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Will Low Natural Gas Prices Eliminate the Nuclear Option in the US?

Natural Gas Word Cluster on Black  Background

A probabilistic comparison of the investment risks of nuclear power and natural gas-based electricity generating plants has been carried out using a total-lifecycle power plant model. Although the cost of the gas plant (with carbon tax) is found to be slightly cheaper, that choice of fuel carries a far greater cost uncertainty, suggesting a greater long-term investment risk than nuclear power.

This study is intended to compare the cost of electricity from natural gas and nuclear power taking each technology's inherent risks into account. There is investment risk inherent in both technologies, but from different sources. The risk of nuclear power resides in uncertain capital costs. For natural gas, the risks are from the uncertain forward cost of natural gas and the potential for environmental compliance costs, primarily from the emissions of greenhouse gases (principally CO2). Because of these uncertainties it is more revealing to use risk-adjusted (probabilistic or stochastic) forecasts of the comparative costs of electricity. These estimates show the probable range of costs for both technologies, given the uncertainties described above. The costs used are the levelized costs of generating electricity (LCOE).1 The results were obtained using the EnergyPath Market Model (EPMM), which financially simulates the operation of electric generating plants, in part, to calculate the LCOE (see Appendix A for a description of EPMM). Since the newest technology nuclear plants are designed to be licensed for 60-year lifetimes, and natural gas generating plants have 30-year lifetimes, it was necessary to assume that the first gas unit (Unit 1) was retired after 30 years and a second unit (Unit 2) was constructed. Other Key Assumptions are shown in Table 1 below. Assumptions used for the risk assessment study are shown in Appendix B.

The results are shown in Figure 1 and 2, below. Figure 1 shows that the expected levelized generating cost of nuclear power over its 60-year lifetime to be about $87/MWh (all figures are in 2012 dollars). There is a 5% probability that the actual realized generating cost will exceed $99/MWh and a 5% probability that the realized generating costs will be below about $77/MWh. Stated equivalently, there is a 90% probability that the realized generating cost will be between $77/MWh and $99/MWh - a range of $22/MWh.

Figure 2, is the same comparison for a high efficiency natural gas plant using a combined cycle technology (and including a carbon tax). Because a second natural gas unit was assumed to be constructed after 30 years, this, introduces the prospect of the second plant having a higher capital cost than the first unit. This was accounted for by assuming that that the capital cost of a natural gas plant grows by 2% per year (in real dollars).

In the case of natural gas the expected value of generation is about $84/MWh, lower than for the nuclear plant. However, the range of uncertainty is higher for the natural gas plant. In this case the 90% probability range is over $38/ MWh, or nearly twice the range of the nuclear plant. This is the result of the volatility of natural gas over a long time frame and implies a greater investment risk if a natural gas plant is chosen over a nuclear plant (as will be discussed below).
This is one key result for this study; but perhaps more important, not only is the investment risk higher, all the risk occurs after the build decision is made. Thus, natural gas plant investors are in the position of having to manage fuel and potential environmental compliance costs for 60 years after the plant is constructed. To illustrate this point more dramatically, Figure 3 shows the risks associated with a nuclear plant in the post- build decision period. The uncertainty range now has been reduced to about $4/MWh, which represents the risk of nuclear fuel cost increases. The reason for this result is that nuclear fuel costs comprise only about 10% of the levelized cost of generating electricity from a nuclear plant. For natural gas, the cost of natural gas comprises 60% or more of the levelized generating cost.
From an investor's standpoint all the risk of a nuclear plant is in the build decision and can be managed with contractual arrangements between investors and the plant suppliers before any major costs are expended. Unlike the previous generation of nuclear plants which experienced significant cost overruns due to a flawed licensing process (particularly following the Three Mile Island nuclear accident in 1979) and led to major rate implications for electric utilities bearing the financial risk, arrangements in today's nuclear markets place the majority of risk on the plant supplier, providing investors with greater certainty about final construction costs they will bear. In addition, there is a new US licensing process that combines the construction and operating license into a single process, further enhancing investor security.
This brings into play the ultimate risk management tool: withdrawal or delay the project. As a risk management tool this option is unavailable to natural gas plant investors as nearly all the risk occurs after plant construction costs are sunk.

