Backing Nuclear Power
October 17, 2008
Taxpayers may have rescued America's banking system, but will they have to assist the country's nuclear energy program, too?
At issue are federal loan guarantees that assure borrowers that they will get reimbursed in the case of default. As part of the Energy Policy Act of 2005, Congress authorized such guarantees and then instructed the U.S. Department of Energy to devise the program. About $18.5 billion is now on the table, although some proponents of the nuclear sector say that the amount must be revised upward if some of the 30 proposed plants are to actually get erected.
Backers of that government policy emphasize that the loan guarantees are not taxpayer handouts but rather a form of insurance that will entice Wall Street bankers to invest in their enterprises. Opponents of them, conversely, say that nuclear plants are expensive and uncompetitive and have a proven track record of cost-overruns. As such, if they are unable to receive private financing then taxpayers should not become a backstop.
The one thing that both sides can agree upon is that the capital costs associated with constructing nuclear power plants are tremendous. According to Moody's Investor Services, the number is akin to $9 billion per reactor -- a lot more than a conventional fossil fired plant or a renewable energy facility.
To put the matter in perspective, consider that the North American Electric Reliability Corp. is predicting nearly a 2 percent increase each year for the next 10 years, necessitating many thousands of megawatts of new generation. Nuclear advocates are drawing support from an amalgam of constituencies including some environmental groups that espouse the fact that such energy has few carbon-associated emissions.
The roughly 30 nuclear projects on the drawing board are on top of the 104 reactors that are currently operating in the United States. But none have been ordered here since the 1970s. Since then, the financial risks have been high as lenders fear project delays and excessive capital costs.
The industry's revival, however, has spawned lots of interest from utilities. Among them, FPL Group and Progress Energy might combine to build two reactors at an estimated cost of at least $8.5 billion each while Southern Company has one planned that it says will come with a $14 billion price tag. Constellation and EdF have one planned for $9.6 billion and Duke Energy is discussing the construction of two nuclear projects to be completed by 2016 at a cost of $4-$6 billion each. The Charlotte-based company just filed an application with the Energy Department for a loan guarantee.
"Loan guarantees allow utilities to lower capital costs for new nuclear construction, which ultimately leads to lower electricity prices for consumers," says Jim Rogers, chief executive of Duke Energy.
Regulatory Path
If Duke and the others receive the loan guarantees, they could then head to the banking community and provide it with the assurance that any advance -- about 80 percent of a project's cost -- would be backed in full. Understandably, Wall Street sees a potential new opportunity to finance billions in new deals and many such firms have argued on Capitol Hill that the guarantees are necessary to get the industry back on its footing. Otherwise, lenders won't bear the regulatory and financial risks.
But that is precisely the argument that opponents of those loan guarantees are making. They say that it is unclear why an industry that is indisputably mature and which has provided a product for decades needs government help. If their ventures are worthy, then they should be able to attract capital just as entrepreneurs in the wind, solar and energy efficiency sectors have been doing.
"Loan guarantees are typically used for emerging technologies," says Michael Mariotte, executive director of Nuclear Information and Resource Service. "We have a case in which private money dried up decades ago because the technology is financially too risky. The private sector has said it is not playing unless the industry can find a way to ensure it gets paid back -- odd since it is risking its money on renewable energy projects."
Meanwhile, the issue is part of the broader debate in the coming presidential election. Republican Nominee John McCain has tried to stand out by saying that he supports the construction of 45 new nuclear power plants by 2030 and another 10 more over the next 10 years. The Democratic nominee Barack Obama, meanwhile, says that increasing the presence of nuclear energy is a future option, but it is not one he would consider now given the concerns over where to store and how to recycle radioactive nuclear waste.
Needless to say, the regulatory hurdles that nuclear power proponents must jump remain formidable. Developers must get approval from numerous state and federal agencies before they can begin to talk about financing. For its part, the industry is not sitting tight. It is a well-oiled lobbying organization and it has spent generously in the quest to begin building anew. It has also extended its outreach to community groups in an effort to clearly explain its positions.
The results of those efforts are showing. A decade ago, the industry was down on its knees. Today, though, it has rallied the support of former environmental opponents as well as lawmakers from both political parties. The presidential candidates, meantime, are either enthusiastic or are at least warm to the idea. If the nuclear sector continues to press the issue in an open and honest fashion, then the regulatory path will ease and the subsequent financial backing may follow.