sources: Bank of Lithuania (2010), European Central Bank (2010) and own elaboration. *Average of two first months of the year **The exchange rate is pegged

During 1994-2002 the exchange rate of Litas was pegged to US Dollar (4.0000 LTL/USD), because of a little trust in a new currency and a will to attract foreign investors to the country. Later, in 2002, as Lithuania was seeking economic and political integration with European Union, a peg to Euro (3.4528 LTL/EUR) was a condition to join the Economic and Monetary Union and later adopt the official currency of EU (Bank of Lithuania, 2010). Due to pegging an official exchange rate may not depict the real economic price of currency. Therefore, a pegged rate cannot be used in the analysis while converting to the national currency. For this reason, an USD/EUR exchange rate was used to derive a fluctuating rate of Litas in the periods of pegging. It is worth noticing that a national manual for project appraisal in Lithuania does not exist and no guide provides nationally accepted parameters for accessing an analysis. Therefore, a long-term average exchange rate was derived from the data above. In order to convert data to the national currency, the following exchange rates were assumed in the analysis: 2.9897 LTL/USD 3.4921 LTL/EUR
Section: Appendices

75

Appendix 5. Change in construction input prices

Year as compared to previous year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
*First month deflation

Annual change

Price Index (2010=1)

0.6591 2.2% 0.9% -0.5% 0.0% 1.0% 6.1% 7.6% 9.8% 13.7% 9.5% -10.60% -1.10% 0.6739 0.6800 0.6766 0.6766 0.6835 0.7279 0.7877 0.8733 1.0119 1.1182 1.0110 1.0000

Source: Lithuanian Statistics Department (2010) and own elaboration

76

Section: Appendices

Appendix 6. GDP deflator

Year GDP Deflator (2000=100) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 7.389 30.007 48.502 70.851 85.147 95.717 100.353 99.512 100 99.63 99.812 99.037 101.549 108.266 115.343 125.519 138.431 137.739 135.673 GDP Deflator (2010=1) 0.0544618 0.2211715 0.3574919 0.5222189 0.6275899 0.7054978 0.7396682 0.7334694 0.7370663 0.7343392 0.7356806 0.7299684 0.7484835 0.7979922 0.8501544 0.9251583 1.0203283 1.0152278 1

Source: Own elaboration based on IMF (2010) data

77

Section: Appendices

Appendix 7. Estimates of nuclear reactor overnight costs

Original Estimate SAIC SAIC SAIC SAIC Scully Sandia EIA EIA MIT U of C TVA CEC Keystone Harding South Texas Turkey Point Calvert 3 Levy 1&2 Summer 2&3 Vogtle Callaway 1 Duke S&P CRS CBO Lazard Moody's Severance MIT II Bell Bend Harding Medium Harding High Date of Estimate 2001 2001 2001 2001 2002 2002 2003 2003 2003 2004 2005 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 10,026 16,711 16,665 19,892 10,941 19,419 25,066 24,644 6,233 Overnight Cost, Lt/kW (in 2010 prices) Low 6,150 4,920 4,198 3,462 3,834 5,698 5,748 3,318 3,142 3,690 Mid 6,150 4,920 4,198 3,462 3,834 5,698 5,388 4,179 6,283 4,612 4,954 8,077 8,901 8,593 8,500 15,449 11,390 11,730 11,714 11,363 12,834 10,962 9,091 10,427 6,305 14,037 3,750 6,250 7,440 4,092 7,263 Section: Appendices 9,375 9,217 High 6,150 4,920 4,198 3,462 4,476 5,698 5,928 4,770 5,535 Overnight Cost, $/kW (in 2008 prices) Low 2,300 1,840 1,570 1,295 1,434 2,131 2,150 1,241 1,175 1,380 Mid 2,300 1,840 1,570 1,295 1,434 2,131 2,015 1,563 2,350 1,725 1,853 3,021 3,329 3,214 3,179 5,778 4,260 4,387 4,381 4,250 4,800 4,100 3,400 3,900 2,358 5,250 High 2,300 1,840 1,570 1,295 1,674 2,131 2,217 1,784 2,070

