Energy subsidies—of any kind—are bad business
Oct 25, 2010, Vol. 16, No. 06 • By AMORY B. LOVINS
Given Americans’ increasing anxiety over made-in-Washington socialism, it’s a wonder that the nuclear power industry has escaped scrutiny for so long. The federal government socializes the risk of investing in nuclear power while pri-vatizing profits. This same formula drove the frenzied speculation that cratered the housing and financial markets. What might it cause with nuclear power?
The Sequoyah nuclear generating station, near Chattanooga
We got a taste three decades ago. Congress grew infatuated with the promises of nuclear promoters. It overrode the risk assessment of private capital markets, and expanded subsidies for nuclear projects to $0.08 per kilowatt-hour—often more than investors risked or than the power could be sold for. This seduced previously prudent utilities and regulators into a nuclear binge that Forbes in 1985 called “the largest managerial disaster in business history.”
Threefold cost overruns amounted to hundreds of billions of dollars. Three-fifths of the ordered plants were abandoned. Many others proved uncompetitive. Steep debt downgrades hit four in five nuclear utilities. Some went broke. Through 1978, 253 U.S. reactors were ordered (none since). Only 104 survive. Two-fifths of those have failed for a year or more at least once.
New nuclear plants, we’re assured, are different—novel enough to merit technology-demonstration subsidies, yet proven enough that investors can rest easy. They’re allegedly so much safer than deep-sea oil drilling that we needn’t fret, yet so risky that one major nuclear operator insured itself eleven times more against nuclear accidents’ consequences than its potential liability to the public. New reactors are supposedly so cheap they crush competitors, yet so costly they need subsidies of 100 percent or more.
That’s right: $0.04-$0.06 of new 2005-07 subsidies, plus $0.01-$0.04 of remaining old subsidies, brings total federal support for new nuclear plants, built by private utility companies, to $0.05-$0.10 for a kilowatt-hour worth $0.06. Some people are outraged that the federal government is subsidizing the new Chevrolet Volt, retailing at $41,000, with a tax credit of $7,500. Imagine if the tax credit were $50,000! If new reactors can produce competitive power, they don’t need subsidies; if not, they don’t deserve subsidies.
Yet nuclear subsidies to some of the world’s largest corporations have become shockingly large. A Maryland reactor’s developer reckoned just its requested federal loan guarantee would transfer $14.8 billion of net present value, comparable to its construction cost, from American taxpayers to the project’s 50/50 owners—Électricité de France (EDF), 84 percent owned by the French government, and a private utility 9.5 percent owned by EDF. The project’s builder, AREVA, is 93 percent owned by the French state, yet has been promised a $2 billion U.S. loan guarantee for a fuel plant competing with an American one. EDF just booked a billion-euro loss provision, mainly over the Maryland plant’s deteriorating prospects. AREVA’s construction fiascoes in Finland and France have “seriously shaken” confidence, says EDF’s ex-chairman, and four nations’ safety regulators have criticized the design. Meanwhile, the chairman of Exelon, the top U.S. nuclear operator, says cheap natural gas will postpone new nuclear plants for a decade or two. Slack electricity demand and unpriced carbon emissions further weaken the nuclear case. Markets would therefore charge a risk premium. But U.S. nuclear power evades market discipline—or did until October 8, 2010, when the Maryland promoter shelved the project because, for its $7.5 billion federal loan guarantee, it would have to have paid an “unworkable” $0.88 billion fee, or 11.6 percent, to cover the default risk to taxpayers.
Another $8.3 billion of the $18.5 billion nuclear loan guarantees authorized in 2007 was provisionally issued in February to two Georgia reactors. Taxpayers will be on the hook for about $100 per American family. To offset that risk, the Department of Energy proposed to charge a default fee that’s only a small fraction of the likely loss rate that the Congressional Budget Office and Government Accountability Office have estimated. In bankruptcy, taxpayers wouldn’t even recover before private lenders—not that there are any private lenders. The Treasury’s Federal Financing Bank, financed by new Treasury debt, would issue the DOE-guaranteed loan. Failure would cost taxpayers $8.2 billion net. The developer keeps any upside.
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