Four types of financial policy are considered here: loan guarantees, accelerated depreciation, investment tax credits, and production tax credits. Another possible policy is to extend the licensing period from 40 to 60 years. This policy was found to reduce LCOE by only about 1 percent and is not considered further.
9.3.1.1. Loan Guarantee
A loan guarantee could be applied to some portion of the capital costs which are financed by borrowing. A federal guarantee of, say, 25 percent of the borrowed funds would allow the borrowing rate on 25 percent of the borrowed funds to fall as low as the risk-free rate. The weighted debt rate is rd = sr+(1−s)rm; where rd is the weighted average interest rate on debt financing; s is the fraction of the loan that the government guaranteed; r is the risk-free interest rate, say 5 percent as geared to the 10-year Treasury note; and rm is the
market interest rate on a loan of the risk class for this asset. The total effect of the loan guarantee on the weighted average cost of capital depends in turn on the debt-to-equity ratio:
, ) 1 ( e d r r
WACC =δ + −δ where δ is the fraction of the capital that is borrowed and re is the
required rate of return on equity, which also will include the risk premium that the market determines for this class of assets. With 50 percent of the funds borrowed, a 10 percent borrowing rate, and a 15 percent equity rate, and no loan guarantee, the WACC would be 0.125. With a 25 percent loan guarantee, the WACC falls to 0.10.
Table 9-3 shows the effect of loan guarantees on nuclear plant LCOEs for the three reactor costs being considered for loan guarantees of 25 percent and 50 percent. Even a 50 percent guarantee lowers the LCOE of the $1,200 per kW reactor by at most $4 per MWh. LCOEs are still almost as far above the cost per MWh for coal-fired and gas-fired generation as with the no-policy alternatives.
Table 9-3: Nuclear LCOEs with Loan Guarantees, $ per MWh, 2003 Prices
Mature Design $1,200 per kW New Design $1,500 per kW Advanced New Design $1,800 per kW Construction time Construction time Construction time Loan Guarantee
5 years 7 years 5 years 7 years 5 years 7 years
0 (no policy) 47 53 54 62 62 71
25 percent of loan 45 50 53 58 60 67
50 percent of loan 45 49 52 57 59 65
9.3.1.2. Accelerated Depreciation
Current tax laws specify a 15-year depreciation period for electric utilities under U.S. corporate tax code’s Modified Accelerated Cost Recovery System (MACRS), which is the no-policy case. Two more greatly accelerated depreciation schedules are examined here, 7 years and the limiting case of expensing, or writing off the entire investment cost in the first year of production. While expensing is not a U.S. practice, it is common in European countries. Table 9-4 reports LCOEs under each of these allowance schedules, for plants with 5-year and 7-year construction periods.
Table 9-4: Nuclear LCOEs with Accelerated Depreciation Allowances, $ per MWh, 2003 Prices Mature Design $1,200 per kW New Design $1,500 per kW Advanced New Design $1,800 per kW Construction time Construction time Construction time Depreciation Policy
5 years 7 years 5 years 7 years 5 years 7 years
15 years (no policy) 47 53 54 62 62 71
7 years 44 50 51 58 58 67
Accelerated depreciation, even expensing, is not a particularly effective support policy. For example, expensing, which is the extreme of accelerated depreciation, brings down the cost for the $1,200 per kW reactor by only $6 per MWh.
9.3.1.3. Investment Tax Credit
An investment tax credit allowing a business to claim a percentage of its investment as a direct offset against its tax obligation in the year of the investment is more potent in affecting LCOE than is accelerated depreciation, which is reasonable since depreciation is only a deduction from income rather than a direct offset against taxes and, moreover, spreads the allowances out over as much as 15 years.
The investment tax credit modeled here is refundable, allowing the owner to apply the credit to the income earned from other assets if the credit is larger than the tax on the asset from the asset. The entity envisioned as investing in the new nuclear plant is a utility with several plants rather than the owner of only a single plant. If a new nuclear plant operated at a loss in its very first years and thus had no tax obligation, the owner could apply the
investment tax credit from it against taxes on income generated by other plants.
Table 9-5 shows the LCOEs for each of the three reactor costs, assuming 7-year and 5-year construction times, a 10 percent investment tax credit, and a 20 percent investment tax credit. The reductions in LCOEs for each plant, moving from no policy, to 10 percent, to 20 percent, while as large as $9 to $13 per MWh, leave each reactor design outside the competitive range with fossil generation. Even the 20 percent tax credit does not bring the $1,200 per kW plant into competitive status with the fossil fuel generation plants. The 20 percent credit for the $1,500 per kW reactor closes the competitive gap by about 50 percent. For the $1,800 per kW reactor, the 20 percent credit just drops the LCOE to $58 per MWh, even further out of the competitive $34 to $36 per MWh range. A further possible benefit of an investment tax credit is that the investor receives this benefit early in the life of the project—during construction when there is a drain on cash flow—rather than later, such as a production tax credit would offer when revenues from sales of power are already generating positive cash flow.
