The awards of $18.5 billion in federal loan guarantees for new nuclear plant projects remain held up by an ongoing dispute within the Obama administration over the financial risk the new reactors pose for the government and taxpayers, according to industry and government officials.
The struggle pits the Energy Department against the Office of Management and Budget, agencies that have been at odds since the loan guarantee program was approved in 2005. DOE will make the final decision on nuclear project loan guarantee requests. OMB has a pivotal say in determining the risk of loan defaults if the projects suffer cost overruns or cannot be completed.
The risk calculation is critical to a launch of the so-called "nuclear renaissance" because it determines how much upfront cash the nuclear project developer must pay to get the loan guarantee, which can cover up to 80 percent of the multibillion-dollar construction costs, for three of four new reactors.
The two factors in dispute are assumptions about the risk of default and the losses the government would suffer if it has to reimburse lenders. "DOE and OMB have been at loggerheads over what the basic assumptions ought to be," said one senior industry executive who would not speak for attribution because of the issue's sensitivity.
Senior OMB officials reportedly signed off on a loan fee of 1 to 2 percent of the total guarantee at the end of the Bush administration, but the agency has reopened the issue by seeking a higher fee now, according to sources. DOE and OMB spokespersons would not answer questions or comment last week about the dispute.
The issue is not resolved, said Mayo Shattuck III, CEO of Baltimore-based Constellation Energy, which has applied for a reactor loan guarantee. Shattuck told a Johns Hopkins University audience Wednesday, "if that upfront fee is really big, it's going to discourage people from wanting to take the loan, because there's so much money going out for a plant of that size. It is a process that we're in to get all parties to get their arms around the gap analysis."
Constellation Executive Vice President James Connaughton said that a 1 percent credit subsidy fee would be reasonable and affordable. A 10 percent fee on an $8 billion guaranteed construction loan would require a nuclear developer to advance $800 million in addition to raising 20 percent or more of the project's financing as equity. At that higher fee level, nuclear projects can't go forward, he said.
Nuke critics press for 50% subsidy cost
DOE has narrowed the initial group of potential guarantee recipients to four companies, including Constellation's proposed third reactor at its Calvert Cliffs site in Lusby, Md., on the Chesapeake Bay's western shore. Energy Secretary Steven Chu has said loan guarantee decisions will be made soon, but the department has not publicly set a timetable.
Critics of nuclear power have said the proposed new reactor projects pose large if unquantifiable risks, so the credit subsidy cost should be correspondingly high to protect taxpayers if a project defaults before completion. The Union of Concerned Scientists and other industry critics say the subsidy figure should be 50 percent, citing conclusions in a 2003 Congressional Budget Office report.
Industry officials reply that that figure is far off base. CBO's 2003 analysis did not assume that Congress passes a cap-and-trade climate program raising the price of electricity from coal and natural gas generators. Nor could it take account of reactor project incentives in the 2005 act -- a federal production tax credit and a total of $2 billion in funding to cover losses if regulatory delays cause construction budgets to escalate. These further reduce the risk of default, industry officials say.
Risk calculations go on behind closed doors
An analysis by Standard & Poor's noted that the credit subsidy cost for Department of Transportation highway projects is 5 percent, to cover expected loan guarantee losses. However, unlike nuclear plants, highway projects pose no technological risks, S&P said in a report to DOE.
Industry officials and its critics say the risk calculations are far from simple. Nuclear reactor construction ceased in the United States after the Three Mile Island reactor accident in 1979, making it hard to assess current construction costs.
The plants now proposed will have new designs, which are being reviewed by the Nuclear Regulatory Commission using a new licensing process. The government's risk of loss is different for reactor construction by regulated utilities, which can recover construction costs as the project proceeds, than for merchant energy companies like Constellation, which will have to sell power in competitive markets and can't charge for construction costs as they occur.
Industry officials contend that OMB's approach appears rigid. More fundamentally, the industry and its critics can't determine how the credit charge is being calculated because the DOE-OMB debate is behind closed doors. "We think the recovery rate should vary from technology to technology and should be calculated project by project," said one industry official.
"It's all behind the scenes," the official added. "It ought to be transparent. We ought to see how it's being done, and be able to appeal, to engage with DOE and OMB in the event we don't agree with their calculations."
The debate about the appropriate risk assessment for future nuclear plants is now the main issue dividing nuclear power proponents and critics.
A 'last straw' for critics?
Critics "are focusing on cost rather than nuclear waste or safety, because they have basically lost on those [latter] fronts," says Matthew Bennett, vice president for public affairs at Third Way, an energy advocacy group that supports nuclear power. "It's the last straw" for nuclear opponents, he said.
Ellen Vancko, nuclear and climate change manager at the Union of Concerned Scientists, said the credit cost number Constellation seeks is far too low. "If there's truly a 1 percent risk of default, you wouldn't need a loan guarantee in the first place," she said. "How on Earth can you suggest that this technology could present such a low risk? The question is whether can you assess the risk at all."
Shattuck said the administration's recent statements of support for nuclear power by President Obama and Secretary Chu leave him hopeful that the DOE and OMB debate will come out favorably for the industry. "They're working hard at making sure that the program that is put in place is actually workable for the companies trying to implement it," he said.
Support for new nuclear projects has become a critical bargaining chip in the Senate climate debate, as nuclear power supporters could provide the last of the 60 votes that are likely to be required for passage of a Senate climate bill.
"I do not think the administration will let it become a real stumbling block," Bennett said. "My strong sense is that DOE and OMB will work it out. They will find a level that is acceptable to both sides."
But one industry source said the dispute is a major obstacle, particularly for merchant developers like Constellation. "This is a serious issue. We're very concerned."