High uranium prices should not have a significant impact on the economics of electricity production for existing reactors. We estimate that for each $5/lb increase in the average price of uranium for a generator, the cost of generating electricity would increase by $0.33 per MWh. New reactor construction economics are only moderately sensitive to changes in the price of uranium. To sustain the required return on equity for new investments in nuclear generation, we estimate a $5/lb increase in the uranium price would require a $0.25/MWh increase in electricity prices. We have also compared nuclear generation to both gas and coal. The economics of gas-fired generation are driven by the relatively low capital cost, low emissions and fuel price. For existing gas-fired generation, we estimate that for a $1/MMBtu change in the gas price the cost of generating one MWh increases by $7.52. To sustain the required return on equity for new investments in gas-fired generation, we estimate a $1/MMBtu increase in the gas price would require a $7.42/MWh increase in electricity prices. Coal-fired generation is competitive with nuclear, offering low cost volatility and reliable base-load generation. We estimate that for each $0.50 per MMBtu change in the price of coal, generating costs for existing plants changes by $4.86/MWh. To sustain the required return on equity for new investments in coal- fired generation, we estimate a $0.5/MMBtu change in the coal price would result in a $4.79/MWh change to electricity prices. Much of nuclear power's rebirth is thanks to the fact is has no airborne emissions. Coal and gas, on the other hand emit CO2. When the potential future cost of CO2 is factored into the cost analysis, nuclear becomes a clear winner. We continue to believe that nuclear power will continue to grow in popularity. The nuclear renaissance is in its nascent stage and we feel there will be many more nuclear plant life extensions and new builds in the years to come.
Uranium Prices and Nuclear Generation Economics We have analysed the price of uranium and its effect on nuclear economics; our nuclear analysis is separated into two parts: 1. Existing Nuclear Operations; and 2. New Nuclear Construction: A comparison of nuclear to both coal and gas as alternative generating choices and the effect of fuel price volatility and capital costs.
Existing Operations Uranium Prices Will Have a Minimal Effect on Nuclear Economics
It is important to note that our analysis does not factor in existing uranium contracts held by all utilities - the actual realized price for uranium will be lower due to legacy contracts. For the currently installed fleet of nuclear generators, we do not believe that the uranium price will have a significant effect on their economics. We estimate that the uranium portion of ongoing cost, including ongoing maintenance capital, has risen from approximately 6.5% to 22% as the uranium price rose from $10/lb to today's $72/lb. This increase may appear to be substantial, but we believe the impact on cash margins is relatively low, if all other factors remain unchanged (see Exhibit 1). Additionally, many utilities are able to capture fuel price increases through higher regulated rates. While operating costs have risen, cash margins should remain robust. Regulated U.S. utilities generally receive a power price that is based on a pre- determined return on equity formula that allows for a pass-through of fuel costs. We believe our levelized cost analysis is a good proxy for regulated rates, implying a regulated price for utilities of between $60/MWh and $70/MWh. This is also in line with the average 2006 market rate in four main U.S. markets as illustrated in Exhibit 2. For utilities operating with regulated rates of ~$60/MWh, we estimate that a utility's average uranium price would have to exceed $625 per pound for it to break even on a cash basis without giving benefit for commensurate rate increases. We believe it is unlikely the uranium price will reach this level in today's dollar terms. This assumes conversion and enrichment prices are held at today's levels. It is important to note that most utilities have entered into contracts for uranium purchases well into the future and, therefore, their average uranium cost will only partly reflect the current spot market. Many of the legacy contracts were signed when uranium was below $15/lb and often had ceilings on the price on delivery; this is well illustrated by Cameco's contract structure for the next 10 years:
A Comparison of Current Installed Nuclear Generation versus Gas and Coal Comparing fuel price volatility between nuclear reactors versus gas and coal fired generators shows that nuclear and coal are quite insensitive to fuel price changes, whereas gas generation is highly sensitive. Existing nuclear generation should not be economically affected by higher uranium prices, especially since utilities have extensive contracts lasting as long as 15 years with much lower, legacy pricing. Exhibit 5 illustrates our estimate of generation costs for the three technologies at various fuel prices. This analysis is for existing generating facilities and includes ongoing capital only.
