The substitutability of nuclear capital for thermal capital and the shadow price in the Korean electric power industry

As part of ongoing efforts to reduce CO2 emissions by increasing the proportion of the energy mix relying on nuclear power, it may be useful to substitute nuclear power for thermal power wherever possible, thereby substantially reducing the need to use fossil fuels. In order to evaluate the contribution of nuclear power to potential CO2 reduction, this study examines the substitutability of thermal capital and nuclear capital in the Korean electric power industry by utilizing the input distance function. Additionally, the unit costs of thermal capital and nuclear capital are compared in terms of their shadow prices, which are defined as the opportunity costs inherent to one additional unit of capital increase deriving from a reduction in labor. The empirical results presented herein indicate that nuclear capital is readily substituted for thermal capital, but the substitutability of thermal capital for nuclear capital is relatively low. The shadow price ratio of nuclear capital to thermal capital is estimated to be 15.9, on average, showing an upward trend over the years from 1982 to 2010. ► This paper estimates an input distance function for the Korean power generating sector. ► Nuclear capital is readily substituted for thermal capital, relatively, not vice versa. ► The shadow price ratio of nuclear capital to thermal capital shows an upward trend.