Decommissioning and Equipment Replacement of Nuclear Power Plants under Uncertainty

Abstract

This study examines the optimal timing for the decommissioning and equipment replacement of nuclear power plants. We consider that the firm has two options of decommissioning and equipment replacement, and determines to exercise these options under electricity price uncertainty. This problem is formulated as two optimal stopping problems. The solution of this model provides the value of the nuclear power plant and the threshold values for decommissioning and replacement. The dependence of decommissioning and replacement strategies on uncertainty and each cost is shown. In order to investigate the probability of events for decommissioning and replacement, Monte Carlo calculations are performed. We also show the probability distribution and the conditional expected time for each event.

KEYWORDS:

• decommissioning
• replacement of equipment
• uncertainty
• electricity prices
• real options approach