Why New Nuclear Reactor Loan Guarantees are Now More Imprudent than ever

Four Long-Term Factors Significantly Increase the Danger of Defaults for U.S. Taxpayers.

Courtesy: scientificamerican.com

(SOUTH ROYALTON, Vermont ) - The U.S. is expected to see very soon (1) the awarding of as many as two more loan guarantees for nuclear reactor projects, (2) possible additional nuclear loan guarantee authority in the House FY2011 Continuing Resolution and (3) a proposed increase of nuclear loan guarantees in the White House FY 2012 budget. However, prevailing market trends could not be worse for lawmakers and taxpayers who are concerned about the risk of defaults on any new loan guarantees.

Contrary to what is asserted by proponents of building more new nuclear reactors in the United States, (1) there is no "nuclear renaissance" underway in this country, (2) the beleaguered nuclear industry's chief woes are not regulatory hurdles in Washington, D.C., and (3) calling nuclear power "clean" won't alter the fundamental reality that nuclear power is totally uneconomic.

The nuclear power industry is dead in the water today in the U.S. because nuclear power is simply too expensive. Only a French-style socialist arrangement under which the industry (by government fiat) has unlimited access to taxpayer-backed loan guarantees and the pocketbooks of ratepayers prior to and during the reactor construction process would allow utilities to even contemplate building new nuclear reactors. Even with these massive subsidies their prospects are murky, at best.

Four marketplace developments ended the nuclear renaissance before it began. Those factors are:

•	Skyrocketing cost of building new nuclear reactors, with no end in sight to the upward spiral;
•	Falling natural gas prices that could stay low for decades, as new technologies have dramatically increased the amount of natural gas that is recoverable;
•	Lower cost alternatives that are widely available and afford utilities much more flexibility in meeting the need for electricity in an uncertain economic and policy environment.
•	Declining demand growth for electricity, with growing evidence that there has been a permanent shift in the pattern of growth; and

Public policy cannot repeal economic reality. Nuclear economics are so bad that subsidies (in the form of federal loan guarantees or unfunded mandates like a federal "Clean Energy Standard"), as well as the infusion of capital from foreign equipment vendors and/or foreign governmnets, are not enough to kick start reactor construction. The nuclear industry is demanding state ratepayers subsidize and guarantee to pay the construction costs, even if the reactors are not built. The nation does not need -- and the federal government should not force taxpayer and ratepayers to fund -- another multi-billion-dollar bailout of an industry that is totally uneconomic and has no chance of standing on its own.

The following charts vividly illustrate the folly of the federal government taking further steps to make nuclear even more of a "ward of the state."

Factor 1: Nuclear reactors cost much more than the industry projected when it made the case for them. You never hear about a new coal or natural gas-fired power plant costing 100 percent or 200 percent more to build than was initially projected. But low-balled front-end cost projections and rising back-end construction costs are the norm in the nuclear power industry. Not only does the sky-high projected cost of nuclear power make them impossible to finance on Wall Street - and unable to produce price competitive power - but the ever-rising construction costs make them even bigger white elephants. U.S. taxpayers and ratepayers have much to fear if elected officials rush in with direct and indirect subsidies where Wall Street fears to tread. The industry understated its initial cost projections in order to get a seat at the energy policy table, counting on being able to stick taxpayers and ratepayers with the inevitably much higher price tag at a later date.

Sources: Cooper, Mark, Policy Challenges of Nuclear Reactor Construction, Cost Escalation and Crowding Out Alternatives: Lessons from the U.S. and France for the Effort to Revive the U.S. Industry with Loan Guarantees and Tax Subsidies, September 2010.

Factor 2: Nuclear power simply cannot compete with low-cost natural gas. In a competitive marketplace, natural gas beats nuclear hands down from a price standpoint. This was a major factor in the collapse of the Calvert Cliffs-3 project in Maryland. Studies have shown that if built the South Texas Project - the next candidate in line for a federal loan guarantee - could not deliver electricity cheaply enough to survive. It is the key factor that has led many of the leading nuclear utilities in the U.S. to abandon plans for construction of new reactors.

Factor 3: Natural gas is not the only alternative with which nuclear cannot compete. There are numerous lower cost alternatives available to meet the need for electricity whether or not the U.S. adopts policies to reduce carbon emissions in the electricity sector. If technologies are allowed to compete on a level playing field to meet the need for electricity, nuclear reactors would be unable to win in the marketplace for the foreseeable future. Policies that address climate change help most of the alternatives as much as nuclear if not more so. This is a key reason why capital markets will not fund these projects and the industry is so desperate for subsidies.

Sources: Energy Information Administration, Cost of New Electricity Generating Capacity in the Annual Energy Outlook, 2011, January 2011; California Energy Commission, Comparative Costs of California Central Station Electricity Generation, January 2010; Lazard, Levelized Cost of Energy Analysis - Version 3.0, June 2009.

Factor 4: Rapidly falling consumer demand for electricity has destroyed the case for many proposed nuclear reactors. While the recession has depressed demand for electricity in the near term, it is becoming clear that a major shift in consumption patterns is taking place, driven in part by the success story of increased energy efficiency. Energy efficiency is the cheapest, cleanest and fastest energy source available today - it is significantly less expensive than nuclear and involves no safety issues, waste disposal problems and lengthy construction delays.

EIA, Annual Energy Outlook, Table A9, various years.

What we have seen in the U.S. nuclear reactor space in the past decade is a classic speculative "bubble." It unfolded in the classic stages: a promotional frenzy (2001-2005 per the streamlining of the licensing process and establishment of the loan guarantee program); a surge in speculative interest (2006-2008, as measured by applications for licenses and loan guarantees) that the industry could not deliver on (as demonstrated by skyrocketing cost estimates); and, finally, the inevitable bursting of the bubble under the weight of economic reality (2009-2010, per plummeting natural gas prices and declining demand growth, resulting in reactor cancelations and postponements). This is a bubble that will one day find itself in the textbooks as an example of market mania on a grand scale.

For detailed background economic analysis, see:

Policy Challenges of Nuclear Reactor Construction, Cost Escalation and Crowding Out Alternatives: Lessons From the U.S. and France for the Effort to Revive the U.S. Industry With Loan Guarantees and Tax Subsidies (September, 2010): http://www.vermontlaw.edu/Documents/IEE/20100909_cooperStudy.pdf.

All Risk, No Reward for Taxpayers and Ratepayers: The Economics of Subsidizing The 'Nuclear Renaissance' With Loan Guarantees And Construction Work In Progress (November 2009) http://www.vermontlaw.edu/Documents/11_03_09_Cooper%20All%20Risk%20Full%20Report.pdf.

The Economics of Nuclear Reactors: Renaissance or Relapse? (June 2010) http://www.vermontlaw.edu/Documents/Cooper%20Report%20on%20Nuclear%20Economics%20FINAL[1].pdf.