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Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?

High fossil fuel prices have rekindled interest in nuclear power. This paper identifies specific characteristics making nuclear power unattractive to merchant generators in liberalized electricity markets, and argues that non-fossil fuel technologies have an overlooked option value given fuel and carbon price uncertainty. Stochastic optimization estimates the company option value of keeping open the choice between nuclear and gas technologies. The merchant option value decreases sharply as the correlation between electricity, gas, and carbon prices rises, casting doubt on whether merchant investors have adequate incentives to choose socially efficient diversification in liberalized electricity markets.

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Energy Specializations: Nuclear Power – Markets and Prices; Electricity – Generation Technologies; Electricity – Policy and Regulation

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q2 -
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Nuclear energy, economic analysis, electricity, stochastic optimization, Fuel mix diversification, option value

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No4-1

Published in Volume 27, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.