[I urge readers to stick their head in a vise before reading this.]
I have previously discussed the non-job-creating $50 billion in nuclear loan guarantees the Senate put into the stimulus (see here). For the record it was Sen. Robert Bennett (R-Utah), which I point out merely because “R-Utah” perfectly describes thinking behind this farce.
Not only won’t these loans generate any jobs in Obama’s first term, but as Peter Bradford, former member of the Nuclear Regulatory Commission, explained to me, it could actually kill jobs. How?
The capital markets are not swimming in credit. If you have billions in taxpayer backed loans for your project, even for a project that will take years to finalize and see actual jobs, you may well suck up money that might be otherwise be available for, say, wind projects that are shovel ready now. Bradford called the nuke loans “straw ready.”
Worse, utilities that actually use these loans to build a nuclear plant would face an all but certain drop in their credit rating—see here. That means we are setting ourselves up to take over more trouble assets, since the Congressional Budget Office estimates the likely default rate of these loans at over 50 percent. If you liked nationalizing banks and insurance companies, you’ll love nationalizing nuclear utilities!
But here is where it gets particularly farcical: The loans only got snuck into the bill by budget gimmickry that replicates the high-leverage, fraudulent risk analysis that got us into the subprime mortgage and credit default swap mess. Some leading nuclear energy experts explained this to me Tuesday, and I will do my best to explain it to you.
[I must warn you again that continuing to read this post puts you at great risk of uncontrolled cranial expansion.]
The Washington Post explained (not quite completely) last week:
Bennett’s amendment took $500 million away from $10 billion initially allotted to a new loan guarantee program for renewable energy and electric transmission projects and moved it to an existing loan guarantee program established under the Energy Policy Act of 2005. The existing program covers a much wider variety of energy projects, including “advanced nuclear” power plants, plants that “gasify” coal or turn it into liquid form, and plants that capture and bury carbon dioxide, a greenhouse gas produced by coal power plants.
Moving the money allows the government to stretch its loan guarantees further. Because of different accounting methods used in the two programs, a $500 million appropriation would permit approximately $5 billion in loan guarantees under the renewable program but $50 billion under the broader, existing program.
Yes, the $500 million switch cost the nation $5 billion in renewable and transmission loans but somehow gained $50 billion in nuclear loans. Does this mean nuclear power plants are 10 times less risky? Does this mean that nuclear power plants have a 1 percent default rate?
No.
The Congressional Budget Office itself explained in a 2003 report [PDF]:
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.
Ouch!
But wait. The CBO does believe that there is some recoverable value in a defaulted plant. Don’t ask my why, since I have no idea how they get value from some uneconomic, half-built plant that is probably the subject of major lawsuits (see “Nuclear meltdown in Finland”, here). I’m just a physicist, after all, and they are economists:
CBO estimates that the net present value of amounts recovered by the government on its loan guarantee from continued plant operations following a default and the project’s technical and regulatory risk would result in a subsidy cost of 30 percent.
I would note that the July 2008 report by the Government Accountability Office on the Loan Guarantee Program assumed “a default rate of 50.85 percent and a recovery rate of 50 percent, which result in a loss rate of 25.42 percent when multiplied together.”
So why is $50 billion in loans being scored as having a $500 million cost, when, in fact, CBO says that the subsidy is closer to 30 percent ($15 billion) and GAO says it is 25 percent ($12.5 billion)? This is where you have to enter the Alice-in-Wonderland world [or is that the Bernie-Madoff world] of budgetary scoring.
The LGP is built around the requirement/assumption that the industry getting these loans will pay, upfront, the equivalent value of the subsidy. I kid you not. The GAO explains:
The subsidy cost, as defined by the Federal Credit Reform Act of 1990, is the government’s estimated net long-term cost, in present value terms, of direct or guaranteed loans over the entire period the loans are outstanding (not including administrative costs). In calculating the subsidy cost for a guaranteed loan program, agencies estimate (1) payments from the government to cover interest subsidies, defaults, delinquencies, or other payments, and (2) payments to the government, including fees, penalties, and recoveries on defaults. Under FCRA, DOE would estimate the expected subsidy costs before issuing loan guarantees and is generally required to annually update, or reestimate, this cost to reflect actual loan performance and changes in expected future loan performance. To the extent that DOE underestimates subsidy costs and does not collect enough fees from borrowers, taxpayers will ultimately make up the difference.
