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On the Optimal Lifetime of Nuclear Power Plants


Author Info

  • John Rust

    (University of Wisconsin)

  • Geoffrey Rothwell

    (Stanford University)


This paper presents a dynamic programming (DP) model of optimal operation of a nuclear power plant (NPP). In each period the operator decides whether to run the reactor at a given capacity level, to shut it down for preventive maintenance or refueling, or permanently close the plant for decommissioning. The maximal lifespan of a NPP is determined by the length of the operating license issued by the Nuclear Regulatory Commission. The optimal lifespan 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: one 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 (1995) by allowing for the occurrence of ``major problem spells''. The DP model predicts that under ordinary operating conditions it is highly unlikely that an NPP will be closed, but that the probability of decommissioning increases by orders of magnitude during a major problem spell. We compare the actual evolution of the nuclear power industry over the period 1984 to 1994 to stochastic simulations of our estimated DP model and show that our model provides accurate out-of-sample predictions of total nuclear power generation and early retirements of NPPs. We use the estimated DP model to forecast nuclear power generation and plant closures 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 extend the life of the US nuclear power industry from 2030 to 2050 and double the expected present discounted value of profits of NPPs.

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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 9512002.

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Length: 34 pages
Date of creation: 15 Dec 1995
Date of revision: 15 Dec 1995
Handle: RePEc:wpa:wuwpio:9512002

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  1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  2. Rothwell, Geoffrey, 1990. "Utilization and service : Decomposing nuclear reactor capacity factors," Resources and Energy, Elsevier, vol. 12(3), pages 215-229, September.
  3. Andrews, Donald W K, 1988. "Chi-Square Diagnostic Tests for Econometric Models: Theory," Econometrica, Econometric Society, vol. 56(6), pages 1419-53, November.
  4. Geoffrey Rothwell & John Rust, 1995. "A Dynamic Programming Model of U.S. Nuclear Power Plant Operations," Microeconomics 9502001, EconWPA, revised 06 Feb 1995.
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Cited by:
  1. Arcidiacono, Peter, 2002. "Ability Sorting and the Returns to College Major," Working Papers 02-26, Duke University, Department of Economics.
  2. Jensen, J. Bradford & Rothwell, Geoffrey S., 1998. "Transaction costs, regulation, and subcontracting at nuclear power plants," Journal of Economic Behavior & Organization, Elsevier, vol. 36(3), pages 369-381, August.
  3. George C. Bitros & Elias Flytzanis, 2003. "A Rehabilitation of Economic Replacement Theory," Macroeconomics 0303009, EconWPA.
  4. Kasahara, Hiroyuki & Shimotsu, Katsumi, 2008. "Pseudo-likelihood estimation and bootstrap inference for structural discrete Markov decision models," Journal of Econometrics, Elsevier, vol. 146(1), pages 92-106, September.
  5. Le-Yu Chen, 2009. "Identification of structural dynamic discrete choice models," CeMMAP working papers CWP08/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Sanghamitra Das & Ramprasad Sengupta, 2004. "Projection pursuit regression and disaggregate productivity effects: the case of the Indian blast furnaces," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(3), pages 397-418.


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