What Does $36B in Nuclear Loan Guarantees Buy Democrats?

February 9, 2010

By KATHERINE LING of Greenwire
The Obama administration extended a helping hand to the nuclear industry last week by proposing to expand nuclear power loan guarantee authority by $36 billion, putting into action its long-stated support for the energy source.
The question now is what the White House has to gain by providing a total of $54 billion in loan guarantee authority for nuclear projects.

The move is not necessarily enough to get Wall Street to jump in to finance a "nuclear renaissance." And while it may soften GOP rhetoric toward the Democrats on nuclear power, it could give away a key bargaining chip needed to obtain Republican support for a bill to limit greenhouse gas emissions.

Republicans last week praised Obama's overtures, but none offered any change of heart on policy matters.
"What the president has proposed in his budget that still doesn't meet the needs but it is at least a positive step forward," said Sen. Lisa Murkowski (R-Alaska), ranking member of the Energy and Natural Resources Committee. "I think most of my colleagues are appreciative of that step forward on loan guarantees, that it is important."

"I think the public appreciates it if the president stands up and says, 'I'm for a new generation of nuclear power plants, I want to increase the loan guarantees and find out a way to get rid of nuclear fuel.' I'm glad to praise him on that, and I think the public welcomes that kind of work back and forth," said Sen. Lamar Alexander (R-Tenn.).

Judd Gregg (R-N.H.) said the move is "very constructive in moving the process along."

Democrats also thought it helped set a better atmosphere for negotiations on an energy and a climate bill. Sen. John Kerry (D-Mass.), who is negotiating on a bill to cut carbon dioxide emissions with Sens. Joe Lieberman (I-Conn.) and Lindsey Graham (R-S.C.), said Obama's budget proposal and State of the Union address helped support the negotiating process.

"I know a lot of Republicans were impressed by the president's listing of priorities in terms of energy, particularly nuclear and the drilling and those other components. They thought it was good. They thought it was positive," Kerry said. He added that increasing nuclear loan guarantees was being considered as part of the nuclear title, so the White House's decision did not hurt the climate bill's chances of getting more votes.

"It's OK. We need people to take a look at what the package is when we have a package. And then we'll see where people are," Kerry said.

Sen. Tom Carper (D-Del.), one of the strongest Democratic nuclear supporters, said it is time for Republicans who support nuclear to now take action to back their words. "If the Republicans are interested in helping to ensure a renaissance for nuclear power in this country, I think the path is clear for how we might do that," he said.

"They want to see as many as 100 plants built in the next 40 years. We'll find out if they're really serious about getting started. If they are, they've got a great opportunity to work with us," Carper added.

Waste management? Tax incentives?

The move might have brought goodwill, but Daniel Weiss, senior fellow and director of climate strategy for the Center for American Progress, said the White House gave up a keystone in climate bill negotiations for nothing.

"The administration should use nuclear loans, this nuclear loan proposal as glue to hold the deal together rather than bait to create a deal, as bait to get someone to talk to them," Weiss said. "There is an opportunity for the nuclear industry to increase their federal subsidies, but it has to be in the context of a comprehensive bipartisan global warming pollution reduction bill."

Republicans wasted no time before getting back to other needs for the nuclear industry, especially since the administration's fiscal 2011 budget would officially cancel the nuclear waste repository at Yucca Mountain, Nev. The administration has created a "blue ribbon" commission to find alternatives to Yucca and announced its members the week before the budget.

"By taking Yucca off the table, we really have not dealt with the back-end of the nuclear equation and how we deal with waste," Murkowski said. "So the administration on one hand says, 'OK, well, we will double on loan guarantees.' That is a good positive step, but if you are looking to invest you don't have that clear signal that this administration is committed to the full on nuclear process."

Energy Secretary Steven Chu told the Energy and Natural Resources panel that the intent of providing the extra $36 billion is to finance seven to 10 new nuclear power plants to provide confidence to the private sector to finance additional plants on their own.

But Sen. Richard Burr (R-N.C.) said that meant nothing without a solution for the waste. "Temporary storage does not meet the requirement for shareholders to aggressively invest in the build out of nuclear generation," Burr said. "As long as the government loans are in place we will probably have activity to build out, but I personally do not believe that is enough nuclear generation plants for the future. So if we build out two dozen and then we stop, where are we better off than the fact that we haven't built any for decades?"

Sen. John McCain (R-Ariz.) summarily dismissed any administrative action on nuclear power without addressing the waste issue. "His secretary of energy says they won't recycle, and they won't restore. That's a nonstarter, so I don't pay attention," McCain said.
Chu said current recycling technology is still a proliferation risk, and DOE should invest in advanced research of recycling and utilitizing more fuel the first time through a reactor.

Loan guarantees "fall into the category of necessary but not sufficient," said an industry source. "Inevitably questions are going to come up. I think that is where the industry, what has been one of the biggest challenges in working with policymakers who had this perception that we will put this money out there and you will have the plant built tomorrow, right?"

