Last month, the United States enacted the Inflation Reduction Act (IRA), purportedly to address rising inflation. In practice, though, the act mainly serves as a vehicle for some of President Biden’s and the Democrat’s legislative priorities. The act includes many provisions to subsidize clean power plants, including nuclear generators.

Many believe that nuclear is the perfect solution to climate change. It is a zero-carbon power source that is nearly constantly available unlike intermittent renewable sources, such as wind and solar. Our recent working paper (and a summary of the paper in the most recent issue of Regulation) examines the economics of nuclear power and concludes that it is very high-cost relative to natural gas generators. Most importantly in the context of climate change, we also determine that the potential climate benefits of nuclear are insufficient to offset its costs.

From the 1960s to 1980s, many nuclear power plants were built, but nuclear construction costs rose dramatically resulting in a severe decline in new construction. Very few plants have been built in the United States and Western Europe in the past several decades. In fact, the most recent projects in the West (the United States, France, the United Kingdom, and Finland) have experienced numerous issues with quality control, supply chains, and labor force management, leading to a more than doubling of construction schedules and costs. The fact that nuclear construction costs increased dramatically in countries with different regulatory regimes suggests that the problem is not simply overly cautious regulators.[1]

The IRA does nothing to address the underlying cost problem with nuclear power. It simply reduces its costs to ratepayers. Is this enough to induce utilities to build nuclear generators rather than coal or natural gas combined cycle (NGCC) power plants?

Our paper calculates the levelized cost of electricity (LCOE) of nuclear, coal, and NGCC electricity generators. The LCOE is the price per unit of electricity produced (in cents per kilowatt-hour (kWh)) required for a power plant to breakeven over its lifetime. The calculation considers both fixed and marginal costs, including construction, financing, operations and maintenance, and fuel costs.

Nuclear power is capital intensive. Thus, its LCOE depends mostly on its construction cost. To model different scenarios, our calculations use three levels of construction costs for nuclear. The highest level (a cost of $9,000 per kilowatt of capacity constructed) represents the average construction costs of the West’s most recent projects. The middle and low levels ($6,700 and $4,000 per kilowatt, respectively) envision substantial reductions in nuclear construction costs through some combination of regulatory reform, improvements to construction management, or innovation. The low level, which is nearly 65 percent lower than the most recent nuclear project in the United States (the Vogtle plant in Georgia where ongoing construction has reached costs of about $11,000 per kilowatt), is particularly optimistic. Whether such a reduction is achievable is not known, but historically US nuclear construction costs have increased as new capacity has been built.

Natural gas electricity generation is not capital intensive. Thus, the LCOE of natural gas plants is largely affected by fuel costs. To account for the uncertainty of future natural gas prices, we use three levels of fuel costs based on the Energy Information Administration’s 2022 Annual Energy Outlook’s reference case and lowest and highest projections of future natural gas prices.

The baseline levelized costs we calculate are presented in Table 1 (see the appendix of our paper for more on the actual calculations involved and additional assumptions). If nuclear construction costs are low, nuclear is competitive with coal. But at all nuclear construction cost levels and all projected natural gas prices, the cost of nuclear is substantially higher than NGCC.

The IRA expands subsidies to new nuclear plants through two options for tax credits, a production tax credit (PTC) and an investment tax credit (ITC). A single facility can only take one of these subsidies. Both credits have two levels, with a higher amount available for plants that meet certain prevailing wage and apprenticeship requirements. To consider the best-case scenario for a nuclear plant, we consider only the higher levels (and these levels are denoted as “base subsidy” in the tables, though there is technically a lower base level included in the act). Additionally, facilities built in an “energy community” (as explained here: a brownfield site, the site of a former coal plant, or an area with high unemployment and large reliance on fossil fuel industries) can receive an even higher tax credit.

The PTC amount is 2.5 cents per kWh of energy produced, and a 10 percent increase (up to 2.75 cents) for a facility built in an energy community. Even though the provision lasts only for the first ten years of a plant’s operation (and its availability is set to phase out based on national emissions targets), it is not hard to imagine that the subsidies will be extended indefinitely so we treat the production tax credit as permanent.

The ITC is for 30 percent of a facility’s investment costs, and up to 40 percent for a plant built in an energy community. To simplify the calculations, we treat the ITC as a onetime payment of 30 (or 40) percent of the plant’s overall construction cost (excluding financing costs) in its first year of service.

