Keywords

1 Introduction

In China, the nuclear power plant (NPP) is regarded as an independent legal entity in the economic evaluation of commercial NPPs, and the on-grid electricity price, an important indicator of the economic feasibility of the NPPs, is calculated on the basis of investment in total capital cost, power generation cost and benchmark internal return rate. The economic evaluation is based on the Economic Evaluation Guidelines of the Nuclear Power Plant Construction Project (NB/T20048–2011) (hereinafter referred to as the "NB"), which was released in 2011. Nevertheless, significant changes have taken place in domestic power market policy, actual operating cost of NPPs, the business environment of the external nuclear power market, the safety standards and the technical approach of NPPs since its release 10 years ago. Therefore, the gaps open up the room for research on how can current economic evaluation further contribute to the scientific decision-making in investment, rational resource allocation, and sound development in the whole chain of nuclear power industry.

In addition, the industry standard NB focuses on guiding studies on the economic feasibility of NPPs. However, with regard to the commercial NPPs, the shareholders, shareholders of listed companies with the long-term development plan at heart in particular, are more concerned about the internal rate of return of all parties involved, while the general contractors pay more attention to the investment of total capital cost per kilowatt and the construction units lay emphasis on whether the project can be approved. The analysis on different schemes can be conducted through scientific economic evaluation, serving as solid data support for all parties, and the results can provide insight in understanding the gap between the theoretical and actual benefits of the project, the allocation options for subsequent development, and the range of maximum total capital cost per kilowatt within the project budget.

2 Limitations of the Current Economic Evaluation Model for Pressurized Water NPPs

On the one hand, NB was officially released in 2011, and the calculation parameters, criterion parameter and boundary conditions in its appendix were in consistent with the market environment and industry expectations before finalization. However, the capital cost and expected revenue based on the market environment at that time is vastly different from the current one. On the other hand, NB was compiled mainly based on the data of Generation 2+ NPPs that were widely built and operated in China, without taking into account the advanced design, the differences in generation costs between the Generation 2+ and Generation 3 NPPs and the actual cost of NPPs in recent years. Furthermore, the existing NB model lacks the in-depth research and analysis on the cash flow planning including financing, loan repayment, and corporate dividend of the whole project, and the evaluation system takes the on-grid electricity price measured by the capital benchmark rate of return as the main indicator, excluding the rate of return of the investment of all parties, which is more closely related to the investors.

2.1 The Background of NB Release

China’s electricity pricing mechanism has undergone a series of changes since the reform and opening up, evidenced by a number of relevant policies implemented, such as the repayment of capital with interest (RCI pricing), “price pegged to the increase in transportation” and “operating price” since 1985. Before 2013, nuclear power on-grid electricity price varies among different generating sets based on compensation costs and reasonable revenue, and against which background the NB was compiled and released.

2.2 The Applicable Analysis of NB to the PWR Reactor Types

The NB regulates that it is suitable for the economic evaluation of PWRs and the economic evaluation of other nuclear facilities could refer to this standard. However, this standard does not clearly indicate the reactor types which are applicable to this standard and there is also no content stating about the relationship between the evolvement of PWR nuclear technology and its applicability to this standard.

The formulation of NB is mainly based on the economic parameters and data of the Generation 2+. The effects of technical innovation on economic evaluation methods and parameters are not considered in current NB. Therefore, the methods and parameters in this NB could not objectively and comprehensively meet the demands of economic evaluation for current PWRs, especially for the third generation PWRs.

2.3 Analysis of Macro-economic Environment Change for Nuclear Power Enterprises

Compared with the year 2011 when the NB was published, the market environment regarding the fund cost and expected returns has changed significantly. From 2010 to 2019, the interest rate under macro-economy had been declined obviously. Under the current economic environment, the internal rate of returns for the capital fund could decrease to 7%–8% while the rate of returns for investors could decrease to 6%–7%.

2.4 Analysis of Business Environment Change for Nuclear Power Enterprises

Compared with the year 2011, the business environment of nuclear enterprises has changed obviously. Due to the higher safety requirement, the project cost of the third generation PWRs has increased. Meanwhile, against the backdrop of benchmark tariff reduction, power market revolution, weakened fiscal and tax support, the nuclear power enterprises are under huge business difficulties. For instance, the power generation capability of some nuclear reactors is compared with their full capacity, posing risks to the business operation of nuclear enterprises. Moreover, with the successive increase of transected electricity, NPPs in certain regions participate in the annual bidding transaction, monthly bidding transaction, straight-powered protocol for large users and trans-provincial and trans-regional power transaction, facing dual pressure from both declined planned electricity and market bidding.

