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Taxpayer protection and the nuclear loan guarantee program

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"Taxpayer protection and the nuclear loan guarantee program"

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The huge cost of nuclear power means that taxpayers will have to provide nuclear loan guarantees to finance new projects if the president and Congress are serious about building new reactors. The terms of these guarantees must include adequate protections for taxpayers.

That’s from the testimony of CAP Action’s Richard Caperton before the House Committee on Oversight and Government Reform.  Below is a summary, and the full testimony is here.

Nuclear power currently generates about one-fifth of American electricity. At the Center for American Progress Action Fund, we strongly believe that nuclear power will continue as a low-carbon baseload power source that will play an important role in America’s clean energy future. It’s vitally important that we explore all potential energy sources and encourage the development of sources that reduce our carbon emissions. At the same time, we must keep in mind that every dollar that supports one fuel source is a dollar that can’t be used somewhere else. In an era of tight budgets and limited government resources, it’s important that every dollar be spent in a way that cost-effectively transitions America toward a clean energy economy.

Perhaps nowhere is this challenge of balancing carbon reductions with low spending more apparent than with nuclear power. Building a nuclear reactor today will involve dealing with tremendous financial uncertainty. Cost projections for nuclear plants keep rising because of variability in material costs, complex new technology, limited suppliers for key parts, and inevitable delays in construction projects. The projected cost for two new reactors in Canada shot from $7 billion to $26 billion in just two years. A new reactor built by Areva in Finland has run into widely publicized challenges, with construction costs going up at least 50 percent since construction began three years ago. And costs for two new reactors at the South Texas Project in the United States have ballooned from $5.4 billion to an estimated $18.2 billion since 2007. Neither of these reactors has been built, so there’s no way to predict what the final cost will be. But cost overruns are virtually certain in nuclear construction, which greatly increases the risk that the nuclear companies will default on their loans. Private lenders are well aware of the risks involved in building new reactors, which is why they’re unwilling to finance the projects without significant government support.

The huge cost of nuclear power means that taxpayers will have to provide nuclear loan guarantees to finance new projects if the president and Congress are serious about building new reactors. The terms of these guarantees must include adequate protections for taxpayers.

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13 Responses to Taxpayer protection and the nuclear loan guarantee program

  1. Bob Wallace says:

    “The huge cost of nuclear power means that taxpayers will have to provide nuclear loan guarantees to finance new projects…”

    I think there’s a great probability that we will have to provide loan guarantees to only a very small number of new reactors.

    At this point there seems to be only two reactors in process, Southern Company’s Vogtle projects in Georgia. All the other major players seem to be holding back, waiting to see how Southern Company will fare.

    I doubt that many other companies will commit until they see whether Southern can build a reactor quickly and for “best price” costs. If costs are anything like what we’ve seen predicted on this site and construction time anything like we’re seeing in Finland then….

    And while they wait (for at least five years) they will be seeing the falling cost of wind, solar, geothermal, and tidal generation. We’ll have some brand spanking new cost for pump-up hydro and CAES with the new facilities now being built. And they will likely be on line before Southern can pour much concrete.

    I suspect the American taxpayer is a risk to the tune of about $10 billion. I doubt the other $90 billion will ever be touched.

    [JR: I tend to think you're right.]

  2. Mark Shapiro says:

    And lower the cost of rooftop PV through building integration (BIPV) and electrical integration (a standard DC voltage, plug and socket combination). This is not new technology, merely an arbitrary, agreed upon set of standards, like standard tire sizes, 2-liter bottles, and the ubiquitous AC 120v, 60 hz, and 3-pronged plug and socket.

    Standards lower costs. Standards replace custom installations with mass production. Eliminating the costs of installation and DC to AC conversion drops the cost of rooftop PV from $8/watt to the cost of the panels, which is under $3/watt and falling.

    All it takes is standards.

