Sunday, December 7, 2008

An alternative to nuclear loan guarantees

Betting the company, even with insurance, is a bad idea

poker chipsAdvocates of loan guarantees for new nuclear power plants have argued that federal insurance for 100% of the loans and 80% of the cost of the new plant will provide confidence to investors. The idea is that by reducing lender exposure to risk of default to just 20% of the cost of the plant that investors will provide the funds to build new reactors. In good times this seemed like a good plan.

In the case of a $4.5 billion 1000 MW facility, the formula would result in insurance for $3.6 billion leaving $0.9 billion at risk in the event the project fails. Cost overruns are not insured. Few utilities and even fewer investors would want to be on the hook for $900 million or more. Anyone watching the catastrophic financial turmoil worldwide knows this plan won't work given current circumstances.

Good times have turned to hard times, and with this drastic change, comes the need to take a new look at the funding mechanisms for new nuclear builds. There has to be a better plan, and there could be one that works if a different set of funding mechanisms and organizational arrangements were put in place. The federal government currently funds large environmental infrastructure projects for water pollution control with revolving loans. The model could be applied to building nuclear power plants.

The government as a credit union

The main idea is that the government should set up a revolving loan fund and be the investor of first choice for a nuclear utility. By offering funding at 100% of the cost of the plant, to be repaid over 15 years at a rate equal to a treasury bond, e.g., 4.5%, the government would break even and provide exactly the same benefit to the utility as a loan guarantee. The difference is the government assumes all the risk, not just 80% of it.

powerlinesNeither the utilities nor the investors in the plant would be exposed to a 20% stop loss in the event of default. Smaller utilities like Ameren (NYSE:AEE)would not have to "bet the company" to get in the game. Larger utilities like Duke (NYSE:DUK) could more quickly commit to building new nuclear power plants and retire older coal fired plants and eliminate their greenhouse gases. Most importantly, this arrangement would make moot state laws that strangle new nuclear builds with prohibitions on recovery of construction costs while the plant is being built.

Smart grids needed for the nation

The second organizational arrangement is to set up smart grids to get the electricity to market and to lock in rate bases so that Independent Power Producers don't pick off the most lucrative customers. This organizational arrangement could include regional power consortiums that promote cooperation across state lines and normalize rates of return for the new nuclear plants. Upgrades to the nation's electrical transmission and distribution grids are needed, and the development of regional compacts among utilities would be advanced as a result of lower costs associated with building new nuclear plants.

In short, there are two mechanisms which would be needed to make this idea work (1) a revolving loan fund, and (2) multi-state electric power compacts to speed development of upgraded delivery of electrical power from the new plants. This isn't TVA on steroids because each utility and each state would have to buy-in to each regional compact. Approval by state legislatures would be needed, but that's a good idea because it would build a political consensus for the compacts.

How much how soon?

nuclearenergy1The size of the revolving load fund would need to be on the order of $100-200 billion depending on how fast the NRC completes licensing reviews of the current pile of COL applications now pending before the agency. The fund would remain stable over time allowing for orderly entry of new projects as old ones pay off their loans. There is no reason why similar revolving loan funds could not be set up for other "green" energy technologies including wind, solar, and energy efficiency projects.

There are applications pending with the Department of Energy for $122 billion for 21 reactors worth an estimated $188 billion. That's why a fund of at least $200 billion is a reasonable target. As the money was paid back, the government could make new loans for new plants. This isn't a public works program for its own sake. It puts the government squarely in the role of funding "essential services" the same as for other government functions.

There are some things government must do

finish the jobThis proposal mirrors the idea of TVA because it relies on the principle that there are some things the government must do. One of them is to take on projects that are so large, and carry so much risk, that they exceed the capabilities of the private sector to undertake them. Examples from the New Deal include giant hydroelectric dams in the West. Examples from the 1950s include the Interstate Highway System. Nuclear power plants are similar types of projects.

It is time to recognize reality that if nuclear energy is to be a means for reducing the growth of greenhouse gases, and diminish the threat of global warming, that the government must stop promoting a charade that projects costing four-to-eight billion dollars each, with payback periods of 15 years, can be financed solely by the private sector.

More coal is the de facto fall back choice

It is time for the government and the nuclear industry to cooperate to design a workable plan to fund and build nuclear power plants without the crocodile tears of so-called "fiscal conservatives" who's policy position is simply a de facto choice for more fossil plants and more greenhouse gases.

Anyone who wants to see the alternative can look at South Africa where Eskom just stopped its efforts to award a $12 billion contract for new nuclear reactors. Eskom may have made some mistakes along the way, but the current power shortage, and continued reliance on coal fired plants also has its roots in government ineptitude and short-sightedness over how to fund nuclear plants.

Nuclear energy is a multi-generational commitment

greenhouse_gasesLet's be clear about why we want to build nuclear power plants with a government revolving loan fund. Once that idea is in the spotlight, the real work of preserving the survival of our species on this planet can begin. Government failure, which is reliance solely on limited loan guarantees, insures only one outcome. Our children and grandchildren will inherit a legacy that turns life forms on the earth into crispy critters. If you think this is hype, take a look at the latest figures on the melting Arctic ice pack.

Green groups take note. This model for development of a revolving loan fund at low interest rates can benefit solar, wind, and geothermal projects. The Energy Policy Act of 2005 could be re-written removing loan guarantees for a whole variety of projects, along with their impossibly small limits for insurance. It would open up development of energy infrastructure across the spectrum of technologies now on the market and make a real difference in terms of limiting the growth of greenhouse gases.

I have no idea who the incoming Obama administration will select as the new Secretary of Energy, but this issue goes beyond mere administration of energy policy. This is a leadership issue that requires action by the new president, his top advisers, congress, and the nuclear industry. The Wall Street Journal reports that the incoming administration is thinking of appointing an "Energy Czar" to coordinate climate and energy issues. The funding of nuclear power plants ought to be on the short list of issues this official addresses the first few weeks in office.

Comments are welcome

Comments are welcome. If you have a blog or web site with your own views, pro-or-con, let me know, and I'll post a link here below the text of the article.

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