LCOE Discount Rate Sensitivity

At a 3% discount rate, nuclear power is competitive with natural gas. At a 10% discount rate, nuclear costs nearly double while gas barely moves. The same plants, the same physics, completely different rankings, all driven by one assumption buried in the spreadsheet.

LCOE sensitivity to the discount rate depends on a technology's cost structure. Capital-intensive sources (nuclear, solar, wind) spend most of their money upfront and produce cheap power for decades. A high discount rate shrinks the present value of all that future output, inflating the cost per kWh. Fuel-intensive sources (gas, coal) spread costs more evenly over time through ongoing fuel purchases, so discounting affects them less.

Quantify the asymmetry. Nuclear LCOE at 3%: roughly $60/MWh. At 10%: roughly $110/MWh. Nearly doubles. Gas CCGT LCOE at 3%: roughly $45/MWh. At 10%: roughly $55/MWh. Barely moves.

Understand why. Nuclear's cost is 80% capital. Raising the discount rate from 3% to 10% dramatically increases the capital charge per kWh (the upfront cost must be recovered from output that is now worth much less in present-value terms). Gas is 60-70% fuel. Fuel costs occur contemporaneously with output, so discounting affects both roughly equally.

Why would a government-backed nuclear project use a lower discount rate than a merchant solar farm?

Risk determines rate. Government-backed projects carry lower financial risk (guaranteed cost recovery, sovereign credit), justifying a lower discount rate. Private merchant projects face market price risk, requiring higher returns to attract investors. The same technology looks different depending on who finances it.

Discount rate assumptions are the most powerful hidden variable in any technology cost comparison. Always ask what rate was used.

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