It's the Shoreham Syndrome, Not the China Syndrome, That Discourages Wall St. From Nuclear Energy
Harvey Wasserman, a long time professional antinuclear energy campaigner, is once again on Huffington Post, claiming that the repeatedly announced increase in the nuclear loan guarantee program is a “giveaway.” He is dead wrong on so many levels.
Aside: Please do not be confused by the numbers you read. The recently announced attempt is just one more attempt to make the same amount of money available as has been tried since the FY2007 budget. The current total remains one loan for $8.3 billion awarded with $10.2 billion of the $18.5 billion authority originally provided in the Energy Policy Act of 2005 remaining to be awarded. The increase of $36 billion requested will make the total roughly $54 billion, which is the same number requested three years ago and also the same number requested four years ago. End Aside.
First of all, a nuclear project that agrees to accept a federal loan guarantee will pay the government an up front fee called the Credit Subsidy Cost (CSC) that is roughly equivalent to the Private Mortgage Insurance that homeowners who cannot afford a 20% downpayment often have to pay in the early days of their loan while they are building up sufficient equity in their home to reduce the risk of “walk away” defaults.
Secondly, the nuclear borrower will also be required to provide at least 20% of the project cost as an equity downpayment. In the great nuclear tradition – the loans are doubly safe with both belt and suspenders – PMI and a downpayment. They are a source of revenue for the federal government in the same way that a mortgage is a source of revenue for a savings and loan.
The borrower also does not see a dime of the guaranteed loan until after they have passed through what may be the most difficult and time consuming part of the process of getting a plant built in the US – the guarantees are only “contingent” until after the borrower has obtained a Combined Operating License that says that the Nuclear Regulatory Commission has evaluated their site, their design, their construction quality assurance program and their operational plans and issued a Final Safety Analysis Report (FSAR). Only then will the borrower – who has probably spent a few hundred million of private capital getting that far – be able to access the loan proceeds.
The reason that electric power generators are reluctantly willing to jump all of these hurdles is that the numbers driven project evaluators have determined that building new nuclear plants is in the company’s best interest and in the case of regulated utilities, that determination was also made by the duly appointed Public Service Commissions that are charged with ensuring that the project is a good deal for the customers as well.
I made presentations and took questions from a large number of funding sources during the period that I was trying to raise capital for Adams Atomic Engines, Inc. so I have a pretty fair idea what discourages financial types from backing new nuclear projects. The word that strikes fear into them is not “Chernobyl” or “TMI”, it is “Shoreham.”
After a lot of initial interest, careful attention to my presentation and hard questions about various aspects of the technology, the questions that generally ended the conversation went something like this. “Excellent presentation. So how sure are you that the government will allow you to finish the project and start earning revenue? What happens if a local, state or federal official or agency tells you that you will not be allowed to operate even if you complete all requirements along the way? How will we get our money back in that case?” The reason I am not a rich entrepreneur is that I could never provide a satisfactory answer to the question.
One of the reasons that the nuclear industry has been pushing the loan guarantee program is to help answer that question. They are a lot better organized that AAE was and deserve the backstop against bad behavior that the loan guarantees provide. The government should have some “skin” in the game because they have demonstrated in the past that they can be swayed by people with a financial interest in preventing nuclear energy from competing in the market.
Here is the comment that I posted on the Huffington Post in response to Wasserman’s opinion piece.
Harvey does not seem to understand the difference between a “giveaway” that takes money away from other programs and a loan guarantee that results in immediate revenue to the federal government plus the opportunit y for 30 years of above average interest payments as the loan is repaid.
Nuclear energy is such a good investment that the German government recently decided to allow its nuclear plants to continue operating so that it could collect a new tax of $2.3 billion marks against just 17 plants. Though the owners were not terribly happy about paying extra taxes, the certainty that they would be allowed to operate their well-built , carefully maintained facilities has resulted in a subsequent announceme nt that two reactors that were shut down a few years ago because they needed some minor investment s will soon be restarted.
The only real risk that has kept many financial sources away from loaning money to nuclear plants is one that Wasserman himself helped to add to the mix – the “Shoreham syndrome”. That is my own name for the risk that a nuclear plant can be completely built and licensed – at the cost of several billion dollars – and then prevented from operating and earning revenue by the political act of a hack who owes his career to the fossil fuel companies who supported his campaign.