8,069 7,837 8,500

8,069 10,037 12,417

3,018 2,931 3,179

3,018 3,754 4,644

14,770

5,524

Source: Overnight Cost, $/kW (in 2008 prices) from Cooper (2009), p. 23

78

Appendix 8. O&M costs for nuclear and CCGT in the base case
Year Nuclear CCGT O&M, O&M, 2010 LTL /MW LTL2010/MW Year (cont.) Nuclear CCGT O&M, O&M, 2010 LTL /MW LTL2010/MW (cont.) (cont.) 481,858 136,172 486,676 137,534 491,543 138,909 496,459 140,298 501,423 141,701 506,437 143,118 511,502 144,549 516,617 145,995 521,783 527,001 532,271 537,594 542,970 548,399 553,883 559,422 565,016 570,666 576,373 582,137 587,958

109,400 2039 110,494 2040 111,599 2041 398,853 112,715 2042 402,842 113,842 2043 406,870 114,980 2044 410,939 116,130 2045 415,048 117,292 2046 419,199 118,465 2047 423,390 119,649 2048 427,624 120,846 2049 431,901 122,054 2050 436,220 123,275 2051 440,582 124,507 2052 444,988 125,752 2053 449,438 127,010 2054 453,932 128,280 2055 458,471 129,563 2056 463,056 130,859 2057 467,687 132,167 2058 472,363 133,489 2059 477,087 134,824 Data sources: O&M estimates based on European Commission (2008a), the escalation rate applied based on Du and Parsons (2009) and NEA et al. (2005). 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038

79

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Appendix 9. Uranium and natural gas supply cost in the base case
Year Gas price change, % Natural gas price, LTL/MWh 94.24 113.19 119.98 115.51 114.74 118.18 119.84 120.02 120.93 122.21 124.83 126.70 130.18 131.10 130.26 131.32 134.37 137.06 141.45 146.03 150.25 156.04 158.21 158.83 162.42 164.56 168.39 172.31 176.32 180.43 184.63 188.93 193.33 197.83 202.44 207.15 211.98 Front-end uranium price change, % 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Front-end uranium price, LTL/MWh 11.97 12.08 12.21 12.33 12.45 12.58 12.70 12.83 12.96 13.09 13.22 13.35 13.48 13.62 13.75 13.89 14.03 14.17 14.31 14.46 14.60 14.75 14.89 15.04 15.19 15.34 15.50 15.65 15.81 15.97 16.13 16.29 16.45 16.62 16.78 16.95 17.12 17.29

80

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047

20% 6% -4% -1% 3% 1% 0% 1% 1% 2% 1% 3% 1% -1% 1% 2% 2% 3% 3% 3% 4% 1% 0% 2% 1% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%

2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059

1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

17.46 17.64 17.81 17.99 18.17 18.35 18.54 18.72 18.91 19.10 19.29 19.48

Data sources: gas price change from U.S. Department of Energy (2010), initial gas price from Lithuanian Statistical Department (2010) adjusted to inflation, uranium price change from NEA et al. (2005), initial front-end uranium price derived from Euratom Supply Agency (2008) and converted to the 2010 level.

81

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Appendix 10. Decommissioning fund

Year Decommissioning cash flows, LTL Annual contributions required to reach required NPV, LTL 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 45,761,285 Fund returns, LTL Accumulated funds from previous year, LTL Value of the fund, LTL

82

Section: Appendices

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055

1,144,032 2,316,665 3,518,614 4,750,611 6,013,409 7,307,776 8,634,503 9,994,397 11,388,289 12,817,029 14,281,486 15,782,556 17,321,152 18,898,213 20,514,700 22,171,600 23,869,922 25,610,702 27,395,002 29,223,909 31,098,539 33,020,034 34,989,567 37,008,339 39,077,579 41,198,551 43,372,547 45,600,892 47,884,947 50,226,103 52,625,787 55,085,464 57,606,633 60,190,831 62,839,634

45,761,285 92,666,602 140,744,552 190,024,450 240,536,346 292,311,040 345,380,101 399,775,888 455,531,570 512,681,144 571,259,458 631,302,229 692,846,070 755,928,506 820,588,004 886,863,989 954,796,873 1,024,428,080 1,095,800,067 1,168,956,353 1,243,941,547 1,320,801,370 1,399,582,690 1,480,333,542 1,563,103,165 1,647,942,029 1,734,901,865 1,824,035,696 1,915,397,873 2,009,044,105 2,105,031,492 2,203,418,565 2,304,265,314 2,407,633,231 2,513,585,347

