Pleased to provide an excerpt from my memoir, "Things Your Discount Rate Didn't Tell You," in honor of the SONGS decommissioning. ~A Thread~
Let's motivate the discussion: the $4.4b decommissioning estimate for SONGS is ~40% of construction costs (2018$), or about $2/W.
Let's motivate the discussion: the $4.4b decommissioning estimate for SONGS is ~40% of construction costs (2018$), or about $2/W.
So this plant is shutting down before it wanted to, but basically we're talking about a 2018$ investment of $10.7b (let's call it all loaded in 1984) to build and now a 2018 estimated $4.4b to decommission (starting next month), after being in shutdown since 2013.
The decom is expected to take 8-10 years, and it's worth noting that nuclear costs have a way of surpassing their estimates, but that's neither here nor there. This is a discount rate convo more than a nuke convo, but SONGS is a nice example.
Ok: so you have full foreknowledge, and the $4.4b estimate is correct for any time you actually commission the plant.
Plant lasts 80 years and you use a 5% discount rate? NPV of end of life costs (EOL) = 1% construction costs. *Negligible*. (3% DR --> 4% of construction)
Plant lasts 80 years and you use a 5% discount rate? NPV of end of life costs (EOL) = 1% construction costs. *Negligible*. (3% DR --> 4% of construction)
What about a 60 year lifetime (2033 shutdown)? 5% discount rate suggests NPV of EOL costs = 2% of construction costs.
Even its actual 30 year lifetime (2013) has EOL NPV show up as 10% of construction costs at 5% discount.
Even its actual 30 year lifetime (2013) has EOL NPV show up as 10% of construction costs at 5% discount.
Spreading $4.4b evenly (bc I don't know the details) across 10 years starting in 2020 (roughly the actual situation) suggests the NPV of EOL costs would have been 5% of construction at the time of construction.
Still ~negligible, esp considering that actual calcs include O&M.
Still ~negligible, esp considering that actual calcs include O&M.
Here's the thing: you still need to come up with $4.4b from ratepayers in a way that is extremely not negligible feeling at this point. $2/W!!! To tear it down!
What's the rationale for the discount rate? The utility could invest the $ otherwise? There's uncertainty? Etc.? Sure.
What's the rationale for the discount rate? The utility could invest the $ otherwise? There's uncertainty? Etc.? Sure.
In the end, though, even a pretty normal discount rate suggests that EOL costs are meaningless. Esp in a utility context and where the EOL costs are uncertain mainly in the sense that you're probably /under/estimating, like for nukes, this is a pretty big deal.
To put it another way: give me 2 power plant options. In one case, I spend 2020$10b in capital and have 2020$4b in cleanup in 30 years. In the other, I spend 2020$11b in capital and have no cleanup costs in 30 years.
A 5% discount rate tells me the first one is a better move.
A 5% discount rate tells me the first one is a better move.
In a utility context: ehhhhh. How much (in real terms) can you actually raise rates? How confident are you about the side of that $4b cleanup, and what makes you think environmental/etc restrictions would be *less* stringent then?
Anyway thank you for reading my memoir. "Things Your Discount Rate Didn't Tell You" will be on sale in 10 years, so, you know, hit me up for like 60% of it now I guess.
