CAN WE AFFORD MORE SUBSIDIES FOR NUCLEAR POWER?

The Senate may finally start debating climate and energy legislation
now that Sens. Barbara Boxer (D-Calif.) and John Kerry (D-Mass.) have
introduced the Clean Energy Jobs and American Power Act. But the
addition of a nuclear provision to the bill raises some questions. What
will be the fate of the so-called nuclear power renaissance, and to what
extent will taxpayers be asked to underwrite it?

Expanding nuclear power capacity in the United Statesbeyond the current
fleet of 104 reactors -- which do not emit global warming pollution when
operating -- has the potential to help combat climate change. Nuclear
power currently generates about 20 percent of U.S.electricity, and
building more reactors could reduce the 50 percent market share held by
coal-fired power plants, the nation's primary source of global warming
emissions.

But is nuclear power a climate solution we can afford? The short
answer, according to the Union of Concerned Scientists (UCS), is no. As
UCS Nuclear Energy and Climate Change Project Manager Ellen Vancko
notes, "Even if you discount nuclear power's current security and
safety problems, the skyrocketing cost of construction could be the
industry's Achilles' heel."

Wall Street has made it clear that it will not finance the nuclear
industry's expansion without federal loan guarantees because of the
high risks and uncertain costs associated with such investments. A
recent Moody's report characterized investments new nuclear plants as
a "bet the farm" risk, stating that companies that build new
reactors will take on a higher business and operating risk profile,
which will threaten their credit ratings.

To circumvent these financing challenges, the nuclear industry is
supporting legislation that was passed by the Senate Committee on Energy
and Natural Resources in June. That bill, S. 1462, would underwrite the
industry's expansion by creating a new Clean Energy Deployment
Administration (CEDA). Although CEDA's provisions are poorly
understood, the implications of this pending legislation are enormous,
according to UCS.

A recent Congressional Budget Office (CBO) report concluded that S.
1462 would exempt the Department of Energy's (DOE) Loan Guarantee
Program, which was established under the Energy Policy Act of 2005, from
Federal Credit Reform Act provisions requiring such programs to be
funded each year by congressional appropriation."The effect of this
exemption," the CBO stated, "would be to give DOE permanent
authority to guarantee such loans without further legislative action or
limitations."That means DOE could give virtually unlimited loan
guarantees to expensive and risky new technologies, all underwritten by
taxpayers without congressional oversight. (For the CBO report, go to
www.cbo.gov/doc.cfm?index=10637.)

"The Congressional Budget Office estimates that the Energy Department
could hand out more than $130 billion to nuclear and fossil fuel energy
projects," Vancko said. "That's a lot of money. But what is
evenmore alarming is that CBO's calculation is based solely on pending
Energy Department loan guarantee applications. It does not include an
estimation of the hundreds of billions of dollars in additional loan
guarantees that could be approved by a new energy bank if this program
becomes law."

Vancko recently co-authored a briefing paper, "Nuclear Power: A
Resurgence We Can't Afford," which is available at
www.ucsusa.org/nuclear_power/nuclear_power_and_global_warming/nuclear-po....
In it she provides a clear-eyed look at the nuclear industry's history
of cost overruns, projections of current reactor construction costs,
comparisons with cleaner, more cost-effective low-carbon energy options,
and the potential risks to taxpayers from overly generous federal
subsidies and loan guarantees. Another UCS briefing paper from earlier
this year, "Nuclear Loan Guarantees: Another Taxpayer Bailout
Ahead?," should also be of interest. For that report, go to
www.ucsusa.org/nuclear_power/nuclear_power_and_global_warming/nuclear-lo....

Ellen Vancko is available for interviews. Please call Elliott Negin at
202-331-5439.

###

Now celebrating its 40th anniversary, the Union of Concerned Scientists
is the leading U.S.science-based nonprofit organization working for a
healthy environment and a safer world. UCS is headquartered in
Cambridge, Massachusetts, and also has offices in Berkeley, Chicago and
Washington, D.C.For more information, go to www.ucsusa.org (
http://www.ucsusa.org/ ).

In case you missed this article from earlier this month:

LEGISLATION: GREEN BANK PROPOSALS PROBE THE HOSTILE FRONTIER OF
POLITICS ANDFINANCE (10/02/2009)
By Peter Behr, E&E reporter

Of all the pieces of the climate legislation before Congress this year,
the most popular may well be proposals to create a federal bank to
channel loans, loan guarantees and other financing to clean energy
projects.

