Obama’s nuclear budget error
President Barack Obama’s proposed FY 2011 budget includes some important proposals to invest in clean energy, but it also includes a nuclear bombshell. The budget will seek at total of $54 billion in loan guarantees for nuclear power. This would require a $36 billion increase over the existing $18.5 billion for nuclear loan guarantees, a program created under the Energy Policy Act of 2005 — none of which has been issued yet. And while they loan guarantee proposal cheered some pro-nuclear senators, it has not garnered their support for comprehensive, bipartisan clean energy and climate change legislation.
None of the four “top-tier” project proposals inspire confidence: all have “rising cost estimates, delays related to reactor designs, and credit downgrades,” according to Taxpayers for Common Sense.
For instance, one of the top four pending applications for a loan guarantee for reactors in Texas may be withdrawn by the utility proposing it, NRG Energy. The project was supposed to be a joint venture with San Antonio’s municipal utility, but the latter is having second thoughts due to enormous estimated cost increases that would bring the project from the initial $5.4 billion to at least $17 billion.
The San Antonio city council was poised to approve a $400 million bond issuance in late October but held back when new numbers came to light that indicated the nuclear project could cost more than it expected.
The nuclear industry wants loan guarantees because Wall Street investors are unwilling to lend money to these projects because of their high level of risk — they are too prone to default. The Congressional Budget Office found that nuclear investments are very risky.
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.
Despite this high potential for losses from default, The Hill reports that the nuclear industry wants a very low assumption of default risk to lower its credit costs.
It wants to keep the ‘credit cost’ at 1 percent or below the anticipated total cost to build a new plant. A company would be required to pay DoE $100 million to reduce the risks for a $10 billion project, but industry critics have sought a much higher percentage.
The guarantees would mean the government would step in to repay 80 percent of a loan should a company default.
Since the going rate of a nuclear power plant is $8 billion or more, such an approach could stick taxpayers with at least a $6 billion bill for every plant that defaults. A $54 billion loan guarantee program with a fifty percent default rate could cost taxpayers billions, and provide no electricity benefits. During this time of trillion dollar deficits, this is a very imprudent use of taxpayers’ money.
The nuclear energy industry has sold itself as a large potential source of low-carbon electricity. The Energy Information Agency has predicted that by putting a price on global warming pollution under the American Clean Energy and Security Act, H.R. 2454, would lead to a big increase in electricity generated by nuclear power.
According to the Energy Information Administration’s 2010 Annual Energy Outlook business as usual scenario, electricity generation from nuclear power will increase by 9 percent from 2010-2020, and only another .3 percent by 2030. It is important to note that EIA assumes that new plants will be much less expensive than real world experience. Under ACES, nuclear electricity will increase by 11 percent from 2010-2020, and by 77 percent from 2010 to 2030. Putting a price on global warming pollution would make nuclear power more economically competitive.
If EIA’s projections are accurate, then enactment of global warming pollution reductions would provide a huge boost in nuclear energy generation without additional loan guarantees beyond the existing program or the ACES Clean Energy Deployment Administration that can provide up to 30 percent of its funds for loan guarantees for new nuclear technologies.
Tripling of the loan guarantees is also dubious political strategy because it provides huge subsidies for nuclear power without securing the support of pro-nuclear senators for comprehensive, bipartisan global warming pollution reduction legislation.
USA Today noted that
Obama’s pitch to expand U.S. nuclear power is seen by some members of Congress and analysts as an effort to win GOP support for his legislation to reduce greenhouse gas emissions, passed by the House of Representatives last year but pending in the Senate.
Indeed, Sen. Lisa Murkowski (R-Alaska), whose state is suffering more than any other from global warming, spoke positively about the loan guarantee proposal, calling it “a good first step toward expanding our use of clean nuclear energy.” She is also the author of the “Dirty Air Act,” to block the Environmental Protection Agency from establishing limits on global warming pollution. Sen. Murkowski has yet to join Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.), and Joe Lieberman (I-Conn.) in their efforts to craft a bipartisan bill.
The Associated Press reported on long-time opponent of global warming legislation Sen. Lamar Alexander (R-Tenn.):
‘I see an evolving attitude on energy by the president,’ said Sen. Lamar Alexander, who has called for 100 plants to be built in the next 20 years.
Yet Sen. Alexander continues to oppose comprehensive clean energy jobs and reductions in global warming pollution legislation.
In 2009, the Senate Appropriations Committee (subs. req’d) approved Sen. Robert Bennett (R-Utah) proposal to add $50 billion in nuclear loan guarantees to the pending Recovery bill. Fortunately, it was dropped due to the opposition of the Obama administration and the House Appropriations Committee. Sen. Bennett remains a fierce opponent of reductions in global warming pollution, yet his proposal was revived by the administration for the 2011 budget.
Nuclear power will likely play a role in the effort to reduce global warming pollution. Yet it does little good to provide Senate nuclear proponents with an expanded loan guarantee program without first securing their support for global warming pollution reductions, such as the bill that Sens., Kerry, Graham, and Lieberman are drafting. At the same time, tripling the loan guarantee program before the existing funds are exhausted does not make fiscal sense. The Obama administration should withdraw this flawed proposal or failing that, Congress should reject it.