New Nuclear Construction Uranium Prices Should Not Affect New Nuclear Builds The decision to build new nuclear plants is very complex, driven by both economics and politics. There are many variables that must be considered, some of these measurable and others not. Today's political landscape is one where environmental issues often outweigh economic returns. Greenhouse gas emissions, once ignored, are becoming important factors to be considered when deciding on an electricity generation technology. Nuclear power generation, only recently considered an industry in terminal decline, has been rejuvenated in a world of increasing electricity demand and environmental concerns. Simply put, nuclear power provides greenhouse gas- friendly, reliable, low-cost base load power. Its spent fuel is highly toxic, but is relatively small in volume and manageable: most importantly, it can be contained and tracked; something which is not possible for smokestack emissions. Governments around the globe are piling onto the nuclear power bandwagon. However, there are still many questions regarding the economics of new builds. In most Western countries nuclear power new builds have been few and far between; in contrast China, India, Korea and Taiwan, for example, have been recently building new reactors. The most significant economic questions that need to be addressed for new nuclear plant construction, especially in the West, are:
Capital Costs: Historically, nuclear plants builds exceeded budgeted costs by a large margin. However, more recent experience in Asia has shown that new plants can be built on budget. Atomic Energy of Canada Limited (AECL) has designed six new reactors in Romania, South Korea and China - all of which were on budget. New designs, modular construction techniques, and partial turnkey guarantees are helping to ensure that cost overruns are avoided. Capital costs, also referred to as "overnight costs", include the construction, engineering and procurement costs, owners costs and financing expense during construction time. The cost is normally measured, for comparison purposes, in US$/kW. The range of future capital cost estimates is wide and depends on the technology and whether it is the first-of-a-kind (FOAK) build or an "nth" build. Estimates range from $1,100 to $2,500 per kilowatt installed with more recent generations of technology forecast to be towards the lower end of the range. With the construction of more reactors and the experience gained, the cost for each additional unit should drop. Further efficiencies should also be driven from modular designs and shared components. The sensitivity of new build economics to capital costs is the most important variable. The reliability of the budgeted price will be key to determining whether new construction is able to commence. To that end, nuclear plant vendors have begun guaranteeing plant prices on a partial turnkey basis. AREVA and Team CANDU have both been involved in recent plant construction on this basis. We believe the turnkey guarantee is the only way new plants will be built until generating companies and governments are comfortable with the build process and price - this will only happen after the first round of new builds are complete.
Construction time The time the first shovel hits the ground until the first watt is generated can vary significantly depending on the reactor technology, capacity constraints and technical/regulatory issues. The time to build a reactor can significantly affect the economics of a new build due to the additional carrying cost of debt and the effect it has on the discounted cash flows. Historically, the record of completing nuclear construction on time has been poor. This was likely due to the fact that the technology was evolving with each new build. At the extreme, reactor designs were being modified even during construction. As a result, initial build time estimates were frequently exceeded. The industry has recognized the need to ensure construction times are managed and, to that end, new plant designs are focusing on modular construction and, with time, the hope is to build many of one kind to reduce the need for site-specific engineering requirements. Recent construction projects in China, Korea and Japan provide evidence that build times are improving. Additionally, pre-approval of nuclear technologies should help minimize design changes before and during construction periods.
Government incentives It is generally recognized that the first round of new reactor builds will be challenging and costly and that subsequent new builds should be less expensive. To overcome the hurdle of the first builds many governments are providing incentives for new construction. These incentives come in many forms and help mitigate the risk being borne by the purchaser and vendor. One of the benefits of government incentives may also come in the form of low interest financing (at, or near, government rates) which can dramatically lower the financial hurdles of new investment.
Regulated Rates In most jurisdictions where new nuclear plants are being considered, the facilities will sell into regulated markets or government controlled markets. In regulated markets the electricity price that will be paid to the facility will be selected to ensure a specific return on equity. In government controlled markets, generating technologies will be selected based on a combination of financial and political reasons.
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