Critics have charged that the commercial nuclear power industry does not consider the cost of “decommissioning,” or “mothballing,” a nuclear power plant when doing an economic analysis and that the analysis is therefore unduly optimistic. As an example, consider the Tennessee Valley Authority’s Bellefont twin nuclear generating facility under construction at Scottsboro in northern Alabama. The initial cost is $1.5 billion, and the estimated life is 40 years. The annual operating and maintenance costs the first year are assumed to be 4.6% of the first cost in the first year and are expected to increase at the fixed rate of 0.05% of the first cost each year. Annual revenues have been estimated to be three times the annual operating and maintenance costs throughout the life of the plant. From this information, comment on the following statements:
(a) The criticism of excessive optimism in the economic analysis caused by the omission of mothballing costs is not justified since the addition of a cost to mothball the plant equal to 50% of the initial cost decreases the 10% rate of return only to approximately 9.9%.
(b) If the estimated life of the plant is more realistically taken as 25 years instead of 40 years, then the criticism is justified. When the life is reduced to 25 years, the rate of return of approximately 9% without a mothballing cost drops to approximately 7.7% with a cost to mothball the plant equal to 50% of the initial cost added to the analysis.