31 Comments

  1. We seen to have all forgotten why the loan guarantees are for:

    To support the learning curve of new designs
    To provision against frivoulous law suits
    To edge against régulator induced délays

    Once the first 2 Vogtle out of the way expect only AP1000 to be built if other manufacturers do not get same kind of deal.

    1. Actually, no. The loan guarantees have nothing to do with the “manufacturers,” and their purpose is to ensure that the lender(s) get paid if the borrower(s) default on the loan. Now, lawsuits (frivolous or not) and “regulator induced delays” could potentially be issues that might lead to a default, but that’s not “what the loan guarantees are for.” Nor do they have anything to do with the “learning curve of new designs.”

      1. @Old Nuke

        Though the loan guarantees are provided to utilities and not to vendors, they were specifically limited to advanced designs – defined as designs certified after 1995 (I think). That is one reason why TVA could not apply for a loan guarantee in order to finish up Watts Bar Unit 2 or either of the Bellefonte reactors.

        1. True, the loan guarantees are limited to “advanced designs,” but that does not (in my view) have anything to do with a “learning curve.” It’s to help ensure that funds are available at favorable interest rates to help build the plants, and to provide a “backstop” against a loan default. And as SCANA has demonstrated, it is possible to develop financing for an advanced reactor project without resorting to Federal loan guarantees.

          The primary beneficiaries of the guarantees are still the utilities, not the “manufacturers.” While the reactor vendors benefit–indirectly–from the guarantees, by virtue of the creation of a market for their products, it’s interesting to note that two of the three advanced reactor vendors are foreign-owned (though they do have sizable work forces in the US). So to some extent, the loan guarantee program is helping the Japanese (Westinghouse)–and might benefit the French (AREVA) if anyone actually decides to build an EPR.

          Actually, the main beneficiary of the loan guarantee program might end up being the NRC. The package of incentives included in the Energy Policy Act helped provide some of the impetus for 10 CFR Part 52 combined license applications. Without that push, who knows how long it would have been before an applicant would have stepped forward to test the COL process.

        2. Also, the reference date for “advanced reactors” is (later than) the end of1993–though as a practical matter, that is not an issue because the first design certifications were completed in 1997. And it’s not clear to me that TVA would have been able to apply for a loan guarantee, even if it had stuck with the original plan to put AP1000s at Bellefonte–if I interpret the EPA correctly, those provisions apply only to non-Federal facilities, and TVA, as a Federal agency, would not qualify.

    2. Well my understanding is that the 2005 Energy Policy Act, in order to kick-start the construction of new nuclear plants, made provisions for the loan were are discussing here.

      This loan was meant to give protection for costs caused by regulatory delay‏. So I was not wrong totally !

      1. There are provisions in the EPA for reimbursement to a COL holder of expenses incurred because of some specific types of regulatory and litigation delays during plant construction. That’s part of the “standby support” in Section 638 of the EPA, not the loan guarantee provisions in Section 1703.

  2. Per the the final “note” above: Keep in mind that no one is “getting” anything other than a commitment by the Federal government to back loans received by the owners. If I understand the process correctly, if the project goes forward without a default on those loans, the owners “get” nothing–other than a break on interest rates as a result of Uncle Sam’s guarantee.

    1. Per the the final “note” above: Keep in mind that no one is “getting” anything other than a commitment by the Federal government to back loans received by the owners.

      @Old Nuke.

      This isn’t correct. This part of the DOE loan program are direct loans from the federal treasury to the developer (presumably at a lower interest than can be obtained from available fixed income markets given associated risks). The originator of this loan is the Federal Financing Bank (not a third party with default risk backed by the Government).

      http://www.southerncompany.com/what-doing/energy-innovation/nuclear-energy/pdfs/GTF_DOE_loan_guarantees_background.pdf

      Among other numerous sources.

      1. Nevertheless – if it was “just” a federal loan, the constructors would JUST be paying interest on the loan. Because it’s offered as a loan guarantee, the constructors ALSO pay the loan guarantee fee. The commercial loan market would give also lower interest with the guarantee in place but the federal rules restrict where the loan can come from when the guarantee amount is 80% or more of the value of the project. As your cite demonstrates, the guarantee approval was explicitly tied in to the federal loan in the first place.

  3. I just read an anti nuke article by Wasserman where he goes on about how much money these loan guarantees will cost the taxpayer.
    I have a very limited knowledge about how these loan guarantees work but it looks like they make money for the government.