  3. Here’s the Nuclear Energy Institute’s testimony from Leslie Kass for the same hearing:

    “To ensure protection of the taxpayer’s interest, all projects seeking loan guarantees will be subjected to detailed due diligence and underwriting by a rating agency and by the Department of Energy. This due diligence evaluates the legal, technical and financial attributes of each project, and will produce a credible estimate of default probability that has a factual, analytical basis. DOE’s due diligence is conducted in concert with outside legal and financial advisers, independent engineering consultants and market experts. The analysis includes a rigorous assessment of the creditworthiness of the project, which can be accurately measured using well-established project finance ranking criteria such as the credit rating of the project sponsor, project capital structure, project cash flow, the strength of power purchase agreements, the terms and conditions of the engineering-procurement-construction contract, and other factors.

    “Finally, the companies building new nuclear power plants will have significant shareholder equity ($1 billion or more per project) at risk. This equity is in a ‘first-loss’ position: The company would forfeit that equity in the event of default. For most electric companies, such a loss would be unsustainable. The significant amount of money at risk imposes a high level of discipline on investment decisions. As a result, the companies seeking loan guarantees for nuclear power plants have a powerful incentive to ensure that projects are properly developed, constructed, operated and maintained to achieve commercial success. The federal government’s interest and the company’s interest are completely aligned. Like the federal government, the nuclear companies wish to avoid default at all costs.”

  4. Bob Wallace says:

    Reducing the cost of installation? Yes. A good thing.

    Going “DC”? Nope. Bad idea. DC would work only with stand-alone, off the grid, buildings. In order for solar to be really affordable means that grid tie is needed to suck up the extra generation and fill in the dark times.

    (I’m off the grid. Batteries are no small potatoes.)

    And what about the hundreds of millions of existing buildings? Rewire them all? And the billions of 120vac devices? Replace them?

  5. David B. Benson says:

    An article in Der Spiegel recently on mini-nuclear power plants indicated a projected cost of $3.5–4 per Watt. Here is a article about Nuscale
    http://www.popularmechanics.com/science/energy/nuclear/4273386
    but it seems some hacker has corrupted the Nuscale website itself, so I won’t post a link to that. Anyway, they expect first installation in 2018 CE.

  6. Mark Shapiro says:

    DC is a “bad idea” that runs several billion devices, namely electronics. Today, each one comes with its own custom AC to DC converter. A standard simply means that they all would be plug and play.

    No need to rewire all buildings or replace all devices faster than normal. SImply build all new ones to the standard.

    Europe finally decided to make micro-USB the standard for all cell phones. Hooray! Now imagine if some power strips had micro-USB outlets along with 120 VAC outlets. Cars would have them, too. Any device that adheres to the standard doesn’t need it’s own adapter to be lost/replaced/discarded — it uses any standard micro-USB outlet. Costs go down for everyone. A second, beefier standard, for bigger devices, should be next.

    DC standards would also make it easier and cheaper to go off the grid. Load leveling and shifting is still the big challenge, but there are options. (Batteries, grid-tie, loadshifting, cogeneration, or your hybrid car . . .)
    And the big appliances still like 220 VAC. And they have a standard AC voltage, plug, and socket.

  7. Bob Wallace says:

    Well, you’d have to start making all DC devices run off the same voltage.

    You’d have to double wire new buildings. I really doubt the market would support AC and DC refers, washers, air conditioners, microwaves, stoves, dryers, etc. Just walk around the typical house and see how much stuff runs off AC. Think of what it would cost to make all those things in a DC format as well, and for a very small market for many, many years.

    You really wouldn’t want a single voltage DC feed running everything. Big appliances mean either higher voltages or huge wires. You need a 120v/220v level line to run your refer or hook it up with wires half the size of your wrist if you use a 5v feed. (You’re also going to have some significant arc problems with those high amperages.)

    You’d have to run two separate nationwide grids, AC and DC. Or you’d have to have inverters to connect your DC building to the AC grid.

    And what would that get you? You wouldn’t have to keep up with a few power bricks.

