Saturday, September 8, 2007

Abstract - Nuclear Loan Guarantees Pending in Congress

Fate of Loan Guarantees Tied to Funding Bills
Industry and Environmental Groups Contend for Influence

by Dan Yurman, Contributing Reporter
Fuel Cycle Week V6 N244 September 4, 2007

As Congress returns from its August recess, it is facing a key issue for the nuclear industry, whether and how much support the federal government will provide to the construction of new nuclear power plants in the form of federal loan guarantees under Title XVII of the Energy Policy Act of 2005.

There are stark differences in the House and Senate bills, which must go to a conference committee and then be passed by both chambers before October 1st. The House passed its appropriation bill, but the bad news for the nuclear industry is that Democrats removed all support for nuclear energy loan guarantees from the bill. The Senate Appropriations Committee offers generous terms for loan guarantees that go far beyond the original conditions of the Energy Policy Act. It isn’t clear when the Senate bill will see floor action.

The House Appropriations bill is contentious even without the loan guarantee issue. President Bush has threatened to veto the funding measure as it now stands. The $25.24 billion allocated for the department in the House version is $1.15 billion over the 2007 budget. Much of the extra spending was focused on climate-change programs, with $1.9 billion for energy efficiency and renewable energy programs, including solar energy, biofuels and vehicle technology. That’s enough to get OMB’s attention and a recommendation for a presidential veto.

Senate, House Appropriations Bills Markedly Differ on Loan Guarantees

Title XVII of the Energy Policy Act of 2005 authorizes DOE to provide loan guarantees for new or improved technologies that reduce greenhouse gases. Nuclear energy is on the list of eligible technologies. A key provision limits loan guarantees to apply only to “new or significantly improved technologies.” Proven commercial nuclear energy reactor designs, such as those licensed by NRC to Westinghouse and General Electric, aren’t eligible for the loan guarantees under the Act, but that hasn’t stopped the industry from trying to change it nor environmental groups from trying kill off loan guarantees completely.

It comes as no surprise that major U.S. environmental groups oppose loan guarantees for nuclear power plants for the same reasons they oppose the plants themselves. These reasons include the lack of a permanent solution to management of spent nuclear fuel and concerns about the potential for terrorist attacks.

Perhaps the most radical idea about loan guarantees comes from Peter Bradford, a former member of the Nuclear Regulatory Commission. In a bit of conceptual block busting, he says DOE should forget about subsidies and loan guarantees altogether. Bradford told the Dallas Morning News last January the government ought to just build the first few new nuclear power plants and operate them until investors are confident nuclear energy is a safe bet. Then the financing would flow because the risks would have been worked out in revised plant designs and improved construction processes.

This sounds like an interesting idea, but it goes down hard with Edwin Lyman, a spokesman for the anti-nuclear Union of Concerned Scientists (UCS). Lyman told FCW the nuclear industry now faces the challenge of proving its economic argument. The only way to do that, he said, is by demonstrating that “the so-called resurgence will result in the construction of more than a small number of reactors, exactly the number that receive subsidies under the Energy Policy Act.”

Adrian Heymer, the Nuclear Energy Institute’s Director for New Plant Deployment, disagrees. He told MSNBC last January the extent of the rebound will soon be clear. While Lyman might be thinking about just four plants, Heymer says applications to the NRC to build 24 or more new nuclear reactors are expected by the end of 2007.

A less contentious policy position than the one laid out by UCS emerges from an interview with Chris Paine, Director of Nuclear Programs, at the Natural Resources Defense Council (NRDC). In response to questions from FCW about loan guarantees, Paine said he anchors his views on the legislative intent of the 2005 Energy Act. If Congress “cannot resist the urge to extend loan guarantees” to new nuclear power plants, it should stick to guaranteeing “only those investments that represent the first constructed unit of a new design licensed for the US market.”

David Frantz takes the helm at DOE's Loan Guarantee Program

The Department of Energy has a new director for its loan guarantee program. David Frantz was named to the post in August. He comes to DOE from the Overseas Private Investment Corporation, with long experience in the public and private- sectors in executive roles managing complex financial instruments. He has advanced degrees in business and securities studies from Tufts University.

This is the type of financial background that the nuclear industry asked the Energy Dept, to get in a leader for the loan program. The Senate also called for an experienced executive in the financial services field. They got what they asked for in a director, but it still doesn’t alter OMB's position which offers the industry far less in covering debt for new nuclear plants than the industry wants.

Frantz, who declined to be interviewed by phone, responded via email to an FCW reporter's questions through DOE spokesperson Megan Barnett. Frantz has inherited the management of DOE’s draft regulations, issued last May.

In them DOE wrote it would guarantee up to 90% of the amount of any loan as long as DOE does not issue guarantees for more than 80% of the total cost of a project. These numbers leave some pretty big holes in the loan coverage and the industry is not happy about them.

According to NEI, under DOE’s plan, commercial debt would be ranked second relative to debt guaranteed by the government. This requirement would have the effect of limiting investor debt for a new nuclear plant to the amount that would be covered by the government and no more. Given the huge costs associated with a new plant, no investor is going to provide funding and stand in second place.

Domenici weighs in on loan guarantees

Senate support for the Council’s position is highlighted by Sen. Pete Domenici. At a July 26th Senate hearing, he lectured Jim Nussle, who was testifying on his nomination to be the Director of the Office of Management & Budget (OMB), about the loan program. Domenici accused OMB of “dragging its feet” on implementing the loan guarantee program.

Instead, Domenici said the loan guarantees should cover $25-30 billion in new investment and hit the industry’s mark of 80% of the cost and 100% of the loans.

Two days later on August 2nd Domenici got an answer more to his liking. In a press release, the New Mexico Senator said he received “a commitment from OMB” to meet his demands.

Industry mobilizes a new group to change the Energy Act

The American Council on Global Nuclear Competitiveness, a relatively new nuclear industry trade organization, is advocating that the federal guarantee program be expanded to cover other types of nuclear facilities. The new facilities would include uranium mills, processing plants, conversion, enrichment facilities, reactor component fabrication facilities, and spent fuel reprocessing facilities.

Kotek calculates the political drift this way: He points out there are 104 nuclear plants operating in the U.S. at 64 sites in 31 states. While only one in seven member in the House have a reactor in their district, the situation is very different in the Senate. The 31 states translates into 62 of 100 Senators who have reactors in their states. Add nuclear R&D operations at DOE labs in several states and, “you have a solid majority of senators, including Democrats, who have states that enjoy the benefits of nuclear energy.”

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Karen Street said...


Thanks for your blog.

Could you explain to the lay person why loan guarantees are so important to the nuclear power industry?

Ohadi Langis said...

The answer to your question is that no new nuclear power plants have been built in the U.S. since the late 1970s. There are many "first-of-a-kind" engineering issues which need to be resolved, and there is a risk factor because of the huge sums needed to construct a nuclear power plant. Government loan guarantees are a form of insurance against these risks which allow investors to put up the money for the plant and charge a commercially attractive interest rate to the utility.