The reason $50 billion in loans are being scored as $500 million is because the CBO is assuming that the DOE will only underestimate the subsidy (i.e. the default rate and recovery-on-default rate) by 1 percent. Don’t believe the CBO could be that credulous? Here’s the GAO:
The Congressional Budget Office (CBO) has estimated that DOE will charge companies fees at least one percent lower than costs, on average.
Does anybody on the entire planet outside of CBO think that? The GAO doesn’t appear to. And who pays if the DOE screws up:
To the extent that DOE underestimates the costs of the program and does not collect sufficient fees from borrowers to cover the true costs, taxpayers will ultimately bear the costs of shortfalls.
But it is much worse than all that.
The nuclear industry has no intention whatsoever of paying, upfront, 25 to 30 percent of the loan to cover the subsidy. Remember, as it is currently written, the loan program is only for a maximum of 80 percent of the cost of the plant. That means, for, say, a $10 billion, 1200 MW plant, the nuclear industry would have to put up the $2 billion not covered by the loan plus up to $3 billion for the subsidy. Not gonna happen.
The nuclear industry will be working hard over the coming year to insert language into legislation, most likely whatever energy bill comes out of Congress, that forces the tax payer to cover the cost of the subsidy. And I suspect they’ll try to get the loan guarantees to cover 100 percent of the cost.
Again, if you liked nationalizing banks and insurance companies, you’ll love nationalizing nuclear utilities!
One last thing. I’m also told that the nuclear industry may try to actually borrow the money for the loan itself from the Treasury—i.e. you and me—but I just can’t contemplate that possibility without risking a Scanners-like fate.
The only good news is that there is some small chance this $50B in loans may be dropped in the conference.
You may remove your vise.
This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.
Obama administration may (finally) offer greenhouse-gas targets
Comments
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David Bradish Posted 9:21 am
11 Feb 2009
First of all, the $50B in loan volume is for DOE's loan guarantee program that includes many more technologies other than nuclear. If you look at this link here, you will see that your pet renewable projects can receive part of this $50B "stimulus" as well.
Second, why are you complaining that nuclear energy is a part of this "stimulus"? Your pet renewable projects and transmission lines were appropriated $8.5B in the final Senate version which will go to support almost $85B in loan volume. Nuclear energy has no access to this. So according to the legislation, your pet renewable projects are eligible to receive potentially $135B in loans.
The nuclear industry will be working hard over the coming year to insert language into legislation, most likely whatever energy bill comes out of Congress, that forces the tax payer to cover the cost of the subsidy. And I suspect they'll try to get the loan guarantees to cover 100 percent of the cost.
Where do you get this garbage? We believe it is completely appropriate for the industry to share part of the risk. That's why utilities are going to be putting down at least $2B of their own money to receive the loan guarantees. If a nuclear utility defaults, their $2B is lost. Very few electric companies could sustain a loss like that which is why the nuclear industry is going to take their time to get it right.
You complain that building new nuclear plants will end up burdening taxpayers an exorbitant amount of money if they default. Well, let me ask you this? How many companies have actually defaulted in the past? I can find only one: Washington Public Power Service. So I would say that a 20 or 30 or 50 percent default rate is quite a bit unrealistic.
Try bringing some common sense to this rant. The nuclear industry isn't out there to burden the government and taxpayers at the expense of your pet renewables no matter how much you want to distort the truth.
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Tasermons Partner Posted 12:04 pm
11 Feb 2009
Uh, no...it's the ratepayers (i.e. the ordinary folk) who lost $2 billion.
Ya know, the ones the utilities receive their money from?
Or did the $2 billion just come outta thin air via magic elves?
To cover a $2B loss, they simply raise the rates of those who pay utilities.
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Max8806 Posted 3:48 pm
11 Feb 2009
Max Epstein
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David Bradish Posted 7:23 pm
11 Feb 2009
Ratepayers didn't lose any money, they chose to spend it on consuming electricity.
