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The Problem with Increasing Energy Loan Guarantees

Posted By Jack Spencer On February 3, 2009 @ 12:37 pm In Energy | Comments Disabled

There has been a lot of talk in recent months on expanding the loan guarantee for energy projects broadly and nuclear projects specifically.

The problem with the LG program is not the cost, per se. It is clearly set up so that the recipient has to pay for the administration costs. And as for the likelihood of default, the risk for nuclear seems almost nonexistent as compared with other renewable sources. New nuclear plants will be cranking out a valuable commodity for the better part of a century.

The problem is that loan guarantees distort normal market forces thus unfairly enhancing the competitiveness of the recipient’s project and removing dollars for projects that might otherwise get funding.

One of the basic problems with the larger economic debate that is going on in the nation is the misunderstanding (or at least a choice to ignore) the fact money does not grow on trees. It comes from real places and exists in finite amounts. So by subsidizing a portion of the actual cost of a project through a loan guarantee, you are actually removing money from the system that could have gone to a project that stood on its own.

This signals to industry (be it nuclear, wind, autos or anything else) that it does not have to be competitive. Because Washington bureaucrats deem a product politically correct, it gets to slide by even though it is not quite good enough.

While this may be good for the near term interests of the LG recipient, it is not good for consumers, tax payers, or the long-term competitiveness of the larger industry in question.

And here is why:

First, it removes incentives to decrease costs. Additional costs are just passed on to the consumer. Any business is going to sell its product at the highest sustainable price. LG’s artificially inflate that price point.

Second, it stifles competition. Not just between sectors, but within sectors as well. If the expensive, non competitive projects or technologies are subsidized, it removes the incentive to pursue less expensive existing technologies that might make sense in a free-market but less so when other technologies are subsidized. Competitive pressures would force all technologies to compete and more importantly, would force efficiency into the process.

Third, it perpetuates the policy and regulatory status quo. Here is a technology like nuclear that could absolutely transform how the nation produces energy across the economy. While it might not be too cheap to meter, with the right policies and regulations in place, it could be very, very affordable. Yet the U.S. has a regulatory system that is basically prepared to regulate one technology, it issues permits at a snail’s pace, and it relies on a dysfunctional waste management system. LG’s simply reinforce this system rather than forcing needed reform.

And lastly, at least for this list, it suppresses private sector solutions. Individuals and companies consistently make investments that might not seem affordable or overtly risky. But that is what capitalism is all about. Taking a chance. Making good decisions. Its called entrepreneurial spirit. There is no reason that investors could not come up with some sort of insurance scheme or risk sharing plan. But LG’s distort this process and basically remove the incentive to come up with better solutions.

There is a need to mitigate the risk posed by the regulatory process. That is why the limited subsides offered by the 2005 Energy Policy Act have a role. But during that debate, the mantra was clear: industry just needs enough to get off the ground. But now there is this movement to increase, or in some cases remove, subsidy levels.

It seems that even before one new plant has been built, the industry is already completely dependent government.

Meet the new nuclear industry, same as the old nuclear industry?

Let’s hope not!


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