10.94. The capital costs (or charges) are those associated with the con­struction of the plant. For engineering economic estimates, as opposed to corporate accounting, it is usually adequate to consider charges on an annual basis during the plant lifetime. These charges are primarily the cost of the required investment needed to construct the plant, allowance for depreciation, and some taxes. A charge for decommissioning may be in­cluded in the depreciation allowance or carried as a separate contribution to the generating cost. We have followed the latter approach in Table 10.2.

10.95. Construction costs consist of direct and indirect charges. The direct costs are those for equipment, materials, and labor required to build the plant. An allowance for contingencies is often included with the direct costs. Indirect costs are essentially all other costs incurred in building and testing the plant, so that it can be turned over by the manufacturer to an electric utility ready for continuous operation at its rated capacity.

10.96. Direct construction costs include costs of such items as land, structure and site facilities, reactor plant equipment (exclusive of fuel), turbine plant (generating) equipment, electric (power transmission) plant equipment, miscellaneous equipment, and contingency allowance. (The latter is sometimes included with the indirect costs.) The direct costs also include the cost of materials and of labor; in some categories, e. g., struc­tures and site facilities and electric plant equipment, labor costs constitute more than half the total.

10.97. Indirect construction costs cover several broad areas. One is professional services for engineering, design, licensing activities (see Chap­ter 12), and supervision of construction. A second area includes temporary facilities, equipment, and services during construction, the plant owner’s general and administrative expenses, and reactor operator training and plant startup. A major indirect cost is the interest on funds expended during the design and construction of the plant. The interest charge on each type of expenditure is based on the amount spent, on the elapsed time between the expenditure and the conclusion of the construction period, and the interest rate. The construction period, i. e., from the award of initial con­tracts for reactor plant construction to the time when the plant is ready for commercial operation, may be as long as ten years or more. But the first few years are devoted primarily to design and licensing efforts, and expenditures are relatively small. Subsequently, after a construction permit is issued by the U. S. Nuclear Regulatory Commission, expenditures for equipment and labor rise markedly. Hence, most of the interest charges are incurred during the later stages of the construction period.

10.98. An escalation cost, which is applicable to both direct and indirect construction costs, arises from increases in cost due to inflation between the time the costs are first estimated and the time a firm purchasing com­mitment is made. The escalation allowance depends on the estimated cost of the item, the time when the item is purchased after the estimate is made, and an annual percentage to reflect the probable consequences of inflation. Since the inflation rate varies from year to year and is difficult to predict, there is a large uncertainty associated with the escalation allowance.

10.99. Now that we have determined the total construction cost, we need to develop an annual fixed-charge contribution to the generating cost that is based on it. After the plant is placed in full-power operation, div­idends on stocks and interest on bonds must be paid each year. Such stocks and bonds were issued to obtain the funds to build the plant. As mentioned in §10.87, other annual “fixed” charges include some taxes and an allow­ance for depreciation. Although depreciation of present plants is based on an estimated 40-year lifetime, it should be noted that advanced plants are designed for a 60-year lifetime (Chapter 15). All of these fixed annual charges may be estimated by applying a percentage rate to the total con­struction cost. Since this percentage rate depends on the interest rates prevailing during the years of construction and other parameters, any value cited here is likely to become dated quickly. However, an annual rate of the order of 14 percent for an investor-owned utility may be used for orientation purposes.