Unlocking Advanced Nuclear Investment: Balancing Operational Flexibility and Competitive Behavior Concerns with Capability CfDs

In the context of the global shift towards low-carbon energy, nuclear power is re-emerging as a key dispatchable technology that can complement renewables. However, increased investment risks for such capital-intensive projects hinder the nuclear sector's growth. Various government-supported financial schemes aim to mitigate these risks, including Contracts-for-Difference (CfDs) and capacity-based supports like tax credits and loan guarantees. While CfDs ensure long-term revenue stability, they may lead to suboptimal short-term dispatch decisions by encouraging maximizing production over market value. Conversely, capacity-based support exposes plants to market prices, avoiding this pitfall, but can lead to strategic capacity withdrawal and artificially inflated prices. A "Capability CfD" has been proposed as a middle-ground solution in the recent literature, ensuring steady revenue while promoting near-optimal dispatch. This paper demonstrates that Capability CfDs closely approximate the optimal short-term dispatch. We show the two solutions are not equal when considering technical constraints on the ability of nuclear power plants to operate flexibly. We first analyze this discrepancy analytically before quantifying it using a numerical MPEC model of the Central Western Europe region in 2040. The Capability CfD only slightly distorts short-term dispatch compared to a perfect competition benchmark while largely outperforming alternative options by balancing the risk of strategic withdrawing behaviors with the incentive to operate flexibly.