Comparative Cost of Generation Modeling: Duke Energy
Updated: Feb 5
Cost of Generation Model for TotalEnergies 1GW Offshore Wind Project
Cost of Generation Model for Belews Creek GEH 300MW BWRx Reactor
Shared Input Values
The following input values are the same for both models: Tax rate (combined federal and state) is 23.5%[1], insurance rate is 2.5% based on industry standard for construction[2], and all escalations (energy price, fixed O&M, variable O&M, fuel cost, and misc. escalation) are 2.6%, which is the average US interest rate since 2000[3]. Cost of equity and discount rate for both companies are from ValueInvesting[4][5].
TotalEnergies 1GW Offshore Wind Project
TotalEnergies projects their capital costs to be $2,622/kW[6] which for 1GW puts the total cost of the project at $2.62 billion. In addition to capital costs, TotalEnergies places their fixed O&M at $90/kW and their capacity factor at 46%[6]. TotalEnergies paid $160 million for the land lease[7] at a royalty of 2%[8]. They will most likely receive financing through the Title XVII Clean Energy Financing Program through the DOE’s LPO as government loans typically have lower interest rates. Given that TotalEnergies has over $30 billion in cash on hand[9] for down payments and that corporate loans require 10-30% down[10], I will be conservative and assume they will be asked to pay 30% giving the project a 70% debt percentage ($1.84 billion). The interest rate for a Title XVII loan[11] is tied to US Treasury rates (currently 4.29%[12]), plus 0.375% and a Risk Based Charge of 0.075% given their A+ rating[13], which totals 4.74%. Title XVII sets the maximum debt term as the shorter of either 30 years or 90% of the project lifetime[14] which given the 30 year lifetime of the project[6] I will conservatively assume the maximum debt term of 27 years. First year fees for the loan will be 0.6% of the principal[14] ($11 million). MACRS for wind projects are 100% at 5 years[15]. The project is eligible for a 30% ITC through the IRA[16]. Given these inputs, my model calculates that for a 10% IRR for the project, TotalEnergies will need an energy price of $57/MWh.
Proposed Belews Creek SMR Project
This project will be modeled using the GEH 300MW BWRx reactor since it has the lowest cost projections among those analyzed by the IEEFA[17]. The NREL calculates a similar range of capital costs[18] and given that SMRs are FOAK technology with a recent history of overruns I will assume the highest capital cost of $12,680/kW, putting our total cost at $3.8 billion. Conservative NREL estimates also place fixed O&M at $216/kW and variable O&M at $2.8/MW[18]. This SMR has a project lifetime of 60 years and a capacity factor of 95%[19]. Duke has halted efforts to secure DOE LPO funding[20] so funding will need to come from green bonds as they have done in the past[21]. Given Duke’s lack of cash on hand[22] they will only be able to put down 10% giving us a debt percentage of 90% ($3.42 billion). Assuming the loan terms are the same as their past green bond loans, this gives us a debt rate of 5.1% and a debt term of 10 years[21]. The standard MACRS for nuclear projects is 100% at 15 years[23]. The current price for uranium from the IMF is $66.50/lb[24] and its heat content is 500GJ/kg (215MBtu/lb)[25] so for this model the fuel cost is $0.31/MBtu. This project would be eligible for the same ITC of 30% plus an additional 10% since it is replacing a fossil fuel plant[16]. Given these inputs, to get a 10% IRR Duke would need an energy price of $104/MWh.
Additional Considerations and Official Recommendation
Both projects have an energy price below North Carolina’s average electricity price of $130/MWh[26] but the wind project’s energy price is around half that of the SMR project. Even if TotalEnergies increases their price to improve their own IRR, it is unlikely it will be close to the SMR energy price so it will still reap greater revenue due to the merit order. This is further compounded by the wind project having a higher yearly output of 3,680GWh compared to the SMR output of 2,500GWh.
A wind project developed by Duke in the same area would be roughly equivalent to that of TotalEnergies, though it would suffer a bit from not using Title XVII loans and not being able to make as large of a down payment. Compared to the proposed SMR project, the wind project has lower capital costs, greater output, and a lower energy price allowing for greater revenue. Additionally, offshore wind is a more mature technology while SMRs are FOAK which means it will be easier for Duke to secure investment and that there is a lower risk of construction delays and cost overruns. The wind project also benefits from the fact that it will start producing energy once one windmill is installed and will increase to its full output over the course of construction, whereas the SMR will not be able to produce energy until fully completed. Conversely, the SMR project has advantages over the wind project as it has a 60 year economic life rather than 30 years. Additionally, SMRs are much smaller in size and can be located on the sites of aging fossil fuel plants that Duke already owns, meaning that future projects will be much less limited by location and land cost.
While there are greater long term benefits of SMRs, it is my opinion that Duke’s current financial status means that it is not suitably equipped to weather the high costs and risks associated with a FOAK SMR project. Proceeding with developing their offshore wind project is cheaper in the short term, produces energy sooner, and has a higher output overall. At present, it is in Duke’s best interest to develop their own wind project in the Long Bay. For future projects, Duke should pursue developing SMRs for their long term benefits once the technology has matured and capital costs have been reduced.
