Loan guarantee gridlock

It’s gridlock on the road to the U.S. nuclear renaissance. Electric companies and consortia – 15 in all so far — are asking the U.S. Nuclear Regulatory Commission for combined construction and operating licenses for 24 new nuclear units under the terms of the 2005 Energy Policy Act.

The companies are all seeking the loan guarantees from the U.S. Department of Energy provided under the 2005 law. The nuclear industry is seeking to guarantee 80% of the construction costs of the new units, which it claims is necessary to secure private-sector financing for the other 20%. It’s fair to call the 2005 law a nuclear bailout, as it pledges the full faith and credit of the U.S. government to back the DOE loans, meaning the companies will get a gold-plated credit ratings.

Here’s the radioactive rub. The law sets aside only $18.5 billion for the loan guarantees (and Congress is unlikely to increase that amount).

In a press release last week, the DOE said the applications for loan guarantees total a whopping $122 billion, supporting a total construction cost of $188 billion for the full slate of units.

On top of that, the worldwide credit market has cramped to the point where Energy Secretary Sam Bodman told reporters in Paris in late September that the atomic renaissance worldwide could slow to a halt. Even China and India could have problems raising the capital necessary for new nukes.

The U.S. numbers are interesting, seeing that three years ago the nuclear industry was estimating capital costs for new nukes at $3-$4 billion a unit. If you divide $188 billion by 24 units, the capital costs have doubled to almost $8 billion for each new unit. That means only three units could get the full 80% federal subsidy the industry wants. If the cost grows to $10 billion per unit – a distinct possibility given the strains in the supply chain for nuclear equipment and labor – only two plants could get DOE guarantees.

What to do? Bodman suggested to a House committee in February scaling back the percentage, perhaps to 40%. That would mean the plant owners would have to come up with a far larger portion of the funds to build the plant, at a time when financial institutions are even wary of lending money to car dealers to buy inventory for the new model year.

The industry is fighting a roll-back in the scale of the loan guarantees, but has no viable option to offer instead, other than more money from Uncle Sam. Retiring Sen. Pete Domenici (R-N.M.), former chairman of the Senate Energy and Natural Resources Committee, tried last year to eliminate the cap on loan guarantees and give DOE open-ended authority to determine how much debt it would guarantee. House Democratic leaders balked and Domenici’s idea died.

Clearly, most of these industry-proposed units won’t be built. Some may, and none may. DOE said it will apply the criteria laid out in June when it issued the solicitations for loan guarantees to rank the applications. The most significant criteria – worth half of the points on the agency’s scoring scale – is creditworthiness. The agency then plans to inform the applicants where they stand in the DOE queue. That may persuade some to drop out.

A second, more substantive, round of submissions from the loan guarantee applicants is due December 19. Based on those, DOE says it will “enter into negotiations that will lead to the eventual issuance of loan guarantees.”

On top of the financial issues, there is a major political component. Note the word “eventual” in the DOE press release. Last February at a Platts nuclear conference in Rockville, Md., which POWER covered, the nuclear industry was pleading with DOE to issue to loan guarantee solicitations immediately, so the entire process could play out before the November elections. The industry wanted to pour concrete before Nov. 4, effectively locking in the guarantees.

DOE has failed to put the loan guarantees on a fast track. So it appears almost certain that a new administration and a new Congress will be in place before the nukes can get their loan guarantees. As a result, there may be none, even if the industry is able to raise capital in the private sector.