    What’s way more likely to happen is wireless charging. Your low-draw goodies wouldn’t be hooked to anything.

    Furthermore, going DC wouldn’t make it appreciably less expensive to go off the grid. The only thing that would be saved is the DC to AC inverter and those prices are dropping.

  8. Bob Wallace says:

    Let me write a simple/single ‘why not’.

    Your argument for wiring buildings with DC is to make it possible to plug in electronics without using an adapter.

    It would be very unrealistic to run a house or commercial building using low voltage power, either AC or DC.

    If we wired buildings 100+vdc (in order to keep wire size reasonable) you’d still need an adapter to get the voltage down to 5vdc.

  9. Mark Shapiro says:

    Thanks for helping think it through.

    I’m not suggesting a whole DC grid and wiring system parallel to today’s AC system, just trying accommodate the huge, and growing, number of DC devices.

    The big appliances: refers, washers, air conditioners, microwaves, stoves, dryers, still do best on 220 VAC.

    But nearly everything else in a house or small office is electronic. LED lighting is also DC. A big part of their cost is rectifiers etc, built into each bulb! Does it make sense to tie them together; have one adapter per room or per floor instead of one for every device and every LED light bulb? Yes, different devices use different voltages, so I’m guessing that stepping down a standard DC voltage to a lower one is simple and cheap, but I don’t know.

    Anyway, I’m glad that Europe is adopting a standard adapter for cell phones — micro-USB. I think it will be widely adopted and useful.

  10. Chris Dudley says:

    For the first loan guarantee, the reactor design looks to be less safe than existing reactors. http://green.blogs.nytimes.com/2010/04/21/critics-challenge-safety-of-new-nuclear-reactor-design/
    If they can’t get that right, I doubt the loan will ever be repaid. We need a 100% upfront escrow to protect taxpayers in case of loan default.

  11. Bob Wallace says:

    “We need a 100% upfront escrow to protect taxpayers in case of loan default.”

    If the companies had that much cash then they wouldn’t need financing. Southern Company, for example, had $733M in cash on hand and $18.13B in long-term debt as of December 2009.

    Their balance sheet shows a total value of about $50 billion (actual value could be significantly higher due to depreciation taken and under-valuation).

    It does seem that they ought to be on the hook for the full amount of any government loan. Use the government guarantee so that the market feels comfortable making the loan at a lower interest rate, but in the event of default allow the taxpayer to recover their money via asset attachment.

  12. Chris Dudley says:

    Bob,

    That is kind of the point. They are going to default for sure so we should not be encouraging them in this.

  13. Bob Wallace says:

    A bit over the top Chris. Nothing is served by extreme statements.

    Southern is running two reactors right next to where they intend to build these. They may well finish these two new reactors. And the people in their service area may enjoy high utility bills far into the future as bills drop in non-new nuke parts of the country.

    (There’s some interesting new data out showing how wind undercuts more expensive energy sources and eats into their profit.)

    And it’s not that we are encouraging them to build these reactors. There are lots of people on the left who feel that nuclear is a big part of the global warming fix. And lots of people on the right who hate renewables simply because “hippies” talked about them first. (Some version of that.)

    To placate these people, who do have votes, we pretty much have to give them a chance to prove their point. Clearly they can’t build a reactor by borrowing money at market rates.

    The market wants little to do with reactor construction, would loan money only at junk bond plus rates. And anyone pushing a pencil can easily determine that if money had to be borrowed at 15+% there is no way in hell to build a reactor.

    So we guarantee a few billion dollars in loans that might go sour. Remember, we burn 21 million barrels of oil per day at $70+. Eight billion dollars lost on a bad loan is less than a week of oil.

    One of two things is going to happen. The unlikely – Southern will build a couple of reactors for less than what most people think the cost will be and build them quicker than anyone expects. The more likely – cost and completion date overruns and the end of new nuclear builds.

    Think of it as a research project. And if we were to make Southern put up hard assets as collateral….