    Can someone explain how they work in a bit more detail so that I can comment intelligently on the Wasserman article?

    Thanks
    Mike

    1. You’re right, Wasserman is (as usual) wrong.

      In principle the loan guarantee is insurance against the failure of the project. If the borrower goes bankrupt, the guarantor takes ownership of the assets – the partial or complete facility – and repays the loans outstanding in full. This gives the lender the confidence to subtract risk from their expected return on the loan leading to lower interest rates.

      The fact that here the lender and guarantor are both the federal government doesn’t make any difference to this principle, although it causes a lot of confusion exploited by the anti-nukes.

      What is overwhelmingly most likely to happen is that the construction project runs to completion, the reactors make their electricity, the loans are repaid, and the government gains by the guarantee fee.

      In the highly unlikely case that the guarantee is called up, this is extraordinarily bad news for Southern Company because they have gone bankrupt. The government then owns the power plant and can make back most or all of the money paid (to themselves, in this case) by completing, running and/or selling the plant.

      1. @Joffan.

        The only thing “guaranteed” here is that the loan is coming from the Federal Government (and not a third party lender with the risk of default backstopped by the Federal Government).

        Credit Subsidy Fee is a program cost … it’s like insurance. If the federal government issues $50 billion in loans (as was the original intent of the program), and one of them goes bust (and the government doesn’t get it’s money back), the credit subsidy fee “paid by all the loan recipients” covers the cost of these losses (at zero risk to the taxpayer).

        The taxpayer should always get their money back in these instances (except in the case of Solyndra where credit subsidy fee was waved, and an additional loan was made to a troubled asset and the taxpayer was put at the back of the line of creditors).

        These loans are paid back with interest, just like they would be if you received a direct loan from a bank. The rate is typically less than can be obtained from private markets. These low cost funds add security to a project, lower risk and thus lower rates on additional loans (such as from private sector), and cost savings are passed on to the ratepayer (because capital costs are lower).

        “Loan Guarantee” is a misleading term here. You should completely ignore it.

        1. “Loan guarantee” is not really “misleading,” as you claim. In fact, the document to which you provided a link, above, explains that DOE holds a lien on the project, so DOE effectively takes ownership if there’s a default. In addition, the FFB website explains (briefly) how Federal agency-guaranteed loans are handled.

          Your explanation of the credit subsidy fee is–I think–accurate, in theory, at least: the fees would be calculated based on an estimate of the risk of default, and if that estimate is reasonably accurate, the pooled fees (assuming the program is fully subscribed) would be sufficient to cover the cost of a default. However, it’s hard to see how that would work if the Vogtle loan is the only one that comes about as a result of this program. Presumably, the fees that Southern and its partners are paying would not be enough to cover the potential losses if they were to default on the loan. (If I understand the language in the EPA correctly, the amount in the fee pool can be augmented by appropriated funds, if necessary.)

          It’s been a long time since I took Engineering Economics, and corporate finance is far outside my area of expertise, but I assume that Southern (and its co-owners) took a look at the financial benefits associated with access to funds at the (very) low interest rates charged by the FFB, balanced against the credit subsidy fee and any other costs associated with applying for the loan guarantee, and decided that there was a net benefit using the loan guarantee.

          1. I assume that Southern (and its co-owners) took a look at the financial benefits associated with access to funds at the (very) low interest rates charged by the FFB, balanced against the credit subsidy fee and any other costs associated with applying for the loan guarantee, and decided that there was a net benefit using the loan guarantee.

            @Old Nuke

            The rate is apparently the interest rate for Treasuries of comparable maturity and a FFB spread (or interest rate premium) of 3/8 of 1% (here).

            Southern estimates the total costs savings for the project (“recovery of financing costs during construction, DOE loan guarantees, production tax credits, lower-than-forecast interest rates and lower-than-forecast commodity costs”) to be around $2 billion.

            1. @EL

              Southern has also estimated that the savings from the loan guarantee portion of the list of incentives provided to be the first mover will be about $200 million over the life of the project.

        2. @EL

          You’re only telling a partial truth by implying that there was something unique about the original loan guarantee treatment for Solyndra. The ARRA appropriated federal funds to cover the Credit Subsidy Cost for all Energy Policy Act loan guarantee applicants EXCEPT those who were only eligible under section 1703.

