Option approach to investment in modular nuclear electricity-generating capacity

Abstract

Intensive research efforts are currently taking place in the United States and abroad to shape the next generation of nuclear power systems offering enhanced reliability and safety along with better economics. Two design philosophies, with different technological and market perspectives, are considered. One is to develop large systems relying on evolutionary versions of the current dominant design, and the other is to go with small and modular reactor technology such as the Modular Pebble Bed Reactor (MPBR). This thesis examines the modular technology and its flexibility to add incremental capacity to timely respond to market demand. The decision to invest in a ten-module 1,100MWe MPBR plant is analyzed as a sequence of compound options, where the construction of each single module provides the decision maker with the option to build the next module. The proposed valuation model uses an original binomial approach. We demonstrate that, at any point in time, the value of a modular nuclear power plant has two components: the value of the installed capacity and the value of the firm's option to add capacity incrementally in the future. The modular technology provides additional economic value due to its flexibility that the traditional Busbar cost analysis fails to capture. We analyze different scenarios that highlight the fact that the value of the expansion option is particularly sensitive to the cost of the first module as compared with the following ones. In addition we show that the expansion option value grows when the cost is equalized among the modules to be built. This result leads to recommendations as to the design of the peripheral support facilities and to a larger extent to the overall plant layout. This thesis ends by exposing policy recommendations as to the use of the real options valuation methods in the regulatory framework that governs technology selection and energy capacity expansion decisions.