On the Optimal Lifetime of Nuclear Power Plants

This paper presents a dynamic programming (DP) model of operating a nuclear power plant (NPP). In each period the operator decides whether to run the reactor, to shut it down for preventive maintenance or refueling, or permanently close the plant for decommissioning. The maximum life of a NPP is determined by the length of the operating license issued by the Nuclear Regulatory Commission. The optimal lifetime of a NPP (from the private perspective of the plant owner, as opposed to the social perspective of the regulator) is the solution to a generalized optimal stopping problem: the operator closes a plant as soon as the expected discounted value of future operating profits (losses) falls below the costs of decommissioning. This model extends the DP model of NPP operations introduced in Rust and Rothwell (1996) by allowing for the occurrence of “major problem spells.” The DP model predicts that under ordinary operating conditions it is unlikely that an NPP will be closed, but the probability of decommissioning increases substantially during a major problem spell. We compare the evolution of the nuclear power industry from 1984 to 1994 to stochastic simulations of our estimated DP model to show that our model provides accurate out-of-sample predictions of early retirements of NPPs. We use the estimated DP model to forecast nuclear power generation under two policy scenarios: (1) the current 40-year license span with no possibility of extension and (2) a “costless” extension in operating licenses to 60 years. Our simulations show that an immediate, costless extension in operating licenses to 60 years would double the expected present discounted value of profits to continued operation of US NPPs. JEL Classification: C41–Duration Analysis