Table 2, below illustrates typical results obtained using only the static (non-simulated) LCOE.2 There are two columns for natural gas, showing the costs both with and without environmental compliance costs - in this case a $25/ton CO2 carbon tax beginning in 2020. This chart clearly shows the tradeoff between capital costs and variable costs (fuel and environmental compliance) between nuclear and natural gas plants. But more important, it illustrates the risks of relying on static LCOE results. The contrast between the risk-adjusted results in Figures 1 through 3 and the point values of results in Table 2 is stark. It is particularly dangerous when making generating technology decisions owing to their dependence on a commodity with a market-derived price over a very long time. This is particularly true for natural gas exposed to not only supply and demand; but also the potential for climate change initiatives directed at carbon-emitting fuels.

The price of natural gas delivered to US electric utilities in 2012 was approximately $4.35/mmbtu. However, this price is unsustainable as it is below the average cost of producing shale gas - currently the major source of new drilling in the US-estimated at between $5-8/mmbtu4. While the prospects that shale gas will extend the supply of natural gas are positive, like any commodity the cheapest and most easily mined supply will be produced first. Further, LNG facilities in the US, once constructed to import LNG, are being converted into export facilities as natural gas prices measured in US dollars are as high as $16.50/mmbtu in Japan and $9.00/mmbtu in the UK5

A single metric can be useful in summarizing these results - the coefficient of variability (COV). The
coefficient of variability is defined as

The coefficient of variability measures the amount of risk (standard deviation) that an investor has to
bear in order to get the expected levelized costs (mean). The higher the coefficient of variability, then,
the riskier is the project to investors. The COV results for the cases described above are shown below in
Figure 4. As shown, nuclear power represents a significantly smaller financial risk relative to natural gas,
and particularly so after construction.

It may be argued that decommissioning also represents a higher risk for investors in the case of nuclear power. However, this is already accounted for in Figures 1 and 3, and moreover, investors have possibly up to 80 years before the decommissioning decision must be made-resulting in an annuity that is easily managed. These results are being validated in real life. In March, 2012 the US Nuclear Regulatory Commission awarded combined construction and operating licenses (COL) to two privately-owned nuclear plants in the Southeast US: the Vogtle 3 & 4 units owned by Southern Company and the Summer 2 & 3 units owned by South Carolina Electric and Gas. (First nuclear concrete has recently been poured for Summer 2 and Vogtle 3.) Both utilities obtained regulatory approval from their respective state regulatory bodies, largely on the basis of fuel diversity. It was precisely a reluctance to develop additional gas resources on the very basis that it left both companies vulnerable to increased fuel and regulatory compliance costs that was instrumental in choosing nuclear-in spite of considerable opposition from parties opposed to nuclear power. While coal would have been an option, both utilities already have substantial coal capacity and there is warranted anticipation that coal will be increasingly targeted by the US Environmental Protection Agency for stringent emissions controls, including, potentially, controls on CO2 emissions. A third utility-Florida Power and Light-is likely to also be granted a COL for the construction of Turkey Point 5 & 6, and FPL has made exactly the same fuel diversity case to the Florida Public Service Commission. All of these regulatory agencies feel strongly enough that nuclear power is essential that they granted the utilities the ability to place their construction costs in the rate base for recovery prior to actual plant operation-a first for U.S. electric utilities.

In conclusion, while natural gas currently has lower generating costs, there is a significantly higher investment risk in natural gas that does not appear to be reflected in the current "bandwagon effect" that natural gas is enjoying owing to very low current natural gas prices and no environmental compliance

Appendix A: EnergyPath Market Model (EPMM)
The EnergyPath Market Model (EPMM) is an Excel-based valuation model which financially simulates the preconstruction development, licensing, construction, operation and decommissioning of an electric generating plant. The model also performs levelized cost of electricity (LCOE) calculations. For this study the model was configured to simulate both nuclear and natural gas plants over a 60 year lifetime. The model incorporates Crystal Ball© risk simulation software6. A diagram of EPMM's modules is shown in Figure A-1 below.