In a year of often bitter partisan warfare, its appeal is not
surprising, advocates say.

Depending on its final structure, the proposed Clean Energy Deployment
Administration (CEDA) could be funded with up to $10 billion from the
Treasury. That capital, in turn, could guarantee $100 billion in
revolving loans. CEDA advocates say the $100 billion in federally backed
loans could bring in another $100 billion in private capital, vastly
accelerating deployment of smart grid technologies, renewable
generation, carbon abatement programs and nuclear power.

Could financing by a green bank hasten the retirement of old,
coal-fired power plants like this one?
The argument has political traction. The House-passed climate bill,
sponsored by Democrats Henry Waxman (Calif.) and Edward Markey
(D-Mass.), includes a CEDA provision. So does the energy bill approved
in August by the Senate Energy and Natural Resources Committee. Although
the House and Senate versions differ in places, both have bipartisan
support from lawmakers frustrated by slow pace of the Energy
Department's current energy loan guarantee program.

The future design of a green bank is in play now as senators consider
climate and energy bills. The question about CEDA being asked in Senate
offices currently is not whether to create it, but how far it might
range in supporting clean energy.

"It could have a much broader mandate" than the current Energy
Department energy loan guarantee program, said Swami Venkataraman, a
group director at the Standard & Poor's credit rating service. "It
could make loan guarantees, direct loans, or provide insurance, for
example, to cover the risk of carbon dioxide leaks from underground
storage."

LOANS FOR GREAT BIG, SOOTY CLUNKERS

Other roles for the bank are under discussion on Capitol Hill. Natural
gas industry lobbyists say the bank could buy old, dirtier coal plants
from power companies at auction. The plants would be shut down, and the
utilities would use the money to build new renewable energy generation
-- an energy version of the Cash for Clunkers program for automobiles.
New gas plants would be the natural backup for increased reliance on
renewable energy, according to the industry's pitch.

Or the bank could support large-scale home weatherization and energy
conservation programs across the county, guaranteeing homeowner loans
that could then be securitized and resold in secondary markets. "The
details of how it would function have to be finalized, and these are
quite open for discussion and debate," said Venkataraman.

Former Federal Communications Commission Chairman Reed Hundt, who heads
a lobbying group called the Coalition for the Green Bank, says federal
funding support is essential, given the cost of renewable energy and the
still-battered state of the banking sector.

"Everyone recognizes that right now, the cost of raising money to pay
for the green revolution is prohibitive," he said. That means that
either consumers must pay significantly more for energy or the
government must continue up-front subsidies, and neither will work for
the long run. "We need a system that is long-term, that is going to
work for 20 years, not one that goes from Congress to Congress. Here's
what's long term -- a 30-year [guaranteed] bond at 4 1/2 percent with
a low risk of default."

Opposition to various versions of the green bank idea comes from
several directions.

CASHFOR NEWNUKES?

Anti-nuclear advocates fear the program would be dominated by huge loan
commitments for new nuclear reactors. Critics also oppose a provision in
the Senate bill that they say would remove annual congressional
oversight of the bank's obligations.

The Union of Concerned Scientists issued a statement last week opposing
parts of the Senate committee bill that it said failed to limit costly
loan guarantees for new nuclear plants and carbon sequestration
projects.

"With no limit on the amount of financial assistance for any one
technology, CEDA's project portfolio could disproportionately factor
capital intensive, non-renewable energy technologies at the expense of
less costly, cleaner technologies," said UCS, pointing a finger at
nuclear reactors.

The House-passed bill is far preferable, says Autumn Hanna, senior
program director at Taxpayers for Common Sense. The House version says
that no single technology -- whether nuclear, wind or any other -- could
get more than 30 percent of CEDA's support.

The Senate bill does not set such a limit, on the grounds that the
total funding commitments by the bank would depend on the varying level
of default risk for various energy projects, which would be lower for
established technologies like wind power and higher, say, for advanced
storage battery projects. A 30 percent cap doesn't make sense in that
context, supporters of the Senate bill say.

Critics aren't persuaded. "We have serious concerns with the
proposals and think they will have serious implications for
taxpayers," Hanna added. She is particularly vexed at part of the
Senate bill and the green bank coalition proposal that removes loan
decisions from regular congressional oversight.

