In the days when electricity generation and supply were performed by state — owned monopolistic utilities, lack of competition ensured that electricity generators could set the price of electricity. When electricity generation costs increased, there were two possible remedies: either the electricity consumer paid more or the government provided a subsidy. Calculations of electricity costs rarely used the net present value method but, instead, relied on fuel costs and an assumption that the capital costs were evenly spread (‘amortised’) over the generating lifetime. i4 Individual power stations were ranked according to the calculated price of their electricity and thus placed in a ‘merit order’, which largely determined how frequently they were called upon to generate. A plant that was high in the merit order would operate 24 hours per day supplying the baseload, while those lower down were employed to meet the shorter-term peaks in demand and to be there as backup in case of planned and unplanned outages. The most likely causes of a change in the ranking of a power station were the introduction of newer generators and variations in the price of fuel. Nuclear stations were often at the top of the merit order because fuel costs are relatively low but, more importantly, because (as we shall see) this method of calculating costs is especially favourable to generators that, like nuclear, have high capital costs.

The application of net present value techniques to the economics of electricity generation has been used — or at least advocated — for perhaps 40 years.4 Instrumental in disseminating the approach more widely was ‘Projected Costs of Generating Electricity’ (PCGE), which first appeared in 1983 (latest edition 2010).5 It uses a spreadsheet methodology and is now published jointly by two agencies ofthe OECD (Organisation for Economic Cooperation and Development): the IEA (International Energy Agency) and the NEA (Nuclear Energy Agency). PCGE seeks to compare electricity costs across a range of generation systems and countries that submit, on a voluntary basis, data for individual existing or projected power plants. Thus the 2010 edition gathers together data for 190 power plants from 16 OECD countries, four non-OECD countries and four industry organisations. The range of power plants includes nuclear, coal, gas and various renewable sources. Here, for example, we can find wind-powered generation in Belgium directly compared with coal-fired generation in Australia. Apart from using a widely adopted methodology, PCGE is also a useful source of data that, given the need for commercial confidentiality, is often difficult to find.