Protecting Taxpayers from a Financial Meltdown

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http://www.americanprogress.org/issues/2010/03/nuclear_financing.html

Protecting Taxpayers from a Financial Meltdown

Calculating the Credit Subsidy Fee on a Loan Guarantee for a New Nuclear Reactor

By Richard W. Caperton | March 8, 2010

http://www.americanprogress.org/issues/2010/03/pdf/nukesubsidycostanalysis.pdf">Download this memo (pdf)

President Obama has made two major announcements in recent weeks regarding loan guarantees for nuclear power. Loan guarantees commit the government to repaying a loan if the original borrower can’t pay back the loan. His proposed fiscal year 2011 budget would http://climateprogress.org/2010/02/01/obama-nuclear-error-nuclear-loan-guarantee/">triple nuclear loan guarantees to $54.5 billion. And on February 16, the Department of Energy issued an $8 billion guarantee for two proposed http://www.lgprogram.energy.gov/press/021610.pdf">Southern Company nuclear reactors in Georgia. Both of these measures will help utilities finance new nuclear reactors, but the underlying terms of the guarantees will determine the risk to American taxpayers and the number of new nuclear plants that will be built.

Building a nuclear reactor today will involve dealing with tremendous financial uncertainty. Cost projections for nuclear plants keep going up because of variability in material costs, a new licensing process, limited suppliers for key parts, and inevitable delays in construction projects. The projected cost for two new reactors in Canada http://www.thestar.com/comment/columnists/article/665644">shot from $7 billion to $26 billion in just two years. And in the United States, costs for two new reactors at the South Texas Project have ballooned http://www.mysanantonio.com/news/local_news/Nuclear_cost_estimate_rises.html">from $5.4 billion http://www.mysanantonio.com/news/local_news/Nuclear_expansion_could_cost_182_billion.html">to an estimated $18.2 billion since 2007. Neither of these reactors has been built, so there’s no way to predict what the final cost will be. But cost overruns are virtually certain in nuclear construction, which greatly increases the risk the nuclear companies will default on their loans. Private lenders are well aware of the risk of building new reactors, which is why they’re unwilling to finance the projects without government support.

The huge cost of nuclear power means that taxpayers will have to provide nuclear loan guarantees to finance new projects if the president and Congress are serious about building new reactors. The terms on these guarantees must include adequate protections for taxpayers. Most important, the so-called “credit subsidy cost” must be calculated accurately. The credit subsidy cost represents the price tag of the guarantee to the government, and in the case of new reactors, must be paid by the utility company borrowing the money. Estimates of what this cost should be run the gamut from 1 percent or less to 30 percent of the total guarantee. If the cost is too low, then it will increase risks for taxpayers. If the cost is too high, then it will unnecessarily decrease the number of reactors financed. Surveys of outside estimates and calculations detailed below indicate that the cost should be at least 10 percent and possibly much more.

Loan guarantees, a valuable tool for borrowers

When the government issues a loan guarantee, taxpayers are assuming the risk if the borrower is unable to pay back the loan. Most borrowers under the nuclear loan guarantee program will get a loan from the Federal Financing Bank, which will now charge a much lower interest rate and provide more favorable terms. In exchange for this valuable service, the guarantor (the federal government) has to account for the risk of default. They do this by calculating the “credit subsidy cost.”

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