Economic evaluation based on the NB would deviate from actual circumstances. The actual operation time of Generation 2+ far exceed 7000 h and operation costs are much higher than the regulations in NB, resulting in higher electricity price. Moreover, actual fiscal and tax policies also have minor differences with NB. As for the third generation, its economics are facing risks in terms with both power generation and electricity price. Thus, to accurately evaluate the economics of the Generation 3 NPPs, it is imperative to focus on the rationality and accuracy of economic evaluation methods. Under the background of declined interest rate, the return rate could be further decreased. NB regulates that the pre-tax benchmark return rate before financing is 7% and the after-tax benchmark return rate after financing is 9%. The above-mentioned return rates could be lowered. Besides, more concentration could be paid to financial internal return rate of investors, which is the core concern of investors. The financial internal return rate of investors is advocated as a core parameter in this study and it could be further optimized to 8%–10%.

2.5 Limitations of Current Financial Evaluation for PWRs

  1. (1)

    Economic indicators

Based on the financial evaluation of PWRs with different Under the hypothesis of identical internal return rate, the on-grid electricity price of PWRs with different power show large disparity. Moreover, there is no significantly linear relationship between power generation cost and on-grid electricity. Focusing on the on-grid electricity price and capital internal return rate in economic evaluation would result in the overlook of other economic indicators. Therefore, apart from the internal return rate and on-grid electricity price, we should also concentrate on the power generation cost and payment schedule, achieving more precise and comprehensive economic analysis.

  1. (2)

    Cost control in the whole life period

According to the feedback from NPPs, the actual operation cost has increased, exceeding the parameters regulated in NB. Specifically, cost from uranium mining, conversion and separation is higher than the international market, resulting in high cost of nuclear fuels. The increase of nuclear fuel cost and operation and maintenance cost counteract the advantages of investment decline brought by the batch production of Generation 2+ and design maturation of HPR1000. Therefore, apart from the investment control, we should focus on the cost from the period of both construction and operation. Operation and maintenance cost as well as nuclear fuel cost should be supplemented as auxiliary indicators in the future economic evaluation of PWRs.

  1. (3)

    Indicator discordance with practice

In financial evaluation, the table of capital cash flow is formulated based on designated either on-grid electricity price or capital internal return rate. Common practice is to designate capital internal return rate as 9% and evaluate the on-grid electricity price, thus evaluating the feasibility of the on-grid electricity price of specific NPPs. However, investors pay more attention to dividend distribution and there exists large uncertainty with capital internal return rate as the only economic indicator.

3 Optimization of Economic Evaluation Model

In the future, the financial evaluation of NPPs should be transformed from the single indicator to multi indicators. Currently, focusing only on the on-grid electricity price and capital internal return rate would lead to incomplete analysis of economics of NPPs and simultaneously controlling multiple indicators is conducive to achieving comprehensive economic evaluation of NPPs. For instance, cost control should be expanded from construction to the whole life period of NPPs, including operation and maintenance. Table shows advocated multi indicators in future economic evaluation of NPPs (Table 1).

Table 1. Proposed multiple indicators for optimized model
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4 Preliminary Research on the Cost of Power Generation of HPR1000

Cost of power generation is the basis of on-grid electricity price evaluation. Because the FOAK reactor of HPR1000 has only operated for 2 years, the data for the cost of operation and maintenance is not thorough. Thus, this study only conducts preliminary research on the cost of power generation of HPR1000. Differences of operation and maintenance cost between HPR1000 and the Generation 2+ result from their technical differences.

Cost of materials consumed during operation includes expense from nuclear fuels, chemicals, water and electricity. Water consumption difference between HPR1000 and the Generation 2+ is clear but the quantity of other materials consumed in the operation of HPR1000 is still unclear. Standard of material expenses for HPR1000 should be identified based on the practice of the Generation 2+ and the in-service HPR1000. The cost for each staff of HPR1000 and the Generation 2+ should be the same, but the staff quota of HPR1000 should be modified based on actual situation. Maintenance of NPPs includes general overhaul and routine operation and maintenance. General overhaul planning is related with the type of nuclear reactors. Correspondingly, the expense of general overhaul is also different for each type of reactor. With the progress of science and technology as well as the management of power plants, the repair fee rate should be declined. Boasting with higher design standard, the repair fee rater of HPR1000 could be decreased from 1.35% to 1.2%.