          For people who do not speak bureaucrat, that means that only nuclear projects had to pay. The laws changed several times, often with final hour changes that slipped in changes to definitions, with the consistent theme of maintaining the exceptional treatment of nuclear when compared to other low or ultra low emission technologies.

          1. @Rod Adams

            It is also exceptional with regards the size of the loan.

            I’m not sure it would have been a good thing to wave the credit subsidy fee in this instance. This would likely be seen as a poor signal to private capital markets. The “more regular” these loans were the better (at least from the perspective of investors looking to minimize their risks in such a project).

            1. @EL

              The credit subsidy fee for all other low and ultra low emission technologies eligible for loan guarantees under section 1705 were not waived. As an additional incentive, funds for those fees were appropriated by Congress.

              The low or ultra low emission technologies left out of that gift were nuclear and large hydro. Arguably (and I expect that you will argue), those are the only two technologies on the list that have the potential for taking enough markets away from fossil fuel to noticeably affect their annual sales revenues and profits.

              It is clear to me that nuclear energy has a powerful array of detractors, including politically powerful competitors that do not want their tax money being spent to encourage, or even to enable, the development of a strong rival.

              Your comment about a signal to private markets is more enlightening that you might have intended. Obviously, if the government had appropriated funds to pay the credit subsidy fee for nuclear projects, there would have been a far higher interest on the part of private capital in providing the rest of the necessary funds.

              The deal offered to Constellation Energy for Calvert Cliffs unit 3 still irks me – they (and any potential capital partners) were being asked to give the government an immediate fee of $880 million in order to obtain a loan with a value of just $7.5 billion. That is a 12%, up front, non-refundable fee that adds no value to the project. It does not pay a single welder, NRC inspector, or operator trainee.

              It’s no wonder Constellation walked away. Their departure killed the project since the other half of the partnership was a foreign owned company that, by law, needed a majority US owned partner in order to put their capital into the project and obtain permission to build and operate the plant.

              At the time CC3 was being planned, I lived in Maryland and attended many of the public meetings associated with the EIS and the COL process. There was strong community support for the project with all kinds of the civic involvement that you are often harping about. Even the Democratic governor of one of the bluest states in the union was in favor of the project.

              NIRS is also a Maryland based organization, but incredibly tiny in comparison to the groups that supported the project. They won because of the powerful array of resistance, mostly from outside of the state.

          2. The credit subsidy fee for all other low and ultra low emission technologies eligible for loan guarantees under section 1705 were not waived. As an additional incentive, funds for those fees were appropriated by Congress.

            @Rod Adams.

            You’re right.

            It appears the credit subsidy fee for 1705 loans (including Solyndra) were in the range of 11.7%. The total cost of this for the entire program was $1.88 billion, or close to half the cost of the subsidy amount for one generation project (e.g., Constellation Energy) benefitting one region in the country. Such heavy public investment ($880 million) in one location is a bit hard to pull off politically (especially in an environment of fiscal constraint). If it was a project in my district getting axed because one project in Maryland was sucking up all the available funds, that’s a heavy lift. While opposition could certainly play a role (a small one I would expect), the larger issue to me is likely the sheer size and very large up front capital costs of these projects (concentrated so specifically in one region). If industry expects government to use leverage in these matters (and I think there is good reason for doing so), the public culture of investment and tax policy needs to change (it’s utterly stultifying in these regards … except through back channels).

            There were many ways to get the financing done on Constellation … or any other project of this scale for that matter (especially when deemed in the public interest). I’ve always argued that nuclear industry is lobbying entirely the wrong folks. Those who are fine with massive taxpayer layouts for oil and gas industry, but speak ill of public investment in general and choke the purse strings on anything else. Fiscal conservatives do a great more harm to the interests of nuclear power than a few disorganized greenpeace activists (IMHO). But don’t tell that to anybody on this site … they’ve found a more convenient target to blame (and patrons of oil and gas, cashing large checks from the public and lobbying against government and public institutions, are thrilled about it). Anybody else want some of these funds, sorry, there’s too little to go around (and bankers can get far better returns elsewhere). But why not, blame NRC regulators and white suburban kids in dreadlocks (and environmental organizations with shallow pockets) for these problems, government shouldn’t have a role in any of this (or so we are told). Follow the money, renewables are getting some (nuclear too) … but it’s still not where the action is happing. Solyndra is a very nice distraction (and it hurts the interests of nuclear to focus on it).

