Nuclear Loan Guarantees Have Failed

One of the key features of the highly touted 2005 Energy Policy Act was a large pool of loan guarantees designed to jump-start a renaissance in nuclear power in the U.S. The idea was that the federal guarantees, along with some other goodies, both financial and regulatory, would lead the private sector to pony up the considerable amounts of capital necessary to build a new generation of nuclear reactors.

Failure to Launch

By many accounts, including more than a few in the nuclear power business, that approach has failed. This sentiment surfaced at the latest Platts nuclear conference, in Rockville, Md., this February.

From the moment former president George Bush signed the 2005 bill, the industry began pushing the U.S. Department of Energy (DOE) to move rapidly on the $18.5 billion in loan guarantees in Title XVII of the new law.

Little happened. Last year, at the 2008 Platts annual nuclear conference, the industry beseeched the outgoing Bush administration to get the admittedly inadequate loan guarantees nailed down quickly. The industry wanted the implementation in place before an election that could enshrine a new group of politicians and bureaucrats with a new agenda and, perhaps, a selective memory of the wishes of the previous Congress that was under the control of pro-nuclear Republicans.

It wasn’t until June 2008 that the DOE issued its solicitation for applications for loan guarantees. At that point, it was obvious to many observers that the clock would run out on the Bush administration well before any guarantees would flow to the nuclear industry. When the energy department finally opened the door for its first phase of review of nuclear loan guarantees, the demand totally swamped the available funds. Seventeen entities submitted applications for 19 new nuclear reactors, for a total estimated construction cost of $188 billion (an average of over $7 billion per reactor) and requests for loan guarantees totaling $122 billion.

Another part of the nuclear loan guarantee in the 2005 law was an earmark for $2 billion aimed at USEC Inc., the U.S. uranium enrichment firm (spun off from the government some 20 years ago). USEC planned to use the money to leverage funds for continued construction of its advanced uranium enrichment project in Portsmouth, Ohio, another relic of the former U.S. government enrichment monopoly. The Portsmouth project is designed to supplant its inefficient and costly gaseous diffusion technology, created during the World War II Manhattan Project, with more advanced gas centrifuges, developed and abandoned by the DOE in the 1990s.

The USEC loan guarantees haven’t moved any more expeditiously than the large reactor funds. In early February, USEC announced a slowdown at the project in order to “conserve cash and reduce the planned escalation of project construction and machine manufacturing activities.” The company, based in Bethesda, Md., hinted that it would shutter the Ohio project if loan guarantees are not available. USEC CEO John K. Welch said, “Because our full application had been before DOE since August 2008, we were hopeful that DOE would make a selection before the change in administration.” Nope.

If Once You Don’t Succeed . . .

With the promises of the Bush administration unfulfilled, the nuclear industry turned to the new Obama administration’s economic stimulus package. The industry backed an increase in the loan guarantee authority to $50 billion, which would still only support a handful of new generation projects—probably fewer than 10 under the current criteria that loan guarantees would support 80% of the capital costs of the new units.

The chief sponsor of the $50 billion loan plan was Utah Republican Sen. Bob Bennett, representing a state that has no nuclear generation (but which does have significant uranium deposits). Bennett ultimately voted against the Senate bill, even though it contained his $50 billion loan guarantee provision. The loan guarantees died in the House-Senate conference committee.

The new Obama administration sent some signals that it might look favorably on the idea but also indicated that it would open the loan guarantees to other technologies, including renewables and transmission. USEC’s Welch, announcing the slowdown on the new enrichment plant, added, “We are strongly encouraged that the Obama administration intends to accelerate the approval process for the loan guarantee program.”

Try, Try Again

Marvin Fertel, newly installed head of the Nuclear Energy Institute (NEI), the industry’s Washington lobbying group, made a pitch in mid-February to the Senate Energy and Natural Resources Committee, the nuclear power industry’s most comfortable political venue. Fertel argued for the expansion of the nuclear loan guarantees to $50 billion. In comments to the committee, Fertel noted that the federal government today manages a loan guarantee portfolio of more than $1 trillion, which also supports shipbuilding and transportation infrastructure.

Fertel noted that the loan guarantees in Title XVII of the 2005 law are “clearly inadequate” for the task of revitalizing U.S. nuclear power. Many analysts expect new nukes to cost up to $8 billion or more per unit. Building a new nuclear plant for most utilities bets the company against the nuke.

“Loan guarantees,” Fertel said, “offset the disparity in scale between project size and company size and allow for these companies to build new plants in a responsible manner that can include financing from export credit agencies in other countries like France and Japan.” The NEI’s testimony argued that the nuclear loan guarantee program has “structural impediments and restrictive interpretations of statutory language.” These bureaucratic provisions, said the NEI, “are proving to be obstacles, particularly in co-financing nuclear plant projects.”

Congress didn’t buy the nuclear industry’s entreaties. No money in the final bill went to new nuclear loan guarantees. At the same time, the industry seems to be moving away from the existing $18.5 billion authorized for loan guarantees, an apparent acknowledgement that the DOE loan guarantee program has failed.

Go It Alone

At the Platts meeting in February, Jeff Lyash, CEO of Progress Energy Florida, outlined one of the big problems with the DOE nuclear loan guarantee program. Florida Progress, he noted, applied in the first round of the DOE program for its planned two-unit new nuke in receptive, rural Luke County, Fla. The DOE approved moving the request to its second-phase review.

Florida Progress declined to go to stage two because, as Lyash explained, the DOE loan guarantee rules require that a first lien on the nuclear asset goes to the federal government. Unacceptable, said Lyash. Florida law requires the first mortgage to be on the books of the utility. In addition, he said, Florida’s municipal and cooperative utilities, whom the utility wants as equity partners, could not participate under the DOE’s lien terms, further poisoning the financial pond.

So Florida Progress, a large, conventionally regulated (cost-of-service) utility, will not seek the DOE loan guarantees. The company hopes to raise money in the traditional way: with construction work in progress authority from regulators (collecting construction costs in existing rates) bolstering the willingness of lenders to participate. But that financial path looks uncertain at best under current credit conditions in the market, Lyash acknowledged.

—Kennedy Maize is executive editor of MANAGING POWER.