Life period is one of major differences between the Generation 2+ and the HPR1000. The life period of the HPR1000 is 60 years, which mainly influences the design of major equipments. Since the capital cost is low in today’s market, a shorter payback period is conducive to sustainable bonus distribution. Therefore, adopting 20 years as depreciation period is still feasible in the economic evaluation of HPR1000.

Based on the comparative analysis and advanced design concept, we estimated the power generation cost of HPR1000 after optimization of depreciation period and repair fee rate. We estimated the power generation cost and on-grid electricity price based on the total capital cost of 37.75 billion RMB and the capital internal return rate of 9% (Table 2).

Table 2. Cost composition of HPR1000
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5 Financial Evaluation of HPR1000

Based on the above-mentioned optimization clue, we formulated 8 schemes to analyze the economics of HPR1000 under each condition.

5.1 Scheme Estimation

  1. (1)

    Original Scheme (Option 1)

The power generation cost, on-grid electricity price, and the rate of return for all parties were calculated at the total capital cost of 37.75 billion RMB, 1.35% rate of general overhaul cost, depreciation period of 25 years and capital return rate of 9%. The long-term loan is reimbursed by deducted VAT, refunded VAT, depreciation, amortization, and undistributed profits for repayment in order, and cash for circulation will be used to repay short-term loans annually. Dividend will be distributed under the condition of guaranteed loan repayment in the form of cash. The dividend distribution ratio is as follows (Table 3).

Table 3. Average dividend distribution ratio of option 1
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As seen from the table, in the first five years after the unit is put into commercial operation, the ratio of cash dividends to distributable net profit is 0, suggesting that there will be no dividend in the first 5 years, and the trend continue till the 6th year; from the 6th to 10th years after the operation, the average distribution ratio of annual dividend is 15%, which is still far below the value proposed by the listed company (30%); from the 11th to 15th years, the average distribution ratio of annual dividend is 65%, and the full allocation can’t be achieved until 17th year. The dividend distribution is so conservative that the listed company’s investment in new projects and its rolling development get impeded.

  1. (2)

    Base Case (Option 2)

The total capital cost, power generation cost, and investment return of all parties were retrodicted with 1.35% general overhaul rate, depreciation period of 25 years, capital return rate of 9%, and the on-grid electricity price, which was calculated according to that of the benchmark local thermal power desulfurization and denitrification. The arrangement of cash flow and dividend is similar to the Option 1 in nature with comparable annual dividend distribution ratio.

  1. (3)

    General overhaul Scheme (Option 3)

The total capital cost, power generation cost, investment return of all parties were retrodicted with 1.2% general overhaul rate, adjusted from 1.35% according to the estimated quota of annual overhaul expense and fixed assets, depreciation period of 25 years, capital return rate of 9%, and the on-grid electricity price calculated according to that of benchmark local thermal power desulfurization and denitrification. The arrangement of cash flow and dividend is similar to the previous case in nature with comparable annual dividend distribution ratio.

  1. (4)

    Depreciation Scheme (Option 4)

The total capital cost, power generation cost, investment return of all parties were retrodicted with 1.2% general overhaul rate, depreciation period of 20 years, capital return rate of 9%, and the on-grid electricity price calculated according to that of benchmark local thermal power desulfurization and denitrification. The arrangement of cash flow and dividend is similar to the previous case in nature with comparable annual dividend distribution ratio.

  1. (5)

    Rate of return Scheme I (Option 5)

The option 5 is to adjust the order of cash flow, the dividend distribution and repayment scheme. The total capital cost and power generation cost were retrodicted with 8% of capital return rate and 9% of return rate of all parties, considering low loan interest rate for the rolling development of the company. Combining the study of the dividend distribution of the listed companies with the research on the dividend of NPPs, the arrangement of cash flow is as follows.

Cash dividends for shareholders are guaranteed at a certain amount, and the rest is repaid to long-term loans in the order of deducted VAT, refunded VAT, depreciation, amortization, and undistributed profits remained after dividend. The short-term loan will be used to compensate for the long-term loan that could not be covered by dividend and repayment. The corresponding dividend distribution plan is that there will be no dividend in the first two years after commercial operation, 860 million RMB per year from the 3rd to 7th year, 1.2 billion RMB per year from the 8th to12th year, and full percent of the profit from the 13th year onwards through the subsequent operation.