            1. @EL

              Those who are fine with massive taxpayer layouts for oil and gas industry, but speak ill of public investment in general and choke the purse strings on anything else. Fiscal conservatives do a great more harm to the interests of nuclear power than a few disorganized greenpeace activists (IMHO). But don’t tell that to anybody on this site … they’ve found a more convenient target to blame (and patrons of oil and gas, cashing large checks from the public and lobbying against government and public institutions, are thrilled about it).

              Sometimes I wonder if you ever read my posts. I have been writing for years about how the real lobbies that effectively hinder nuclear energy development are the people who are far more interested in maintaining the status quo hydrocarbon economy. I’ve even published debates with “fiscal conservatives” like Jerry Taylor of Cato.

              In fact, I believe that a fair number of organized opponents get their funds from sources that can be traced to the hydrocarbon industry. Actually, I suppose that is a bit unfair; it is hard to find any funds at all in an industrial economy that cannot be traced in some way to the business of finding, extracting, transporting, refining, financing, supplying, distributing, or retailing fossil fuels.

              (BTW – please do not put “greenpeace activist” and “disorganized” in the same phrase. They may appear scruffy at times, but I have always found them to be extremely organized, focused and perhaps even professional in their directed actions.)

              Please remember that “this site” takes no responsibility for the comments posted. I try to moderate with a very light hand and allow people to express a wide variety of views, even when they disagree with me.

            2. @EL

              The total cost of this for the entire program was $1.88 billion, or close to half the cost of the subsidy amount for one generation project (e.g., Constellation Energy) benefitting one region in the country. Such heavy public investment ($880 million) in one location is a bit hard to pull off politically (especially in an environment of fiscal constraint).

              Let’s be fair. The Ivanpah solar facility included a $1.6 billion loan guarantee. As I recall, it was only one of several solar and wind projects for the same rather unpopulated area of the country. Here is a list of all of the loan guarantees that includes their status, amounts, locations, and recipient – http://lpo.energy.gov/our-projects/

              Maryland may be a small state, but it is densely populated. The CC3 location was in close proximity (well within construction worker commuting range) to several other densely populated states (Delaware, Pennsylvania and Virginia plus the District of Columbia.)

              CC3 was also widely understood to be the lead plant of 5 proposed US-EPR units that were all negatively affected when Constellation made the rational decision to avoid the $880 million as an excessive fee for $7.5 billion.

              In addition to being the lead US-EPR, CC3 was the selected example of a “merchant” power generation company in the loan guarantee program. The failure of the government to make a reasonable offer (I’m not even asking for free, but something reasonable) made it clear to all other merchant generators that it was not worth their time to even ask for encouragement.

              CC3 had one more important feature. It was a project where the US could have made it clear that it was open to capital investments from abroad to build an important energy industry back up. Instead, it clearly demonstrates that the US, which happily allows importation of Dutch windmills and Chinese solar panels, is closed to both capital and technology from France if it is related to building new nuclear power plants here.

              Remember the basic issue – the program was approved by congress with strong bipartisan support with a stated goal of encouraging low and ultra low emission generation technology. I don’t think the people who approved that program realized how it would be torpedoed by unelected people like Peter Orzag or some minion with a spreadsheet at OMB.

              The loosely, but effectively, organized opposition to nuclear energy had a much better grasp of the stakes involved in allowing that project to move forward with a solid design, a well capitalized partnership (that could draw on the French government if required), and strong community support in one of the bluest states in the union. They worked hard to make sure that the project could not even break ground.

        3. “Loan Guarantee” is confusing, as I say, because the guarantor and the lender are two parts of the same body. But the principles in operation are the same – there is one transaction for the guarantee, and another transaction for the loan. A simple loan would not have the upfront guarantee (insurance) fee payment involved, and the lender would charge a higher interest rate because of the risk of default.

          If you ignore the term “loan guarantee” then you run the risk of overlooking the fee payment. Or you have no explanation for it.

          My guess is that the FFB is only generally allowed to charge commercial rates in any case, so as to avoid undercutting commercial loans. A commercial loan with a guarantee supporting it would also be at lower interest rates than one without the guarantee.

          By contrast, the term “credit subsidy fee” is misleading, bordering on meaningless, since it is just the “net” expected cost of the loan guarantee to the guarantor (the DoE) – administration cost, plus cost of default proportioned to probability of default. There’s no credit and no subsidy involved in that number.

