The future of nuclear power

May 2, 2008

CBO issued a study today examining possible future private investment in new nuclear power plants. The extent of such investment depends not only on possible charges for carbon dioxide (if the Congress adopts climate change legislation) but also on existing incentives provided for such plants in the Energy Policy Act (EPAct) of 2005.

The Energy Information Administration (EIA) projects that demand for electricity in the United States will increase by 20 percent by the end of the next decade. Most of the additional demand would likely be met by conventional fossil-fuel technologies without the incentives in EPAct or the prospects of a market price on carbon emissions.

  • Carbon dioxide charges of about $45 per metric ton would probably make nuclear generation competitive with conventional fossil fuel technologies as a source of new capacity and could lead utilities to build new nuclear plants that would eventually replace existing coal power plants. At charges below that threshold, conventional gas technology would probably be a more economic source of baseload capacity than coal technology. Below about $5 per metric ton, conventional coal technology would probably be the lowest cost source of new capacity.
  • EPAct incentives would probably make nuclear generation a competitive technology for limited additions to base-load capacity, even in the absence of carbon dioxide charges. However, because some of those incentives are backed by a fixed amount of funding, they would be diluted as the number of nuclear projects increased; consequently, CBO anticipates that only a few of the currently proposed plants would be built if utilities did not expect carbon dioxide charges to be imposed.
  • Uncertainties about future construction costs or natural gas prices could deter investment in nuclear power. In particular, if construction costs for new nuclear power plants proved to be as high as the average cost of nuclear plants built in the 1970s and 1980s (adjusted for inflation), or if natural gas prices fell back to the levels seen in the 1990s, then new nuclear capacity would not be competitive, regardless of the incentives provided by EPAct. Such variations in construction or fuel costs would be less likely to deter investment in new nuclear capacity if investors anticipate a carbon dioxide charge, but those charges would probably have to exceed $80 per metric ton in order for nuclear technology to remain competitive under a scenario with high construction costs and low natural gas prices.

The study was written by Justin Falk of our Microeconomic Studies Division.