Rod Adams
Publisher, Atomic Insights
Why couldn’t those who had built Shoreham sue the politicians who prevented it from going into operation, preferably seeking out evidence beforehand that those politicians had been bought by fossil fuel money?
@ Rod – excellent response to Mr. Wasserman’s column. My only objection to you leaving a post on the Huffington Post is that you’ve validated their spending money on his poorly written, emotion filled, anti-nuke nonsense. My guess is that more people will visit Harvey’s article to read the comments than the actual content of the article.
Unfortunately the tactic of pushing costs higher via various delaying tactics and forcing regulatory ratcheting has been the single most effective tool of the antinuclear side. The worst part is that a large majority of objectors is not required for this to be effective, all that is needed is sitzfleisch and money.
It’s interesting to consider exactly what basis CBO provides for determining the high default rate (at “well above 50 percent”) for loan guarantees on new nuclear plants to 2025. Shoreham Syndrome is in there, but it’s not the primary reason. They look primarily at operational costs and competitive environment of new nuclear vis a vis coal and natural gas generation.
“In its 2003 Annual Energy Outlook, the Energy Information Administration (EIA) projects that production from new nuclear power plants would not be cost-competitive with other power sources until after 2025. EIA also reports that current construction costs for a typical electricity plant range from $536 per kilowatt of capacity for natural-gas-powered combined-cycle technology to $1,367 per kilowatt of capacity for coal-steam technology. Although construction costs could diminish significantly as a new generation of nuclear plants are built, a new nuclear power plant starting construction in 2011 would have a construction cost of about $2,300 per kilowatt of capacity. By 2011, that cost would result in capital costs that are 40 percent to 250 percent above the cost of capital for electricity plants using gas and coal. Because the cost of power from the first of the next generation of new nuclear power plants would likely be significantly above prevailing market rates, we would expect that the plant operators would default on the borrowing that financed its capital costs.”
EIA provides a look at Title XVII loan guarantees, and impact on leveled costs of generation for different generating technologies. So it’s on this basis (of reducing leveled costs) that many people consider federal loan guarantees as a subsidy (because this is how they work). Investors could wait until 2025, and see if the financials change for nuclear (as the CBO projects they will), but the best way to lower lending costs is simply to start building new plants, and 2025 may be too long to wait.
<img src=”http://www.eia.doe.gov/oiaf/aeo/otheranalysis/images/tbl9.jpg” alt=”” height=”192″ width=”700″ border=”0″>
It seems to me nuclear has always faced this problem (and is not unique to the current moment). When capital projects are large and highly leveraged (as they are for nuclear), borrowing costs on loans are also likely to be very high (and not all of this is a product of excessive regulation or industry performance). Ontario is still paying off it’s debt from it’s nuclear build out in the 80s, and will likely continue to do so until 2026. Private markets are simply ill equipped to handle capital spending at this scale, and spread out over such a long time (40 years or more). You have to “believe in something” very strongly to overlook more certain and more immediate short term returns on conventional sources, and investors aren’t typically the kind of people who make decisions on the basis of “belief” and “trust” that market conditions won’t change over a long period of time.
EL, I don’t know whether that CBO analysis fed into the Energy Policy 2005, but the document probably stands fairly well as representative of CBO thinking on nuclear power. Focussing on the investment return rather than the overall cost of electricity seems to me to be a dereliction of governmental duty. Coal and gas plants do indeed cost less to build, but they cost more to fuel and run.
It seems to me that “many people consider federal loan guarantees as a subsidy” because they have forgotten that “incentive” is a useful word too. A subsidy is a common form of incentive, but there are other incentives which are not subsidies, and the nuclear loan guarantees are an example. The major flow of money in an approved loan guarantee is to the government from the constructor. The CBO’s nuclear timidity ignores the extensive qualification process and the significant exposure of the constructor, when deciding that a default is likely.
These costs are indeed strongly influenced by the Shoreham Syndrome. Construction loans would be massively better regarded if there were no capricious governmental intereference in established nuclear construction projects; in fact loan guarantees would be unnecessary, as the EIA’s chart indirectly shows with the rates for coal and gas.
My understanding is that the government is providing a loan guarantee. The Feds get a large upfront payment and if the utility defaults on the bonds the Feds step in and make the bondholders whole. In other words it is a revenue producer for the Feds right out of the gate. They may have to pay out in the distant future. Someone needs to give Amory Lovins a lesson in how this works.