The loan guarantees will help nuclear projects in regulated markets where it provides incentives for state regulators to approve power plants paid for by state consumers, but overall additional tax incentives and other support will definitely be needed in competitive markets, the source said.

John Rowe, CEO and president of Exelon Corp., the U.S. utility with the most nuclear capacity in its fleet, told the Wall Street Journal in November that even with a loan guarantee he would need a price of $8-per-gallon gasoline and $25-per-ton carbon in 2018 to justify the economics of building a nuclear plant in a competitive market such as Texas, where the company had proposed a plant.

Critics of loan guarantees for nuclear power say all the additional help for nuclear power requests on top of the loan guarantee authority emphasizes the potential for financial catastrophe.

"With hundreds of billions in bailouts already on the shoulders of U.S. taxpayers, the country cannot afford to move forward with a program that could easily become the black hole for hundreds of billions more," Taxpayers for Common Sense wrote in a letter to Obama last month. "The DOE program currently has more than $50 billion in loan guarantee authority and no time restriction on its use. Regardless of your opinion on the loan guarantee program, providing any additional authority while this funding is already available is fiscally irresponsible."

Loan guarantees do not actually require the government to pay the money up front, and the government only has to inject money into the project if it fails. DOE is supposed to require a credit subsidy from each of the projects awarded loan guarantees in order to pay for the projects that default. But covering 80 percent of expenses of one nuclear reactor would be a minimum of about $5 billion to $7 billion, and a 2003 assessment by the Congressional Budget Office estimated nuclear projects have a 50 percent chance of default.

"It is a huge liability for the taxpayers even if CBO is off by half, it is a 25 percent possibility of default still, the taxpayer is on the hook for billions of dollars and getting nothing in return," CAP's Weiss said. "That is the burden on senators who see themselves as deficit hawks to do something about this."

Several of the top four contenders for the loan guarantee authority already face issues and potential delays, including a $4 billion jump in cost estimate that has jeopardized NRG Energy Co.'s South Texas project and design flaws in the Westinghouse AP1000 reactor that Southern Co.'s Vogtle plant in Georgia and SCANA's Summer plant in South Carolina are relying on.

Next on the wish list

Even with billions of dollars more in the loan guarantee program, there is still the matter of negotiating the hundreds of millions of dollars in up-front costs nuclear companies have to pay DOE for the billion-dollar loan guarantee authority -- known as a credit subsidy -- that is likely tying up the current $18.5 billion. The industry would like the subsidy to be 1 percent of the project, while critics would like it as high as 50 percent, reflecting CBO's default risk. It is unclear what DOE and the White House Office of Management and Budget are deciding is reasonable.

"Frankly, my sense is the delay in the program for nuclear turns in substantial part on debates about what exactly is that credit subsidy cost," said Mary Anne Sullivan, a partner at the Hogan and Hartson law firm in Washington, D.C., who has several clients who have applied to the nuclear loan guarantee program. "If that problem were taken off the table, if there was an appropriation to cover it, that would speed the process. That would make it easier on everybody," she said.

The White House proposed fiscal 2011 budget includes $500 million in appropriation to cover the credit subsidy costs of renewable energy and energy efficiency loan guarantees.

Other incentives that nuclear supporters may try to negotiate into a nuclear title in a climate bill include investment tax credits, worker education programs and extended insurance coverage.

A draft of a nuclear title from Sen. Lieberman recently in circulation, although outdated, includes additional regulatory risk insurance, accelerated depreciation for nuclear plants, investment tax credits similar to renewable energy and language to expedite the Nuclear Regulatory Commission licensing process.

This lines up with the nuclear industry's proposal (pdf) released in October. It not only included a $100 billion boost for the entire loan guarantee program but also an extension of the production tax credits for new nuclear reactors through 2025; the removal of the 6,000-megawatt limitation for those credits; a 30 percent investment tax credit or a grant in lieu of the production tax credit; tax credits for new or expanded manufacturing and worker training; and the reduction or elimination of tariffs on nuclear components under certain conditions (E&ENews PM, Oct. 26, 2009).

The Nuclear Energy Institute proposal was mostly silent on the waste issue, asking for a restructuring of the used fuel waste management program after a "blue ribbon" commission completes its recommendations.

Kerry told reporters last week that tax incentives are also part of the nuclear title in the climate bill he is negotiating, although he did not provide details.

But Sullivan said these additional incentives are only a bonus now that Obama boosted the loan guarantee program, if Congress approves the addition. The loan guarantee authority, as well as the 2005 tax incentives and insurance policies, are what her clients have used in their economic calculations, and based on them, and not any future incentives, have decided to move forward, she said.

The increase in loan guarantees "is a huge plus. Are there other things the industry would like? Of course. Their imagination is as large as their plants," Sullivan said. "I think it is enough of a push that if the industry can perform on the construction side as well as they have performed on the operation side over the last decade this should really give the nuclear renaissance some steam."

Senior reporter Darren Samuelsohn contributed.