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  • No Loan Guarantee, No Nuclear? Not Quite


    The prospects for new nuclear energy in the U.S. were purportedly set back this weekend when Constellation Energy pulled out of the Calvert Cliffs 3 nuclear energy project in Maryland. They argued that the Department of Energy’s loan guarantee program was too expensive and complicated to be workable.

    No loan guarantee, no new nuclear project.

    And this was consistent with what many on the nuclear industry have been saying. To move forward, industry argued, they needed the federal government to back up the multi-billion-dollar investments. This credit subsidy would give recipients access to below-market capital, which would have serious impact on the balance sheet of any multi-billion-dollar project.

    Such subsidies to offset the risk of the first few plants could be justified. The fact is that the federal government imposes significant risk to nuclear investors. Washington’s amateurish approach to fixing its broken nuclear waste management policy and an antiquated and unpredictable regulatory regime would make any sane businessperson think twice about nuclear energy. But given loan guarantees, the soundness of the technology and the potential long-term economic benefits of building a nuclear power plant kept investors coming.

    At least until the burden of dealing with the federal government outweighed the benefit of the subsidy. That seems to be what happened with Constellation.

    Absent the loan guarantee, we were told there would be no new nuclear power. Yet today The Washington Post reported that Electricite de France (EDF), one of Constellation’s partners in the project and the world’s largest nuclear plant operator, said that it was willing to take 100 percent of the project’s financial risk, thus removing the need for a loan guarantee—though it must be stated that EDF did not explicitly say that it would not pursue a loan guarantee at some future point. But taking on 100 percent of the risk burden would seem to preclude a subsidy that removes a significant portion of that risk.

    Although EDF’s decision does not guarantee that Calvert Cliff’s 3 will move forward, it does demonstrate that loan guarantees are not essential to new nuclear power and could actually indicate that they are detrimental. EDF’s decision to shoulder 100 percent of the risk of the project demonstrates the market viability of nuclear power even absent federal backing.

    This is a critical point for the future of nuclear energy. Opponents of nuclear power are quick to point out that nuclear energy is too risky and too expensive to have a future. And so long as industry demands federal subsidies to move forward, it is difficult to argue against that position. But EDF’s decision shows that even absent federal support, investors will put resources toward nuclear energy.

    The government imposes significant risk on the nuclear industry. And this risk does justify some government help for companies willing to build the first few nuclear power plants. Nonetheless, depending on such help is foolish when the burden of securing the subsidy outweighs its value, especially when a project is viable without government support. Yet the promise of subsidies continues to dominate the debate over the long-term health of the nuclear industry.

    The efficacy of this approach, however, must be questioned in light of the case of Calvert Cliffs 3. After all, it took less than a week for a non-U.S.-government-backed financing alternative to potentially emerge after Constellation pulled out of the project. Essentially, the time and effort used to secure the loan guarantee was wasted. Those resources would have been better used in finding alternative financing options. Not only would this have left Calvert Cliffs on a more sustainable path forward, but it would have undermined a primary argument used against nuclear power.

    Ultimately, if investors are willing to bet on nuclear energy in the free market, additional subsides should not be pursued. Instead, pro-nuclear policymakers should shift their focus toward addressing structural problems, like waste management and the unpredictable regulatory regime.

    The U.S. has not ordered a new nuclear power plant in three decades. This clean, affordable, and safe energy source is simply too important to leave solely in the hands of federal bureaucrats and politicians. Yet that is precisely what the current system does.

    Posted in Energy [slideshow_deploy]

    5 Responses to No Loan Guarantee, No Nuclear? Not Quite

    1. Scott Denman Silver says:

      Jack, you argue that "EDF’s decision to shoulder 100 percent of the risk of the project demonstrates the market viability of nuclear power even absent federal backing." Are you forgetting that EDF is entirely owned and operated by the entity the French government? It is no more a "free market" player or advocate than the Tennessee Valley Authority in the U.S. EDF is one of the most prominent examples of a socialized energy sytem in the world.

      The empirical evidence points to one sober conclusion about the future of nuclear reactors: The only new reactors that will be built will be those that the U.S. federal and state governments (or foreign governments, for that matter) want to have built.

      Wall Street has turned it's back on the so-called Nuclear Renaissance; it's simply too expensive compared to cheaper, less complicated, more secure, non-radioactive waste producing energy options. Once again, last week, the marketplace delivered its latest judgement last week on new reactors. Right after Constellation announced it was ending its pursuit of the new Calvert Cliffs Reactor, its stock price shot UP, not down. Let's hope the Heritage Foundation will listen more accurately to the music of the marketplace and ignore the Siren's song of the new reactor hype-sters.

    2. Orpheus says:

      Did you even bother to read EdF's letter or did you just decide that would get in the way of the argument you wanted to make? Of course EdF is going to pursue a loan guarantee. They have made that quite clear. Why not engage a more interesting public policy question, namely why a French company is willing to invest in US jobs and infrastructure and Constellation, a US company, isn't?

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    5. Joel Gehman says:

      To second the comment by Scott Denman, it is hardly accurate to describe EDF as proof that “investors are willing to bet on nuclear energy in the free market.”

      If anything, the fact that EDF, Rosatom and China are three of the most active developers of nuclear power projects worldwide suggests quite the opposite. History suggests that nuclear power plants are acts of state, not acts of free enterprise. For instance, as of January 2010, the French State owned 84.48% of EDF (see: http://shareholders-and-investors.edf.com/edf-share/shareholding-structure-42691.html). And of course Rosatom and the Chinese nuclear industry are entirely owned by their respective States.

      Similarly, it is worth noting that the nuclear power project in the US to have progressed the farthest is Southern Company’s proposed Waynesboro, GA facility. Not only has it received $8.2 billion in loan guarantees from the federal government, as the recent Constellation deal revealed, its economic viability hinges on the fact that Georgia remains a regulated energy market (unlike Maryland), meaning that the ultimate costs of the project (whether the currently projected $14 billion, or more) will be borne by Georgia electricity ratepayers, in effect, offering the company state-level guarantee.

      The preponderance of the evidence from both the US and the rest of the world suggests that heavy governmental subsidies and guarantees — either explicitly or de facto — are essential to the development of nuclear power. Similarly, all of the academic literature I have read on the topic suggests that the world has yet to build a nuclear plant without subsidies of some kind.

      If you know of *any* nuclear plant operating or currently under construction without subsidies, guarantees and/or governmental limits to its various risks, I would invite you to make me aware of it.

      Joel Gehman
      Pennsylvania State University
      Smeal College of Business

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