thesis zivile kazlaus kaite

8/2/2019 Thesis Zivile Kazlaus Kaite

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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
http://www.asb.dk/staff.aspx?pid=11463http://www.asb.dk/staff.aspx?pid=11463


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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 oftechnological 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.


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Contents

1. Introduction .................................................................................................................. 1

1.1 Lithuanian energy sector and government policy ................................................... 2

1.2 Problem statement and delimitations ..................................................................... 4

1.3 Choice of methodology ......................................................................................... 5

1.4 Structure of the thesis ............................................................................................ 5

2. Theoretical foundations ................................................................................................ 7

2.1 Key theoretical aspects of CBA ............................................................................. 7

2.1.1 Partial and general equilibrium approaches in CBA ....................................... 7

2.1.2 Price dynamics .............................................................................................. 9

2.1.3 Social Discount Rate ....................................................................................10

2.1.4 Investment criterion......................................................................................15

2.2 Energy economics ................................................................................................15

2.2.1 Cost and performance characteristics of electricity generating technologies ..15

2.2.2 Levelised-cost methodology .........................................................................18

3. Analysis ......................................................................................................................21

3.1 Project description and alternatives ......................................................................21

3.2 Scope and Standing ..............................................................................................283.3 Identification, quantification and monetization of costs and benefits .....................29

3.3.1 Cost Penalty/Advantage ...............................................................................31

3.3.2 Accident Costs .............................................................................................47

3.3.3 Environmental Benefits ................................................................................49

3.3.4 Security of Supply ........................................................................................54

3.3.5 Employment benefits ....................................................................................56

3.4 Discounting procedure and NPV calculation ........................................................57

3.5 Sensitivity Analysis .............................................................................................58

3.6 Recommendation .................................................................................................61

4. Conclusions .................................................................................................................63

Bibliography .......................................................................................................................66

Appendices .........................................................................................................................71


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List of Figures

Figure 1. Electricity generation in Lithuania by fuel type.................................................. 3

Figure 2. Analytical structure of conducting CBA ............................................................ 5

Figure 3. Key cost variables of power plants ...................................................................16

Figure 4. Projections of electricity demand in Lithuania ..................................................22

Figure 5. Assumed timeline of the new nuclear build project ...........................................26

Figure 6. Estimates of nuclear reactor overnight costs .....................................................33

Figure 7. Structure of electricity generation cost in the base case .....................................46

Figure 8. Break-even CO2 shadow prices in various sets of alternatives (LTL/tCO2) ........60

List of Tables

Table 1. Deriving SDR for Lithuania .............................................................................14

Table 2. Representative proportions of electricity generating costs, % ............................20

Table 3. Nuclear technologies under consideration .........................................................24

Table 4. Identified costs and benefits of a new NPP build ..............................................30

Table 5. Recent evidence on III generation nuclear reactor construction cost ..................34

Table 6. IDC calculations for the base case ....................................................................37

Table 7. Total construction costs for nuclear and CCGT plants in the base case ..............38

Table 8. Cost to get 1 kg of uranium as UO2 reactor fuel ................................................40

Table 9. Decommissioning costs ofIgnalina NPP ..........................................................43

Table 10. Average nuclear and gas-fired plant levelised-cost for the base case .................46

Table 11. GHG emissions (kg CO2 equivalent/MWh) from nuclear fission and CCGT .....50

Table 12. Net annual lifecycle CO2 equivalent and carbon emissions reduction ................51

Table 13. Welfare balance of a new NPP in the base case ................................................58

Table 14. Welfare balances of a new NPP project under different gas price, nuclearconstruction cost and CO2 shadow price (in million Litas) ..................................................59

Table 15. Welfare balances of a new NPP project under different SDR and cost of capitalcombinations (in million Litas) ............................................................................................60


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List of Acronyms and Abbreviations

BWR Boiling Water Reactor

CBA Cost-Benefit Analysis

CCGT Combined Cycle Gas Turbine

CO2 Carbon Dioxide (a Greenhouse gas)

EGC Average Lifetime Levelised Electricity Generation Cost

EPC EngineeringProcurement - Construction

GHG Greenhouse Gas

GWe Gigawatt electrical (power)

IAEA International Atomic Energy Agency

IDC Interest During Construction

IEA International Energy Agency

LCOE Levelised Cost of Energy

LTL Lithuanian Litas

NEA Nuclear Energy Agency

NPP Nuclear Power Plant

O&M Operating and Maintenance cost

PHWR Pressurized Heavy Water Reactor

PWR Pressurized Water Reactor

SDR Social Discount Rate

STPR Social Time Preference Rate

TWh Terawatt hours

UNIDO United Nations Industrial Development Organization

WNA World Nuclear Association

WTP Willingness-to-pay

WWER Water-Water Energetic Reactor


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Section

:Introduction

1

1.IntroductionWorldwide 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 electricityconsumption 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


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Section

:Introduction

2

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 ofobstacles. 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 (SustainableDevelopment 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 policyOn December 31, 2009 Lithuania shut down the second reactor ofIgnalina 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 ofIgnalina NPP Lithuanian economy confronts a major challenge

because of significant changes in its energy generation (see Figure 1).