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archigeek Posted 11:52 pm
11 Feb 2009
The mellotron is your friend.
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David Bradish Posted 2:18 am
12 Feb 2009
When it comes to managing our used fuel, the nuclear industry has committed more than 30 billion dollars to the Nuclear Waste Fund. The debate right now is how and where that money is spent.
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David Roberts Posted 2:42 am
12 Feb 2009
grist.org
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GRLCowan Posted 4:03 am
12 Feb 2009
If government astroturfs and regulates a nuclear plant to death in its construction phase, government gains billions in natural gas revenue. But this will not be as pleasant as it historically has been when the same government must pay the money right back out to the creditors of the defunct project. It no longer will have the conflict of interest that in teh past has caused it to kill so many nuclear projects, and citizens.
(How fire can be domesticated)
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amazingdrx Posted 4:13 am
12 Feb 2009
The technology to go off grid or minimize financial support for the status quo grid power system is here. But it takes lifestyle adjustment. So what?
Who needs always on unlimited power 24/7 to live a happy life? No one. We just think we do, it's an addiction that can be kicked.
The cities of Boulder and Austin are launching their resdients into a whole new world of choices to boycott the usual power sources. And all kinds of people are doing this on an individual home, farm, and business scale.
Call their bluff, they claim we can "choose"? We can choose to throw their talking point obstructionism into the recycling bin of history.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Pangolin Posted 4:13 am
12 Feb 2009
Crucial to all of this was the ability to turn Diablo Canyon off for refueling and then use the resulting limits on power generation to create artificial shortages and blackouts. Once they had the blackouts the Enron cabal demanded massive payments from the state government and utility companies to turn the power back on again.
The economic whiplash caused by these manipulations bankrupted PG&E and several other electricity providers. The state of California assumed billions of dollars of debt that it could ill afford to service and viable alternative energy companies were destroyed also.
Currently ratepayers for privately owned PG&E pay a substantial penalty in electricity costs compared to ratepayers in the Sacramento Municipal Utility District next door. Much of this premium cost is explained as PG&E's debt load from Diablo Canyon nuclear power plant.
Due to the construction and manipulation of power from this one NUCLEAR power plant the state pays, the ratepayer pays, pension funds paid in investment lost and millions of individuals had their lives disrupted. Since there is no functional nuclear waste depository there is no way people can STOP paying for Diablo Canyon.
Plutonium is forever and so are the bills.
Put the Carbon Back
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amazingdrx Posted 4:33 am
12 Feb 2009
Great explanation Joe! Obama would get this in about 20 seconds. Which is why I wish he would "blackberry" you and Lovins, and Lester Brown and people like you even a minute per week.
How much would even a minute a week fix energy/climate policy? With clear explanation like this it could turn it right around and steer us onto a renewable/conservation climate curing green stimulating path.
Obama groks it, if he hears about it. That's a great development, but how to get the message to him?
(Imagine McBush or Sarah the wolf killer trying to understand these issues?)
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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1Eco Posted 12:37 am
20 Feb 2009
Leave it to a (R) from Utah to get it thrown in.
No RISK of getting beat the next election, that is for sure.
Disgraceful. Nothing short of Disgraceful.
Where are these spent fuel rods going?
I KNOW. How about we Forget...
http://en.wikipedia.org/wiki/Yucca_Mountain
Maybe it would be best to move everything to UTAH. They could care less about spent fuel rods there. What they don't know doesn't seem to really matter anyway. Surely if the big companies say it is OK, it must be.
Ecosystems empowerment for the rural poor.
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1Eco Posted 12:41 pm
26 Feb 2009
what a JOKE. and these are the very same people who want more new loan protection.
Complete and total B.S.
Then they call this CHEAP POWER. YOU BET, cheap for them because they aren't paying for it and they aren't paying for the clean up either.
GREED, plan and simple. Fire every CEO and OUST every BOARD.
Ecosystems empowerment for the rural poor.
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1Eco Posted 12:43 pm
26 Feb 2009
see the video.
Ecosystems empowerment for the rural poor.
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