Tuesday, January 15, 2008

The Nuclear Guarantee

In the Energy Policy Act of 2005, the U.S. Congress provided that, if funds were appropriated, the Secretary of the Department of Energy could provide loan guarantees equal to 80% of the project cost of new nuclear facilities. In December 2007, Congress, as part of omnibus appropriations legislation (HR 2764), provided for up to $18.5 billion in such loan guarantees.

Yesterday, it was reported that people are again protesting the idea of new nuclear plants. This is nothing new. Personally, I am conflicted about whether nuclear energy is a good option for the United States, but I have no doubt that such loan guarantees are a bad idea. Why? In 2003, the Congressional Budget Office assessed a similar proposal for a 50% loan guarantee for new nuclear plants:

CBO considers the risk of default on such a loan guarantee to be very high—well above 50 percent. The key factor accounting for this risk is that we expect that the plant would be uneconomic to operate because of its high construction costs, relative to other electricity generation sources. In addition, this project would have significant technical risk because it would be the first of a new generation of nuclear plants, as well as project delay and interruption risk due to licensing and regulatory proceedings.

Between high construction costs and licensing and regulatory delays, nuclear power is all but a guaranteed loser of an investment. Many proponents of nuclear energy note that other countries, such as France, generate much of their energy using nuclear facilitates. And that is true. However, France never had to deal with the delays seen in the United States. (Among the worst of the U.S. projects: The Watts Bar Unit I plant, a TVA project, obtained its operating license in 1996; the construction permit was issued in 1973.)

Unless and until Congress guarantees a streamlined regulatory process, nuclear plants will be just like the worst of the subprime loans -- we pretty much know now that there is no way the entire loan will get paid. At this point, quite simply, there are better investments, in energy and otherwise, than nuclear power. I can only hope that the investors who are supposed to put up the first 20% will agree.


Eric McErlain said...

A colleague of mine at NEI, Richard Myers, wrote a three-part defense of the loan guarantee program that you ought to read.

Part I
Part II
Part III

Josh Fershee said...

Beyond the fact that I think the market will figure out the best generation options, according to the Nuclear Energy Institute, "Under an integrated management approach, used nuclear fuel will remain stored at nuclear power plants in the near term. Eventually, the government will recycle it and place the unusable end product in a repository at Yucca Mountain, Nev."

Exactly what is the near term? For how long will we make new plants expect to store their waste? It's just not clear to me that "eventually" for Yucca Mountain will ever come. I have my reservations even with a waste disposal site, but until that time, I maintain that loan guarantees are not defensible policy.