  1. (6)

    Rate of return Scheme II (Option 6)

The dividend distribution and loan repayment scheme is adjusted in option six, while other parameters remain the same as Option 4. The total capital cost and power generation cost were retrodicted with 8% of capital return rate and 10% of return rate of all parties. The slight changes in the cash flow and the corresponding dividend distribution can be found in comparison with Option 5. There will be no dividend in the first two years after commercial operation, 1.08 billion RMB per year from the 3rd to 7th year, 1.66 billion RMB per year from the 8th to 12th year, and full percent of the profit from the 13th year onwards through the subsequent operation.

  1. (7)

    Rate of Return Scheme III (Option 7)

The dividend distribution and loan repayment scheme is adjusted in option seven, while other parameters remain the same as Option 4. The total capital cost and power generation cost were retrodicted with 7% of capital return rate and 9% of return rate for shareholders. The slight changes in the cash flow and the corresponding dividend distribution can be found in comparison with Option 5. There will be no dividend in the first two years after commercial operation, 1.03 billion RMB per year from the 3rd to 7th year, 1.4 billion RMB per year from the 8th to 12th year, and full percent of the profit from the 13th year onwards through the subsequent operation.

  1. (8)

    Rate of Return Scheme IV (Option 8)

The dividend distribution and loan repayment scheme is adjusted in option eight, while other parameters remain the same as Option 4. The total capital cost and power generation cost were retrodicted with 7% of capital return rate and 10% of return rate for shareholders. The slight changes in the cash flow and the corresponding dividend distribution can be found in comparison with Option 5. There will be no dividend in the first two years after commercial operation, 1.31 billion RMB per year from the 3rd to 7th year, 1.6 billion RMB per year from the 8th to 12th year, and full percent of the profit from the 13th year onwards through the subsequent operation.

5.2 Results and Comparative Analysis

  1. (1)

    Estimation results

Table 4 shows the results of power generation cost and its composition for each scheme while Table 5 demonstrates main indicators.

Table 4. Estimation of power generation cost
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Table 5. Estimation of main indicators
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  1. (2)

    Comparative Analysis

Based on the results of the above options, it can be concluded that the rate of return of shareholders from all parties and the total capital cost per kilowatt increase by modification of power generation cost of the base case in the model and optimization of cash flow with current low interest rate under the condition that the on-grid electricity price and energy being the same, i.e. the same revenue from electricity sales.

The model enables shareholders to prepare for the rolling development of the company and invest in new projects from a long-term perspective. In addition, as the total capital cost of projects gradually increase, the general contractor can better allocate its resources against background of mounting investment in the Generation 3 NPPs by diverting premium resources to design, construction and procurement, which will in turn benefit the owner. The optimization that attaches more importance to the whole life cost of the project rather than limited to the investment in the total capital cost can be more conducive to the sustainable development of the entire nuclear power industry.

It can be concluded that the yield of the plant can be further increased with the same construction investment. Meanwhile, the project can endure higher construction investment under the condition of the same or even higher yield, urging relevant units to apply higher safety standards to improve the safety and reliability of the plant. Based on the current market environment and operating practice of dividend strategy of groups including China National Nuclear Corporation (CNNC), it is recommended that Option 6 can generate stable shareholder yield and total capital cost per kilowatt. Finally, the risk resisting capability of nuclear units is lifted.

6 Conclusions

Considering the current market and the experience practice of in-service NPPs, we optimized the economic evaluation model of NPPs. Since in listed nuclear power companies, investors pay more attention to dividends and the long-term development of the company, the optimized capital internal return rate, internal return rate of investors and total capital cost could be obtained via optimized capital flow and bonus allocation. This research provides viable investment strategies for decision makers.

The flexible arrangement of cash flows and allocating bonus to investors in priority would significantly enhance the debt risk compared with the baseline scenario. Moreover, if the interest rate increases with the change of financial market, the debt rate of the proposed scenarios would increase, posing debt risks to the project. However, the asset liability under current circumstances could meet the requirements. It is noted that our research is based on the current market environment and the variance of power market and financial market would influence the results of optimization.