Appendix B EPMM Simulation Model Key Assumptions
Figure B-1 shows the data used in the EPMM simulation model for the nuclear plant (Figures 1 and 3).

Figure B-2 shows the simulation model data used for the natural gas plants (Figure 2).

Finally Figure B-3 provides financial data used in both the nuclear and natural gas comparisons.


1 Levelized costs are useful as comparisons of costs between generating technologies. They can be thought of as the equivalent annual cost incurred over the life of the generating technology having the same present value as actual costs which differ from year to year.
2 By "static results" it is meant that EPMM used only deterministic input and did not run in the simulation mode. For instance a single capital cost was used instead of a probabilistic capital cost. When EPMM is in simulation mode it draws a sample from the probabilistic capital cost input (and all other probabilistic inputs) and calculates an LCOE for each simulation. The LCOE output is thus probabilistic also.
3 Includes both sales taxes and income taxes
4 See, for example, Berman, A.E. and Pittinger, L.F., "US Shale Gas: Less Abundance, Higher Cost", The Oil Drum (, August 5, 2011. Berman and Pittinger contend that the breakeven cost of shale gas is currently between $5-$8/mmbtu and that production from shale gas wells is declining faster than predicted.
5 BP (British Petroleum), "Energy Outlook 2030, Statistical Review of World Energy 2012", Natural Gas Prices
6 Crystal Ball© is a product of Oracle Corporation (

Content Discussion

Ferdinand E. Banks's picture
Ferdinand E. Banks
I gave a brilliant lecture in Milan a few years ago on Electric deregulation, and a mover and shaker from MIT gave a Power Point gig later on the same subject, The result was that everybody congratulated me on my lecture, and nobody congratulated him, and the reason was that he had taken an easy subject and made it difficult.

That's what we have here. The model is too complicated and it needs to be slimmed down.. Can I prove it? Oh yes, if a lot of Money canged hands. You see, I start out with what I consider to be the answer. Another mover and shaker in the US gave the cost of a 1000 MW nuclear facility as 4 billion to 9 billion dollars. That's math, but economic logic tells me that that means between 4 and 5 billion, and in the long run probably close to 4-. ...

Len Gould's picture
Len Gould
Good article, interesting presentation.

A neat thing about this topic is that the stronger one argues on one side or the other (nuclear or gas) the more likely you are to be wrong. For instance, if anti-nuclear people get really active, and shut down a lot of otherwise rational nuclear generation, that capacity will likely be replaced by gas generation, meaning a bunch of gas consumption will happen which didn't otherwise make economic sense, meaning the price of gas will skyrocket (what was that Japan price again?) meaning a lot of unhappy activists at billing time. Likewise for anti-fracking lobbyists. Shut down gas plant construction significantly, and a bunch more nuclear gets built ... could nuclear fuel prices become significant?

Well, after re-reading that, I'm thinking maybe I should delete. But was so much work to type;<]

The main thing is that people should think hard about where they're going else they might end up somewhere else. (credit Lawrence Peter "Yogi" Berra)

Harry Valentine's picture
Harry Valentine
What is the future long-term cost of natural gas? Answer - unknown. At the present time, present economics favours the natural gas option. Nuclear is a long-term option . . . and thorium-nuclear power would be a possible future option.

Natural gas can compliment rather than compete with low-temperature nuclear conversion that produces saturated steam . . . . natural gas can superheat the steam and raise power plant efficiency. Off-season nuclear thermal energy (superheated by natural gas) can be pumped underground, courtesy of research by Dr Forsberg's team at MIT and also courtesy of research by ISENTROPIC ENERGY of the UK. During peak season, stored high-temperature geothermal energy can drive turbines and generate electric power.

