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No Loan Guarantee, No Nuclear? Not Quite

Posted By Jack Spencer On October 15, 2010 @ 3:00 pm In Energy | Comments Disabled

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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 [1] 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 [2] of any multi-billion-dollar project.

Such subsidies to offset the risk of the first few plants could be justified [3]. 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 [4] 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 [5] 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 [6] 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.


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URL to article: http://blog.heritage.org/2010/10/15/no-loan-guarantee-no-nuclear-not-quite/

URLs in this post:

[1] pulled out of the Calvert Cliffs 3 nuclear energy project: http://www.baltimoresun.com/business/bs-bz-constellation-calvert-1009-20101010,0,7592937.story

[2] would have serious impact on the balance sheet: http://www.heritage.org/Research/Testimony/Nuclear-Power-Federal-Loan-Guarantees-The-Next-Multi-Billion-Dollar-Bailout

[3] could be justified: http://www.heritage.org/Research/Reports/2010/02/Conditions-and-Policy-Reform

[4] antiquated and unpredictable regulatory regime: http://www.heritage.org/research/reports/2007/11/competitive-nuclear-energy-investment-avoiding-past-policy-mistakes

[5] reported: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/13/AR2010101307386.html

[6] taking on 100 percent of the risk burden would seem to preclude: http://www.baltimoresun.com/business/bal-edf-constellation-letter-page-1013,0,5758250.htmlpage

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