Table 2 reports the effective amounts of the subsidies averaged and discounted over a nuclear plant’s life, as well as the total LCOE when the subsidies are included. If the PTC is permanent, the effective value of the subsidy is higher than the ITC except at the highest nuclear construction cost considered (if the PTC is treated as ending after ten years, the ITC is always more valuable). At the lowest nuclear construction cost level, the PTC reduces the levelized cost of a nuclear plant built at the lowest construction cost (5.4 or 5.1 cents per kWh for nuclear with the base subsidy or built in an energy community, respectively) to less than a NGCC with high projected natural gas prices (5.5 cents per kWh from Table 1). If nuclear construction costs are substantially reduced and future natural gas prices are high, the subsidy is sufficient to incentivize private investors to invest in nuclear capacity.

What happens to the analysis if we include the climate change benefits of nuclear power? Subsidies to clean energy act “like” a negative carbon tax (government can either impose a carbon tax on carbon emitters or offer a subsidy to clean energy that lowers its costs relative to “dirty” technologies.) Subsidies for clean sources are traditionally thought to be less efficient than taxes on dirty sources, but recent scholarship challenges that conclusion. Ignoring efficiency differences between clean energy subsidies and a carbon tax, we calculate the implied carbon price of the subsidies and calculate the additional carbon tax necessary for nuclear to have cost parity.

The baseline carbon taxes (in dollars per metric ton of CO₂) needed for parity between a nuclear power plant without the new subsidies and the fossil fuel plants are presented in Table 3. These taxes are calculated by comparing the levelized cost of nuclear to coal and NGCC and then calculating the carbon tax necessary for the levelized costs to be equal based on the carbon emissions of coal and natural gas.[2] The US government and academic experts recommend a tax within a range of roughly $15 to $75 per metric ton in 2020.

As Table 3 shows, the carbon tax necessary for nuclear to compete with coal is within the range of recommended carbon taxes at all nuclear construction cost levels, suggesting that nuclear is competitive with coal if the carbon emissions of coal are priced. The carbon tax necessary for nuclear to compete with NGCC is only within the recommended range if nuclear has low construction costs and natural gas prices are high, implying that unless nuclear construction costs can be reduced substantially, the high costs of nuclear are not worth its climate benefit relative to NGCC plants.

Because the IRA does not reduce construction costs, it does not alter any of these conclusions. For most entries in Table 3 a new nuclear plant would reach cost parity with NGCC only with a significant carbon tax in addition to the IRA subsidy. For example, if nuclear construction costs are low and future natural gas prices are mid-range, nuclear would require a carbon tax of roughly $19 per metric ton in addition to the effective carbon price of $60 per metric ton implied by the PTC of 2.75 cents per kWh. A carbon tax of $19 might be politically feasible, but the overall carbon price of $79 ($19 plus $60) is outside the range recommended by experts and, therefore, implies that the combined subsidy and carbon tax exceeds the social cost of carbon emissions.

Table 3 also illustrates the inefficiencies of subsidies relative to a carbon tax. First, while the PTC is a constant amount paid to nuclear generators, the effective carbon tax depends on whether the generator displaced is a coal or natural gas plant (e.g., the PTC of 2.5 cents per kWh has an effective carbon tax of $20 compared to coal and $55 compared to natural gas). This is because clean energy subsidies do not differentiate between dirty technologies with differing emissions levels. Currently, the levelized cost of coal is higher than NGCC, so the subsidy to clean power is likely to displace dirtier coal power plants first. But if future coal and natural gas prices changed enough for NGCC to have a higher LCOE, or if we were comparing coal to less efficient natural gas power plants with higher costs but lower emissions than coal, the subsidy could have the perverse effect of displacing cleaner natural gas power plants before dirtier coal plants.

Second, the ITC increases as investment costs increase; the implied carbon price of the ITC is actually higher at higher nuclear construction cost levels. Subsidizing investment costs incentivizes the construction of power plants with higher capital costs, an ironic result considering the problem with nuclear power is its high capital costs.

The IRA subsidies are not sufficient to change the economics of nuclear power. Before the IRA, nuclear construction costs were too high for nuclear to be competitive with natural gas or coal. Even with the IRA subsidies and even if nuclear construction costs were 65 percent less than the current costs of the Vogtle plant in Georgia, NGCC plants would still be cheaper unless natural gas prices remain historically high for decades.