While the figures for natural gas power shows an economic advantage during peak season operation, natural gas power plants could sit idle during the off-season. The combination of nuclear power PLUS seasonal energy storage will change the long-term economics of nuclear power . . . including nuclear power that uses natural gas for super-heating

Michael Keller's picture
Michael Keller
It is unclear why the assumption is made to build a 2nd combined-cycle unit at year 30. Relatively easy to simply upgrade (change-out) 1st unit components as needed if components wear out. This materially alters the analysis.

It is not clear if both nuclear and combined-cycle units operate at the same capacity factor. If not, that materially alters the analysis. Also, with the increasing use of renewable energy, "base-load" assumptions are becoming increasingly unrealistic. The nuclear unit, with the very high capital component, is particularly hard hit by the need to reduce load to support renewable power.

The primary risk to nuclear is the cost of construction. The assumption that the risk can be "managed" is not supported by recent new builds (Finland, France), at least in regions other than China. This materially affects the analysis.

There is no chance of a carbon tax ever being levied in the US.

Running a somewhat similar type of analysis, with the assumption of no escalation and identical capacity factors of 85%, yields the following expected LCOE values: nuclear ~$85/MWh; natural gas ~ $55/MWh.

As the price of natural gas is essentially a pass-through, the only folks really at risk are the ratepayers, not the investors. By contrast, the investors in nuclear plants are at great risk because the capital cost is so high. A simple contrast between the US market price of power and the required billing price from a new nuclear unit demonstrates that the risk is immense. The same comparison with a new natural gas plant reveals a significantly less cost differential and corresponding level of investment risk.

Ferdinand E. Banks's picture
Ferdinand E. Banks
Michael, the business in Finland is wonderful. Take my Word for it. The new nuclear facility was supposed to cost 5 billion, but the price ended up at 8 billion, and maybe 8+ billion. So what! Areava had to eat Everything over 5 billion, or so I was told.

So I was told, but I didn't investigate. You see, I understand the thinking of our Finnish friends on this. Eventually gas will pass, but nuclear will be on line all the time. With Russian gas on one side, and Norwegian gas on the other, the Finns chose nuclear. Exactly what I would have done, because if you look at the statistics, the Finns may be the best educated people in the World.

Michael Keller's picture
Michael Keller
If I was Finnish, I would not opt for Russian natural gas either, under any circumstances. The economics in Finland support nuclear, but not natural gas. The situation is quite different in the US, with the economics of natural gas much better than nuclear for 5 to 10 or so years.
Ferdinand E. Banks's picture
Ferdinand E. Banks
Now you are going to hear something that you don't want to hear, Michael. Energy is too important to be left EXCLUSIVELY to the private sector. Please note the Word beginning with E.
Michael Keller's picture
Michael Keller
So we should rely on leftist ideologues in the government instead? Like hell.

The marketplace is more than capable of sorting out the dumb from the smart, if given reasonable latitude. By contrast, the ponderous government has a remarkable ability to pick losers.

Malcolm Rawlingson's picture
Malcolm Rawlingson
Interesting article but being a humble nuclear engineer I prefer a much simpler analysis. Electricity will be required for the foreseeable future. I cannot envisage a modern society without it.

Therefore the fuel we choose to make the electricity with must last for the foreseeable future.

It seems to me that the only fuel that can last that long (several hundred years out) is Uranium. We will almost certainly be out of oil by then. Likely out of gas and getting low on coal. So then what do we do. Well the Sun will still be shining and the wind will still be blowing but both will suffer from the same problems as they do now. That leaves Uranium and Thorium. And maybe by that time fusion but I would not bet the farm on that happening any time soon.

So we might as well get used to the idea of large scale nuclear plants. If not we will have to get used to the idea of living back in the dark ages.

Seems obvious to me. I don't need any analysis to tell me what is staring the world in the face.