Table 9-5: Nuclear LCOEs with Investment Tax Credits, $ per MWh, 2003 Prices Mature Design
$1,200 per kW
New Design $1,500 per kW
Advanced New Design $1,800 per kW Construction time Construction time Construction time Tax Credits
5 years 7 years 5 years 7 years 5 years 7 years
0 percent (no policy) 47 53 54 62 62 71
10 percent 43 47 50 55 57 63
9.3.1.4. Production Tax Credit
Like the investment tax credit, the production tax credit is a direct offset against tax obligation. A firm is offered a tax credit on each kWh of power it produces, for a specified number of its first years of operation. A production tax credit of $18 per MWh, non payable, with duration of 7 years is considered. This credit is the magnitude of the current production tax credit for renewable energy, and its duration is that specified for advanced nuclear
generation in Section 1310 of the Conference Energy Bill of 2004. The production tax credit is reported in Table 9-6.
Table 9-6: Nuclear LCOEs with Production Tax Credits, $18 per MWh, 8-Year Duration, $ per MWh, 2003 Prices
Mature Design $1,200 per kW New Design $1,500 per kW Advanced New Design $1,800 per kW Construction time Construction time Construction time Tax Credit
Policy
5 years 7 years 5 years 7 years 5 years 7 years
0 (no policy) 47 53 54 62 62 71
$18 per MWh,
8-year duration 32 38 40 47 47 56
With a 7-year construction period for a first plant, assumed to be expected by the business community in view of risk concerns, the $18 per MWh credit brings the LCOE of the $1,200 per kW reactor from its no-policy level to a level within the upper end of the range of coal-fired LCOEs of $33 to $41 per MWh and into the middle of the range of gas- fired LCOEs, $35 to $45 per MWh. This credit leaves the LCOE of the $1,500 per kW reactor just beyond the competitive range of gas-fired generation. The LCOE of the $1,800 per kW reactor remains well above the competitive range.
An optional feature of a production tax credit is that it may be specified as a long- term, low-interest or interest-free loan. Called a repayable tax credit, the repayment term could be as long as 20 or 25 years. Discounting the distant-future repayment to the present, the repayable version of this tax credit is nearly indistinguishable from a production tax credit with the loan forgiven. The repayable version of this credit was investigated, and its results were very close to those of the non-repayable credit in Table 9-6.
In practice, some restrictions might be imposed on the amount of power on which a utility may receive such a credit. In the 2004 Conference Energy Bill, the credit is not to exceed $125 million per 1,000 MW of new capacity. The present analysis imposes this cap on payments, which limits the credit effectively to $16.79 per MWh.
9.3.1.5. Summary of Individual Policies
In summary, with the expectation of a 7-year construction period, no individual financial policy can be counted on unambiguously to bring the LCOE of first new nuclear plants within the range of LCOE competitive with fossil generation. A 50 percent loan guarantee can bring the $1,200 per kW LCOE down to $49 per MWh, and an accelerated depreciation policy allowing full expensing reduces its LCOE to $47 per MWh. The investment tax credit is somewhat more potent, but the best LCOE even for the lowest reactor costs of $1,200 per kW is $44 per MWh with a 20 percent investment credit.
However, an $18 per MWh production tax credit lasting 8 years, with a cap of $125 million per 1,000 MW, can bring the $1,200 per kW LCOE to $38 per MWh, which is in the upper half of the range of LCOEs that may be delivered by coal-fired generation. However, the production tax credit helps cash flow only after the plant has been built and does not reduce the heavy drain on near-term dollar requirements during the construction period.
The figures in the preceding paragraph are for a construction time of 7 years, assumed to be used in utility investment decisions for first nuclear plants in view of risk concerns, even though a favorable 5-year construction period may actually be experienced after the fact. This section has also presented figures for a 5-year construction period. LCOEs under single financial policies for plants built in 5 years are 9 to 15 percent below those under the same policies for plants built in 7 years. The 2-year difference in construction time would make the difference between reaching or not reaching the competitive cost range with fossil generation for the production tax credit with the $1,200 per kW plant.
Ambiguities in achieving nuclear competitiveness through uses of any single policy are reduced if a combination of policies is considered.
9.3.2. A Combination of Policies
In Table 9-7, the effects of the two most effective policies when acting together are considered for both 5- and 7-year construction periods: the $18 per MWh production tax credit, with a duration of 8 years, and the 20 percent investment tax credit. The table reports the initial, no-policy LCOE in the upper row, and the impacts of the combination of policies in the lower row. The LCOEs are reported for the three reactor costs and for 5- and 7-year construction periods.