The guarantee option against the construction cost overruns of nuclear power plant: Monte Carlo simulation approach
by Mohamed Ben Abdelhamid, Chaker Aloui
International Journal of Business Continuity and Risk Management (IJBCRM), Vol. 1, No. 3, 2010

Abstract: The financing process of nuclear power plant (NPP) remains the most complicated task to launch the nuclear programme. Even when the private partnership constitutes the basis of the financing arrangement, the construction cost overruns of NPP represent an important issue to complete the project. Hence, the International Atomic Energy Agency (2008) specifies that the financing arrangement for NPP might include some government funding. This paper studies the way to mitigate the risk of NPP construction cost through a government support involvement in the project financing arrangement. Furthermore, the government support policy is analysed as a construction guarantee option that depends on the progression time of the construction. We use real options theory to assess this guarantee, when private investors have the right to exercise the grant option multiple times over the construction stage. We formulate the NPP financing problem in terms of the ration guarantee/cost overruns. We show that when the risk becomes important, the guarantee option gains value. It seems that private investors require a surplus of government funds for each additional unit of the stochastic construction cost.

Online publication date: Sat, 02-Oct-2010

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