Chris Wiegand's picture
Chris Wiegand
Michael Keller: Did your analysis use the rest of the table two data? I ask because something doesn't seem right with the data; e.g. if we remove the capital cost then nuclear is significantly cheaper but in the real world existing nukes can't compete with gas. That is, it has been reported that the Kewaunee, Vermont Yankee, and Clinton plants are losing money because they can't compete with gas fired plants at the current low gas rates. Note that these plants have essentially no capital costs because they were bought in the late 90's for essentially nothing by fleet owners.
Michael Keller's picture
Michael Keller
Chis, Our Pro Forma analysis for a large new nuclear plants suggests a "debt-free" power price of around $65/MWh (90% capacity factor), while a debt-free natural gas combined-cycle plant would be around $45/MWh ($5/MMBTU gas).

Power prices from the referenced single-unit, older smaller nuclear plants are actually above the average market prices in the regions where the plants are located. These plants are basically "independent power producers" that sell into the wholesale market but power market prices are quite depressed due to depressed demand caused by the dismal economy. Nighttime power prices actually approach single digits in many parts of the Midwest. That means a major loss for a good part of a typical 24 hour period because the nuclear units cannot reduce power very easily at night. Low-gas prices are a consideration, but more likely a secondary affect.

Older larger multi-unit nuclear plants have much lower embedded fixed costs and are much more able to compete.

Ferdinand E. Banks's picture
Ferdinand E. Banks
"The ponderous government has a remarkable ability to pick losers" .

You mean like the American Navy and Air Force during WW2? The people who pick the losers are the American voters, by which I mean those two Beautiful choices Bush and Obama. But you see, one day there will be someone in the White House who can add and subtract, and when that day comes we might...might get the energy assets we deserve and need.

Michael Keller's picture
Michael Keller
The US government did not win World War II. Private industry armed our sailors, soldiers, marines and airmen. Those folks, with a big assist by everyday Americans, won the war. The folks are the ones who will drop-kick the elitist political class over the stern.

As for energy, the US does pretty well, in spite of the clowns in Washington trying to tell everybody what to do.

Chris Wiegand's picture
Chris Wiegand

Thanks for your reply. Does your $65 per MWh have the same percentage of costs as the article (with capital removed)? That is, I found it incredible that taxes almost beat O&M as the highest cost component. Also, what gas price does your analysis show for equivalence between nuclear and gas?

Ferdinand E. Banks's picture
Ferdinand E. Banks
I'm sorry, Michael, but I'm too smart to Believe that - Everything considered - private industry did what they should have done during WW2, and probably not during any other war for that matter. All I need to do is to Think about the slow development of the Pershing tank to know that, or for that matter the failure to to put the right gun in the Sherman. I mean, even the English and your friends the Russians figured out that the US version of the Sherman was a dog, and made the necessary adjustments..If they hadn't made those adjustments it's quite possible that Heisenberg would have figured out that an Atomic bomb can be produced in a gourmet kitchen, and the rocket that the Germans were designing for giving New York a surprise would have have been ready by summer or fall of 1945. If I remember correctly, that rocket was called the New York Rocket..

At the same time I'm willing to buy your argument that Washington is filled with clowns, and I'm not talking about the monkey business going on now. First Bush, and then Obama - just how much do we normal Americans have to be insulted.

Michael Keller's picture
Michael Keller
Chris, All our analyses do not include an allotment for income taxes but do include an allotment for local taxes (fixed % of plant capital cost) and a 10% return on invested equity. For the debt burdened case, we predict a natural gas price of $15/MMBTU for a new nuclear plant to achieve parity with a new natural gas plant. Debt free case is $10/MMBTU. Mike
Michael Keller's picture
Michael Keller
... well the Sherman tanks, Hellcat tank destroyers and soldiers did win the battles and the Germans lost.
Ferdinand E. Banks's picture
Ferdinand E. Banks
I've read about and Heard a lot of criticism of the American Army, but I disregard it because a lot of that criicism is hooey. But this business about the Sherman tank is fundamental because of the lies and misunderstandings about nuclear energy. My economics tells me that when the US Heard about the superiority of the German Panther tank they would have immediately done the same thing that the UK did and put a better gun in the Sherman, and rushed production of the Pershing. They did neither.