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Section

:Introduction

3

Figure 1. Electricity generation in Lithuania by fuel type

2004before Unit 1 closure 2007before 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 firstnuclear 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 inthe 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

(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).

Oil

2%

Gas

14%

Nuclear

78%

Renewab

les6%

Oil

3%

Gas

17%

Nuclear

70%

Renewab

les10%


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Section

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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 delimitationsInspired 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 Lithuaniansociety 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 monetizethese 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.

Therefore, the assessment of how these assumptions contribute to the conclusions will

be necessary to evaluate.


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Section

:Introduction

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1.3 Choice of methodologyA 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. Morespecifically, CBA is a tool used to determine whether a project2 contribute to the

economic welfare, i.e. could they potentially be Pareto improving3. 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 thesisThe 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

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

2The terms project, policy andprogram are used as synonyms in this paper

3 This is known as Kaldor-Hicks decision criterion

1 Defining alternative projects

2 Defining scope and standing

3

Identifying, quantifying and monetizing costs and benefits

4 Discounting and calculating NPV

5 Performing sensitivity analysis

6 Deriving recommendations


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Section

:Introduction

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Therefore, the analytical section is divided into steps, depicted in Figure 2. Finally,

the conclusion is provided in Section 4.


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Section

:Theoreticalfoundations

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2.Theoretical foundationsThe 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.

2.1Key theoretical aspects of CBAHere 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 byshedding 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 CBACBA 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 Boardmanet 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

would be straightforward to measure how governmental project affects the consumer

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

4The surplus of consumers willingness-to-pay (WTP) for the good over price of that good (EuropeanCommission, 2008b).5 The revenue from selling the good minus the opportunity cost given up in order to produce that good

(Boardman et al., 2006).


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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 estimationproblems 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. Shadowprices 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, itis 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 sociallyinefficient. 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


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Section


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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 socialprofits 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 thatif 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 todo 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 dynamicsOne 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

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


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ction:Theoreticalfoundations

10

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 lookingback 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 RateIt 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

6 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 andbenefits 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

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

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).


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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 ofEuropean 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

rReal social discount rate;

gGrowth rate of per capita consumption;

eElasticity of marginal utility of consumption;

pPure 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 moneyunit 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) representsconsumers 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.


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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 appropriaterange 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 capitagrew 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. Ife 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 ofits 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 ofe 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 ageneration that has twice the consumption of the current generation will decrease the

utility by half.


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Table 1. Deriving SDR for LithuaniaCase p e g SDR

Optimistic 0% 1 3.2% 3.2%Base 1% 1 4.3% 5.3%

Pessimistic 2% 1 5.4% 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 31-

75 years, HM Treasury (2003) decreases the SDR by 0.5%. The same procedure will

be followed in the CBA appraisal of a new NPP.


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2.1.4 Investment criterionThe most widely applied investment criterion in practice is the net present value

(NPV) principle. As mentioned above, the main reason for discounting future socialcosts 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 + (Bt Ct)1 + SDRt

=1

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


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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

Overnight construction cost sometimes is called as instant costs, which are

dedicated to construction of the plant. It comprises of Engineering-Procurement-

Construction (EPC) and owners cost. EPCmeans bare plant costs, for example, in acase 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 costdepends 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-fueloperating 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

Busbar/Levelized-cost

Construction cost

Overnight

EPCOwner's cost

IDC

Operating costs

O&M Fuel Cycle cost

Front-End Back-End


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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. Asthese 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).Back-

End 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 asa 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

costs. Using cost of capital as a discount rate, the price of producing electricity isderived. 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).

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


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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 generatingunit. 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 ofplanned 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 methodologyOne 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

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:

8Important distinction between capacity and energy terms. Capacity measured in watts and meansa 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).


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= I0 + It + Mt + Ft1 + rt /

=1

Et1 + rt

=1

EGCaverage lifetime levelised electricity generation cost;

ItCapital investment in year t;

MtOperating and maintenance cost in the year t;

FtFuel cycle cost in the year t;

EtElectricity output in year t (Et= 87609*Plant Capacity*Load Factor);

rCost of capital (post tax real WACC);

nEconomic 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/MWh

10

.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 capita l

(see Table 2).

