By Ryan Alexander, August 21, 2009
Almost four years ago, as part of the 2005 Energy Policy Act, Congress created a loan-guarantee program that was mandated to distribute guarantees for innovative and emerging energy technologies. While the program covers a range of such technologies, mature energy industries, such as coal and nuclear, also were eligible to receive them.
Today, the program has a $51-billion budget cap, of which $47 billion is earmarked for specific technologies including nuclear, coal, renewables, electricity transmission, and efficiency. This includes $18.5 billion for nuclear reactors and $2 billion for uranium enrichment.
As one might guess, the broad scope of the program has made it popular with many in the energy industry. But one sector of the energy industry has responded enthusiastically–nuclear energy. With extremely high capital costs, significant technology risks, and private investors leery–even when times were good–nuclear power arguably stands to gain more from federally backed loan guarantees than any other energy sector. The nuclear energy industry is well aware of the benefits of loan guarantees; applications from the industry total $122 billion.
For taxpayers, this could easily spell financial disaster. The Congressional Budget Office considers the risk of default on the part of the nuclear industry to be very high–well above 50 percent–and payments for defaults would come directly from the U.S. Treasury, in other words, the U.S. taxpayer. Additionally, loan guarantees issued under the Energy Department program carry an extremely high risk because they can cover the entire value of a loan worth up to 80 percent of a project’s total cost–terms far better than any private lender would provide. Consider that cost estimates for new nuclear reactors have risen to at least $7 billion each, and it becomes apparent how serious it would be if these companies default.
Such industry-wide defaults have unfortunately happened before, and the U.S. taxpayer was left holding the bag. In the late 1970s and early 1980s, the Energy Department rushed to offer billions of dollars in loan guarantees to help companies develop synthetic fuels. When administrative failures and market changes caused those companies to fail and default on their loans, taxpayers were forced to pay up.
In addition, although the loan-guarantee program is purported to be self-financing, with industry paying so-called subsidy costs to cover the government’s long-term liabilities associated with the program, the Congressional Budget Office projects that Energy will likely underestimate those costs. Furthermore, the Government Accountability Office has stated that appropriations will be necessary to cover the operational and administrative expenses of the program because collected fees will likely be insufficient.
The reality is that loan guarantees are extremely risky–especially when dealing with megaprojects such as nuclear power plants where the true final costs are unknown. These same factors also make loan guarantees attractive to lawmakers because they look like a source of free money: Buy a reactor now, pay for potential defaults later. Consequently, some lawmakers have made it their top priority to expand the existing loan guarantee program and create additional financing mechanisms to distribute them and other forms of credit support. The most significant of these proposals creates a new entity known as the Clean Energy Deployment Administration (CEDA), which would be authorized to issue direct loans, loan guarantees, and letters of credit to clean energy projects. The House of Representatives included its version of CEDA in the 2009 American Clean Energy Security Act, which it passed. The Senate Energy and Natural Resources Committee included a version of CEDA in its 2009 American Clean Energy Leadership Act, but the bill has yet to be voted on by the entire Senate.
In the House version, CEDA is a government-owned corporation separate from Energy’s existing loan guarantee program and has a 30-percent cap on providing guarantees to any one technology. The Senate version would keep CEDA within Energy, absorbing the existing loan guarantee program into the new agency. The Senate’s version specifically exempts this new agency from caps on the amount of loan guarantees it can distribute, opening up the U.S. taxpayer to unknown future liabilities.
By providing an incentive to place large amounts of cheap capital in very high risk projects, nuclear loan guarantees have the potential to literally crowd out other, perhaps superior, technologies. Nuclear power has received billions in subsidies over its more than 50 year history, if federal loan guarantees are truly intended to encourage nascent energy technologies, nuclear shouldn’t be included. If Congress wants to demonstrate support for a clean and secure energy future and usher in a new era of fiscal responsibility, it should reject the irresponsible expansion of loan guarantees for nuclear power. The industry is already sitting on $18.5 billion for risky reactors, which we didn’t support. Taxpayers shouldn’t be asked to shoulder even more.
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