Where nuclear is concerned, if it is really true that it is possible to produce a 1000 MW facility for between 4 and 9 billion dollars, then industry in the United States of America would have been told to aim for 4 billion instead of listening to fools talking about 9 billion, and if necessary the government would help. By that I mean that they would help engineers like you and NOT the guys who got booted out of engineering school like me (even though Fred was first in a few of his engineering classes later on.).

Dasari Rao's picture
Dasari Rao
Michael Keller. In my humble opinion this is a very important topic and should be discussed as such. So, lets get back to numbers. In this what I consider a good probabilistic analysis, Graber and Retson provided their cost basis and LCOE for two options. Out of curiosity I compared them with DOE NETL analysis. While natural gas LCOE of Graber and Reston is slightly higher, it appears to be in the reasonable range; My opinion is that DOE NETL 2010 study didn't capture electrical distribution costs or taxes effectively. Given the transparency of this study, I can always adjust the numbers and recalculate LCOEs for nuclear and gas. I would be much obliged if you could list which of the cost assumptions you disagree with and perhaps provide your proposed value. That way we can have an informed set of discussions (sort of apples to apples comparison). Thanks.
Malcolm Rawlingson's picture
Malcolm Rawlingson
Thanks Dasari. Good post and I agree with what you say but only if that logic is applied short term. long tem the logic falls apart. Here is why.

The price of natural gas in the future (and therefore whether it will remain competitive with nuclear) is dependent upon a set of assumptions.

The first assumption is that North American produced natural gas can not be exported. Currently that is true. It, unlike coal or oil - or Uranium for that matter, is constrained within the continent in which it is produced. It is this fact that causes the price of North American gas to be the lowest in the world at the present time. We only have a glut of the stuff because production is high and relative demand is low. World demand is high. This assumption goes out of the window when LNG facilities currently under development start to remove supply out of North America in LNG tankers to markets eager to take it. China, Japan and Europe come immediately to mind.

In Europe the demand for North American natural gas exists because currently the continent is heavily dependent upon Russian produced gas...a situation that is politically awkward to say the least - especially when GazProm like to use it as a political tool. European politicians while eagerly denouncing shale gas exploration in their own countries would be only too delighted to get it from friendly North America by the tanker load.

In Japan with all its nuclear plant currently out of service the country is importing all the LNG it can lay its hands on.

Similarly with China where city smog is becoming politically unacceptable.

So when that assumptions ceases to have validity in the economic argument the price of natural gas in North America will increase as Asia and Europe start to draw large quantities of gas as LNG from the system. That is about to happen and is the reason why fortunes will be made by those who understand where the North American price is going. And ..... here is a is not down.

The second assumption is that shale gas wells keep producing at the same rates as they are now and akin to that whether public opposition to the development of shale gas increases. There are already worrying signs of that opposition now as well as concerns by industry insiders that current production rates cannot be sustained.

So two key assumptions must continue in order for North American natural gas to remain at historically low prices. I see all the signs that both of these assumptions are incorrect.

A third assumption is that natural gas is not traded as a world commodity. Currently it is only traded continentally and there is no world commodity market for LNG. That is most certainly going to change and once it does LNG will be traded in the same or similar way as oil is now. Today it does not matter much whether North American oil is cheaper than that produced in Saudi Arabia. The price paid is the world price set by WTI and Brent oil prices. Should the same occur with gas the price will be the world price and that is far higher than we pay here in North America.

Therefore when these three cornerstones of price start to fall apart the price of North American natural gas will increase.

Then nuclear power will look like a bargain - which of course it is.

Taking the longer term view of course the only feasible long term (next 2-300 years) energy source is Uranium. When coal oil and natural gas are burned up we will have to keep our lights on with Uranium.

To those with their energy blinkers on there really is no choice. We either face that fact now or face it later but sooner or later the obvious will become obvious