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DOE-USEC Loan Guarantee Decision Shows Danger of Government Dependence

Posted By Nicolas Loris On July 29, 2009 @ 3:14 pm In Energy | Comments Disabled

In what chief executive John K. Welch called [1]“shocking and disappointing,” the Department of Energy denied USEC’s request for $2 billion in loan guarantees for a new uranium enrichment plant in Piketon, Ohio.

But should anyone really be surprised? The fact is that government policymakers have been dictating the future of nuclear power for decades. And this decision shows exactly why the nuclear industry should not put its future in the hands of Washington.

America’s nuclear plants will need to be fueled with enriched uranium, and the U.S. has very limited uranium enrichment capabilities. But that is about to change. While America’s limited domestic enrichment is currently provided by USEC’s plant in Paducah, Kentucky, the company invested $1.5 billion to build a new $3.5 billion plant in Ohio. USEC initially estimated that the American Centrifuge Project would create 3,300 jobs [2]in Ohio, as well as an additional 3,000 direct and indirect jobs for USEC’s suppliers to expand appropriately to manufacture the centrifuge machine parts.

At first glance, this comes as disappointing news. After all, how are we supposed to meet our carbon-capping goals without a rapid expansion of nuclear? In fact, when estimating the costs of the Waxman-Markey cap and trade legislation, the Environmental Protection Agency found costs of only $140 per household per year, partly because they assume that nuclear power generation [3]under Waxman-Markey will be roughly double the baseline production in 2035.

On the campaign trail last year, President Obama told Piketon residents [1], “Under my administration, energy programs that promote safe and environmentally sound technologies and are domestically produced, such as the enrichment facility in Ohio, will have my full support. I will work with the Department of Energy to help make loan guarantees available for this and other advanced energy programs that reduce carbon emissions.”

Signaling is important in business and economics, and the President’s words, followed by his successful bid to win the election, may have sent the wrong signals to USEC. But perhaps the DOE’s denial is a blessing in disguise for USEC, and ultimately for electricity consumers. Heritage Research Fellow Jack Spencer argues that loan guarantees never make for good policy because they distort the market [4]:

Loan guarantees discount the cost to build a project, and this artificial price reduction allows the recipient’s project to be market viable at a point where it otherwise would not be. The consumer will eventually have to pay for this artificial reduction either through higher prices once the subsidy is removed or by being denied access to the less expensive technology that the guarantee recipient displaced. Eventually, these inefficiencies will result in higher electricity prices for consumers.

They stifle competition and innovation both between sectors and within sectors. Loan guarantees artificially reduce the cost of capital, which allows a recipient to offer its product at below actual cost. This removes the incentive to look for less expensive or more competitive options. If a product is not competitive in a free market, then it should be allowed to adjust or fail.”

The initial response from USEC is that it cannot move forward with its project—it seems that they are leaning toward “fail.” But could this be an opportunity for USEC to “adjust” and implement the types of reforms that would be necessary so that its enrichment project is not dependent on loan guarantees? We hope so, because as America’s only domestically-owned uranium enrichment company, a successful, market-viable USEC is a good thing.

In the end, however, this decision demonstrates once again the danger of putting the future of any industry into Washington’s hands. Business models that depend on subsidies, preferences, and mandates are simply not viable.

USEC’s future should never have been dependent on a campaign promise, perceived or otherwise, from the President. Such decisions should be made in the market.

While a loan guarantee may be good for the near-term interests of the individual guarantee recipient, it is not good for consumers, taxpayers, or long-term competitiveness.

The policy goals of the federal government should not be to create a set of subsidies that promote certain energy sources, but instead to institute reforms so that economical energy sources can be successful on their own.

Nuclear energy is simply too important to leave its future in the hands of politicians and bureaucrats.

How many more times do we need to learn that lesson?


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/07/29/doe-usec-loan-guarantee-decision-demonstrates-danger-of-government-support/

URLs in this post:

[1] called : http://www.washingtonpost.com/wp-dyn/content/article/2009/07/28/AR2009072802617.html

[2] would create 3,300 jobs : http://www.heritage.org/research/energyandenvironment/bg2207.cfm

[3] partly because they assume that nuclear power generation : http://www.heritage.org/research/energyandenvironment/wm2470.cfm

[4] distort the market: http://www.heritage.org/Research/EnergyandEnvironment/wm2277.cfm

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