          For section 1705 projects – everything-but-nuclear – there was an explicit subsidy, because that fee was paid by the government (to itself (DoE), so it could guarantee a loan from itself (FFB)). Pass the Tylenol.

  4. Rod–

    I agree with you that it is a shame that Calvert Cliffs 3 has not gone forward, and I also agree that the credit subsidy fee proposed by DOE was unreasonably high. However, it’s also true that what ultimately killed Constellation’s participation was some extremely poor decision-making in the non-nuclear parts of its business, leading to near-bankruptcy during the financial crisis. That set in motion a series of moves that resulted in Constellation’s withdrawal from UniStar (leaving it wholly owned by EdF and thus unable to hold a license under current US law) and–eventually–the company’s acquisition by Exelon, which–despite its position as the country’s largest nuclear utility–has shown itself thoroughly averse to building new nuclear plants.

    Had Constellation’s financial postion not been degraded, it’s conceivable that it might have continued negotiations with DOE–and possibly achieved a reduction in the credit subsidy fee; obviously, there is no way of knowing. Meanwhile, the project remains alive–technically, at least–and the NRC’s COL review continues. If EdF/UniStar is able to find US-based partners who can acquire a majority interest in the project and allow it to meet the foreign ownership provisions of the Atomic Energy Act, or if that part of the AEA (and the corresponding NRC regulation) is modified in such a way that UniStar would be an eligible licensee under its current ownership arrangement, perhaps there is still a chance–admittedly slim–that the plant could eventually be built.

    1. @Old Nuke

      It’s never easy to pin a complex situation on a single cause, but that loan guarantee fee determination sure comes close to being the straw that broke the camel’s back for what might have been several significant construction projects.

      CC3 was more than just a single unit; it was the chosen lead unit for as many as five projects whose owners had exhibited more than passing interest in the EPR.

  5. “CC3 was more than just a single unit; it was the chosen lead unit for as many as five projects whose owners had exhibited more than passing interest in the EPR.”

    Let’s see. They’re building a couple of them in Europe, their home. One in France and the other in Finland. Both seem to be having cost and schedule overruns. Could you have had a blessing in disguise? I always try to avoid buying the first production run of any new gadget that comes out. After they get the bugs out of the 4 they are building, (China) maybe they’ll be an even better deal.

    1. @Eino

      Let me rephrase. CC3 would have been the first US-EPR. It would have been able to build on the European and Chinese lessons learned.

      Even if things had continued to progress as planned, I am not sure that the COL (construction and operating license) would have been completed by now, though it would have been close.

  6. “…but there was also a heated bipartisan effort from groups as diverse as NIRS and Cato to prevent that from happening.”

    I would agree with the Cato Institute on no government funding for nuclear if:

    (1) There were no government funding for any source of energy, and
    (2) Each source of energy were treated equally under regulation – you don’t get to dump your refuse into the environment.

    If those two conditions were met, then nuclear would win hands down.

    BTW, the Cato Institute is correct about the free market up to a point. This is the point. An unrestrained Laize Faire (did I spell that correctly?) economy leads to the sale of human flesh in the market place. Pope Leo XIII alludes to this in his encyclical, Rerum Novarum, in the 19th century. Socialism – just the opposite – is State ownership of that same human flesh. Again, Pope Leo XIII describes this in his other encyclical, Quod Apostoloci Muneris. Really, what substantive difference is there between the two? The right solution is exactly what Popes Leo XIII, Pius XII, John Paul II, Benedict XVI and Francis I have been saying for the past century and a half. A man:

    (1) Is entitled to own the fruit of the sweat of his brow,
    (2) Is responsible for the consequences of his actions,
    (3) Is required to love God with all his being and his neighbor as himself.

    Why is nuclear power not succeeding? It is the one industry that requires:

    (1) We own what we do,
    (2) We are responsible for the consequences of our actions, and
    (3) We look out for our coworkers as we would look out for ourselves.

    Hey, those are the three principles which these great Popes have spoken about and those are the principles which our hedonistic, libertine, reality-TV, Facebook-narcissist society have abandoned. If we abandon Christian principles, then we deserve to suffocate in our own coal dust fumes. And that is why I talk about principle – it is principle that matters, not DOE loan guarantees. But most want a free handout with license to do whatever one wishes, and few want the personal responsibility and accountability that comes with true freedom.

    🙁

    Kyrie Eleison, Christe Eleison, Kyrie Eleison. Domine Deus, miserere nobis et totius mundi.

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