” My guess is that more people will visit Harvey’s article to read the comments than the actual content of the article.”
Like me.
As I understand it, a Title XVII loan guarantee (under the present rubric) is basically a congressional appropriation to authorize the Federal Financing Bank to make a direct loan (up to 80% of the cost of a project) of taxpayer dollars at a very low (below market) interest rate. It “makes money” only if the loan gets paid back to the federal treasury (the US taxpayer) without default and without substantial loss of revenue.
The credit subsidy fee is what gets recorded as a cost for this loan on the federal budget (cost of cash flows for loan disbursements, repayment of principle, payment of interest and other payments, changes in loan terms, etc). If these costs are offset by a credit subsidy fee from borrower, the loan is in effect revenue neutral (and does not show up as a deficit on the federal budget). Depending on the goals set by appropriators, it is the job of the CBO to propose a price at which the impact on the federal budget over the lifetime of the loan will be zero (it may lose or gain revenue on the basis of such assumptions). So in effect, if the loan originates from the Federal Financing Bank (as many of these do), it’s basically the US taxpayer who is underwriting the construction of new nuclear power plants, biomass or renewable energy projects, or anything else financed in this way (and sharing the risk of completing a project and meeting debt obligations with utilities, other lenders, and ratepayers).
Anybody care to add or subtract from this view? It seems what most industry proponents object to is not the use of taxpayer funds to generate these loans (in the short run), but what assumptions are used to calculate the credit subsidy fees for borrowers (which can be high, but are always far less than interest payments would be on a typical market rate loan).
And here is what is happening to coal.
http://www.powergenworldwide.com/index/display/articledisplay/3526833311/articles/powergenworldwide/coal-generation/emissions-control/2011/02/four-corners.html
How much will a new Coal plant that meets EPA regs cost?
Why is there no information on how much pollution is caused by mining/manufacturing the rare earth magnets needed for the “efficient” windmills? It has to be on a scale equivalent to that of Gold. Or is it OK since they do it in China?
I’ve posted more than a few comments on the Huffington Post and Harveys’s are the only ones for which my comments haven’t made it through moderation. I don’t use foul language and the only label I’ve given someone is “anti-nuke” which Harvey clearly is. I’m hoping that since AOL owns the HuffPo, they may reduce their payroll a bit an trim writers like Harvey, who offer little to readers. I welcome criticism of the nuclear energy industry, when the criticism is constructive.
That’s to bad because the investment community is missing out on a great bond opportunity.
Rod – re: your HuffPo comments “… and then prevented from operating and earning revenue by the political act of a hack who owes his career to the fossil fuel companies who supported his campaign.”
Who are you referring to? I know Mario Cuomo couldn’t close Shoreham fast enough but wasn’t aware of any (overt) ties to the fossil fuel industry.
@Rich. The mining of rare earths for magnets is by no means exclusive to wind industry. They are used in nuclear industry (in control rods, as dilutants, in shielding, detectors and counters), in most consumer electronics, TV displays, batteries, glass and ceramics industry, oxygen sensors, electric engines, and more. Thorium is very much linked with rare earth deposits. And no
EL, have you read the CBO director’s Blog from March 4, 2010. http://cboblog.cbo.gov/?p=478 He explicitly explains that the 50% default rate noted by the CBO analysis of 2003 S.14 is for a bill that was not enacted into law and is considerably different from the current loan guarantee program. Referring to that old CBO analysis is akin to citing Chernobyl in a discussion of the accident risks of a US-built commercial nuclear power plant. (The closest US relative to Chernobyl is (was) Hanford-N, a dual purpose plutonium and power generation reactor. While Hanford-N was graphite-moderated and did not have a containment, it did have a positive void coefficient.)
The “direct loan” thing is a NIRS misreading of the loan guarantee requirements. At 80% of capital cost the loan can come from any lender.
My statement refers to both the governor and a senator named Al. Ties to fossil are not necessarily easy to show – part of the problem is that the fossil fuel industry represents about 20% of the total US GDP and financing the fossil fuel industry is an enormous business in NYC. The other strong tie is something called “petrodollars” that flooded the city for a number of years after the price ratcheting of the 1970s. In 1970, a barrel of oil was worth about $2.50. By 1979, the price peaked at about $39 per barrel. That led to a huge shift of wealth and a lot of cash that had to go somewhere. Not surprisingly, a bunch of it ended up in the world’s financial capital.