The Federal Credit Reform Act requires annual appropriations to cover
the estimated cost of loan defaults, but CEDA would be exempt from that
in the Senate and coalition plans. "That's one of the biggest
issues," Hanna said.

Hundt responded that it makes far more sense to capitalize the bank
once and for all, rather than require annual appropriations, which would
leave it "totally politicized all the time," he said.

LIKE TVA WITH A CHECKBOOK?

The House version creates CEDA as a government-owned corporation like
the Tennessee Valley Authority. The Senate would make it a corporation
within the Energy Department. In either case, the public interest can be
protected by government audits and congressional oversight, proponents
say. Michele Boyd, director of the Safe Energy Program for Physicians
for Social Responsibility, said the critical issue is how well CEDA
would measure the risk of default. On this issue, she said, the Senate
version offers much less visibility than the House bill

Hanging over the proposal in some minds is the memory of the housing
bubble and the toxic spawn of securitized mortgages, no-document loans,
credit default swaps and other structured finance vehicles that
metastasized into a global financial crisis.

While the differences between the multitrillion-dollar housing bubble
and the energy industry are profound, CEDA skeptics worry that CEDA will
move guaranteed energy loans into secondary financial markets, creating
fee-driven, poorly vetted energy investments backed by taxpayers.

The creation of an effective "green bank" requires a collaboration
between Congress and Wall Street, where politics and finance meet, and
that boundary has been rubbed raw by the financial crisis and recession.
Hundt's coalition includes a strong representation of private equity
financiers, venture funders and professionals in that field such as
Equilibrium Capital Group, GreenCore Capital, KRM Energy Advisors,
Riverstone Holdings and Mesirow Financial Consulting LLC.

"Whenever 100 bankers line up behind 50 senators, you start to wonder
what's in the bill," said Kevin Book, a principal at ClearView
Energy Partners in Washington. But he added that the collaboration is
essential, whether the issue is carbon markets or an energy loan
guarantee program. "It is impossible to meet the financing needs for
green energy without private capital."

Analogies between the housing bubble and a green energy campaign are
off-target, he maintained. "Consumer mortgages can be written in an
hour. Even the quickest energy project has permitting requirements that
completely identify partners and stakeholders every step of the way."

Hundt said a critical difference is that the implicit government
banking behind the mortgage bubble came from Fannie Mae and Freddie Mac,
both of them profit-seeking enterprises. The bank must be nonprofit, he
said. Concerns about derivative transactions tied to bank financing
should be dealt with by overall financial market reform, Hundt added.

GOVERNMENT-BACKED LOANS THAT CAN BE ‘STRIPPED'?

An illustration of the financial-political tension involves the issue
of "stripping" or separating the guaranteed parts of green bank
loans from non-guaranteed parts.

The bank's most common product could be a project loan with a
government guarantee covering 80 percent of the total, and the remaining
20 percent borrowed by the project developers from commercial banks or
private lenders without a guarantee.

S&P's Venkataraman has advised the Energy Department that if loans
cannot be stripped, then the risk of default on the unguaranteed 20
percent portion would lower the credit score -- and raise the borrowing
costs -- for the entire project. If, however, the debt is separated into
guaranteed and non-guaranteed portions, and then resold separately to
investors, the high rating on the government-backed debt could offset
the much lower rating on the privately issued debt, potentially lowering
the project's overall financing costs.

Doug Koplow, president of Earth Track, a Cambridge, Mass., advocacy
group, said the private lenders in the energy deals should stay in the
deal, to give them more reason to scrutinize the energy project
proposals carefully at the outset. "There's a public benefit in
requiring lenders to keep their capital at risk for an extended period
of time," he said. "If private lenders weren't able to get out a
month later, leaving the feds holding the bag, I'd have a lot more
confidence the deal wouldn't blow up."

DOE last month proposed to permit loan stripping in its current loan
guarantee program except when the government guarantees more than 90
percent of a loan.

Allowing green energy loans to move into secondary markets replenishes
the capital of private lenders so the process can keep going, replies
Hundt. "We need to add 25 gigawatts of clean energy capacity every
year for 16 straight years, and we need to get started right away,"
Hundt said.

###
Elliott Negin

Media Director
Union of Concerned Scientists
1825 K St. NW, Suite 800
Washington, DC 20006-1232
202-331-5439 (direct)
202-997-1472 (cell)
202-331-5420 (Media Department)
202-223-6162 (fax)
[email protected]
Web site: www.ucsusa.org ( http://www.ucsusa.org/ )

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