9 There are 8760 hours per year (365*24=8670)10 LTL is an abbreviation forLitasthe national currency of Lithuania.


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Table 2. Representative proportions of electricity generating costs, %Variable Nuclear CCGT11

Renewable

(wind)

Construction or capital (including IDC) 60-75 30-40 85-90

Fuel 5-10 50-60 0

O&M 8-15 5-10 5-15

Back-End * 0 0

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 istypical 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 expectedto 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).

11Combined Cycle Gas Turbine plant


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3.AnalysisThe 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.

3.1Project description and alternativesAfter the shutdown ofIgnalina 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 inLithuania.

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 ofNuclear 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

12 See Figure 2 in the introduction section


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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 ofDrkiai 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

Data Source: International Atomic Energy Agency (2007), p.111

13 See Appendix 3 for the map

6

8

10

12

14

16

18

2010 2015 2020 2025

Electricityde

mand,TWh

Year

Slow economic growth

scenario

Basic Scenario

Fast economic growth

scenario


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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 beemphasized 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

scenario800MWe and optimistic1600MWe.

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 orGeneration 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)


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Table 3. Nuclear technologies under considerationTechnologies Type Size, MWe Supplier

V-392 WWER (PWR) 1006 AtomStroyExportV-448 WWER (PWR) 1500 AtomStroyExport

ABWR BWR 1300 Hitachi (General Electric)

ESBWR BWR 1535 General Electric

SWR-1000 BWR 1254 AREVA Nuclear Power

ACR-1000 PHWR 1085 Atomic Energy of Canada Limited

EC-6 PHWR 700 Atomic Energy of Canada Limited

APWR PWR 1700 Mitsubishi Heavy Industries

AP-1000 PWR 1000 Westinghouse

AP-600 PWR 600 Westinghouse

EPR PWR 1600 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 thatLithuania 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

AREVA will be ordered in Lithuania.


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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 loadfactor 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 100plants 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 of85%.

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 furtherin 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%.

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


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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-yearconstruction 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).


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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 powerplants 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 StandingThe 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

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


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3.3 Identification, quantification and monetization of costs and benefitsThe next step is ultimate in this appraisal as it covers the identification of costs and

benefits to be estimated, specifies the measurement indicators, forecasts thedevelopment 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, whotend 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 onelectricity generation cost, there has been identified the impacts to be discussed and

evaluated in this CBA appraisal (see Table 4).


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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 themeasurement 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 andbuying 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/AdvantageThe 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 advantagesocial 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.


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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 hasalready 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 distortresults 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).

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


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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

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

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2000 2002 2004 2006 2008 2010

OvernightConstructioncost,Lt/kW

(in2010prices)

Date of Estimate

Lithuanian estimate


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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

Plant Technology

Overnight Construction Cost, LTL/kW

(in 2010 prices)

Primary estimate Updated estimate/Actual

Olkiluoto (Finland) EPR 8,065 14,150Flamanville (France) EPR 10,054

San Men (China) AP-1000 2,957 8,600

Bellefonte (USA) AP-1000 12,430

(Georgia) 17,005*

Visaginas (Lithuania) 7,915

*IDC included

Data source: Lietuvos Energija (2006) and own elaboration based on CitiGroup (2009)

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 BritishEnvironmental 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


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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 isattempted 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 case6,798 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


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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 3rd 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 around90% 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.


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Table 6. IDC calculations for the base caseOvernight construction cost: 10,000,000 LTL/MW

Interest rate: 6.00%

Year Fraction spent during

the year (1)

[(1+n)n -1]* (1) Interest amount,

LTL/MW

2014 10% 0.041852 418,519

2015 20% 0.067645 676,451

2016 30% 0.078743 787,431

2017 20% 0.038203 382,032

2018 10% 0.01236 123,600

2019 10% 0.006 60,000

Total 100% 0.244803 2,448,033

nnumber 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.


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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 pricelevel). 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 isassumed 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

Year

NUCLEAR CCGT

IDC,

LTL2010/MW

Overnight

construction

cost,

LTL2010/MW

Total

construction

cost, LTL2010

Construction

cost,

LTL2010/MW

Total

Construction

cost, LTL2010

2014 418,519 1,000,000 1,418,519,112 1,162,196 1,162,196,000

2015 676,451 2,000,000 2,676,451,155 1,162,196 1,162,196,000

2016 787,431 3,000,000 3,787,430,880 581,098 581,098,000

2017 382,032 2,000,000 2,382,032,000

2018 123,600 1,000,000 1,123,600,000

2019 60,000 1,000,000 1,060,000,000

Total 2,448,033 10,000,000 12,448,033,147 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.


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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 thetotal 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/kWin 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 at

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