45,761,285 92,666,602 140,744,552 190,024,450 240,536,346 292,311,040 345,380,101 399,775,888 455,531,570 512,681,144 571,259,458 631,302,229 692,846,070 755,928,506 820,588,004 886,863,989 954,796,873 1,024,428,080 1,095,800,067 1,168,956,353 1,243,941,547 1,320,801,370 1,399,582,690 1,480,333,542 1,563,103,165 1,647,942,029 1,734,901,865 1,824,035,696 1,915,397,873 2,009,044,105 2,105,031,492 2,203,418,565 2,304,265,314 2,407,633,231 2,513,585,347 2,622,186,265

2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069 2070 2071 2072 2073 2074 2075 2076 2077 2078 2079 2080 2081 2082 2083 2084 2085 2086 2087 2088 2089
(2006).

45,761,285 45,761,285 45,761,285 45,761,285 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667 147,366,667

65,554,657 68,337,555 71,190,026 74,113,809

2,622,186,265 2,733,502,207 2,847,601,047 2,964,552,358

2,733,502,207 2,847,601,047 2,964,552,358 3,084,427,452 3,014,171,471 2,942,159,091 2,868,346,402 2,792,688,396 2,715,138,939 2,635,650,746 2,554,175,347 2,470,663,065 2,385,062,974 2,297,322,882 2,207,389,288 2,115,207,353 2,020,720,870 1,923,872,225 1,824,602,364 1,722,850,757 1,618,555,359 1,511,652,576 1,402,077,224 1,289,762,488 1,174,639,883 1,056,639,214 935,688,528 811,714,074 684,640,259 554,389,599 420,882,672 284,038,073 143,772,358 0

Source: the calculations are based on the model proposed by UK Deparment of Trade and Industry

83

Section: Appendices

NPV of future costs at the start of a decomissioning period is 3,084,427,452 LTL.

Appendix 11. Value of CO2 equivalents reduction in the base case

Year Phase Net annual lifecycle CO2 equivalent emissions reduction, t CO2 (eq.) 0 0 0 0 0 0 0 0 0 0 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 CO2 Shadow Price, LTL2010/t CO2 653 666 679 693 707 721 735 750 765 780 796 812 828 845 862 879 896 914 933 951 970 990 1,010 1,030 1,050 1,071 1,093 1,115 1,137 1,160 1,183 1,206 1,231 1,255 1,280 1,306 1,332 1,359 1,386 1,414 1,442 1,471 1,500 1,530 Value of emission reduction, LTL2010 0 0 0 0 0 0 0 0 0 0 2,396,843,079 2,444,779,941 2,493,675,540 2,543,549,050 2,594,420,031 2,646,308,432 2,699,234,601 2,753,219,293 2,808,283,679 2,864,449,352 2,921,738,339 2,980,173,106 3,039,776,568 3,100,572,099 3,162,583,541 3,225,835,212 3,290,351,916 3,356,158,955 3,423,282,134 3,491,747,777 3,561,582,732 3,632,814,387 3,705,470,675 3,779,580,088 3,855,171,690 3,932,275,124 4,010,920,626 4,090,915,874 4,172,734,192 4,256,188,875 4,341,312,653 4,428,138,906 4,516,701,684 4,607,035,718

84

Section: Appendices

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053

Operation

Construction

Pre Development

2054 2055 2056 2057 2058 2059

3,011,097 3,011,097 3,011,097 3,011,097 3,011,097 3,011,097

1,561 1,529 1,624 1,656 1,689 1,723

4,699,176,432 4,793,159,961 4,889,023,160 4,986,803,623 5,086,539,696 5,188,270,490

Data source: initial shadow price of CO2 taken from Salnykov and Zelenyuk (2005), increase of shadow price from DEFRA (2007), deriviation of the quantity of emissions reductions is descibed in the main body of the thesis and provided in Table 12.

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Section: Appendices