Analysis of the decision to invest for constructing a nuclear power plant under regulation of electricity price

In this study, the effect of the regulation of electricity prices on the decision to invest in power plants is rationally explained using a real-options approach. Conditions under price regulation are described by a simple model in which the variable cost follows a stochastic process; free market conditions are described using Cortazar's model. The resulting comparison could explain the promotion of nuclear power plant construction in Japan from about 1980 until the middle of the 1990s, and the avoidance of such investment in recent years. This difference between economic environments is not confirmed by the traditional net present value (NPV) approaches. (C) 2003 Elsevier B.V. All rights reserved.