@EL – care to put any reasonable numbers on the scale of the dependence? It is not enough to tell people that nuclear also uses a material and contributes to a problem unless you can help understand how large the contribution is. Mining rare earths in general is not the source of devastation – mining them in vast quantities using methods that take numerous short cuts in the name of driving down the price so that customers can afford to claim that they are making huge strides in cost reductions is what causes the issue.
If a nuclear plant needs a few hundred pounds of rare earths for the uses that you mention, that is a cost that is buried in the decimal dust of the price of the plant. If EACH large wind turbine requires a few hundred pounds, the difference between responsibly mined material and shortcut mined material may very well show up as a noticeable difference in the price of the ultimate product.
I drive a diesel engine car. However, I bear far less responsibility for the environmental devastation caused by drilling for oil than an interstate trucker does. In my current communing pattern, I fill up a 12 gallon tank about once per month.
@EL – yes, the loan comes from the Federal Financing Bank. However, that bank does not get its money from taxpayers, per se. It arranges for a customer for a large sum of money. It then issues debt instruments that are backed by the federal government to raise that money from the debt market. The interest on those bonds will be lower than what they would be if the borrower accessed the market directly. The borrower pays the interest on the bonds with a little extra to the FFB to cover the cost of the time invested in arranging for the helping hand.
The financing pattern is very similar to what happens when a parent who has worked, made a good income and established a good credit rating wants to help a child borrow money for a car or a house. The parent can either cosign a loan at a bank or go out, borrow the money at a much lower rate than is available for the child who has a higher risk profile, and then lend that same amount to the child.
Do parents in that case feel like they are giving their child money out of their own pocket? Do they actively get involved to help guide the child to ensure that the loan gets paid back? I cannot answer for anyone else, but I have used that scheme a couple of times to give my girls a “get started” hand at no cost to me. They are both good people with excellent educations and sound morals. They benefited by easier access to lower cost money, the loans got repaid and the whole family is better off from the experience.
The US government has done the same for veterans, for low income students, for international shipping companies, and for state and local governments. The ONLY reason that NIRS and other professional antinuclear organizations dislike the system is that they do not like the idea of nuclear energy taking markets away from their favorite kinds of energy. They hate the pattern that Mark Cooper refers to as “crowding out”.
By the way, the CSC is not used to cover the costs of the items that you describe. There are other fees that take care of those kinds of lending related costs. The CSC is specifically tasked with covering the perceived “risk” of the investment with the idea that a bunch of borrowers will pay the fee, but only a certain portion will default and require tapping the accumulated fund.
My contention and the contention of many other analysts is that using a fixed default rate for all borrowers is a bad model whose use can be traced to either bureaucratic laziness or bureaucratic sabotage directed at nuclear because of the high cost of individual projects. The fact that the feds pick up the CSC for all other forms of emission free energy points me to the latter assumption.
I just added the following comment after having a similar one not make it through moderation. I think the problem with my first attempt was that I included several links to the more detailed articles I have published here about the NC Warn sponsored paper by Blackburn.
Just in case the second attempt does not get published I wanted to put it somewhere visible:
Wasserman made the following assertion:
“At the same time, major breakthroughs in solar cell technology have prompted a wide range of studies showing deployment of green energy to be cheaper than new atomic power, and growing moreso.”
I have been tracking this claim for the past six months. It is traceable to a single paper that was commissioned by an organization named NC Warn whose mission statement clearly shows that they oppose nuclear energy and support alternatives like solar.
“NC WARN is a member-based nonprofit tackling the accelerating crisis posed by climate change
I don’t know what to say about coal, except that admitting that the GHG regulations will cripple the industry. I feel for all the people who will lose their jobs, shareholders who will lose their investments, and I fear the GHG regulations will harm the total economy by bringing about higher energy prices at a fragile stage in its recovery.
Change is hard, but shikata ga nai, it can’t be helped.
Yes, the Director’s blog is an interesting statement. It all sounds pretty reasonable to me. The goal of the loan program is not to penalize the industry with excessive costs, but to assist with future development plans. And the unknowns that were present in 2003 are still some of the same unknowns today, and the best way to remove this uncertainty is to start building new plants. I detect the main shift in policy right at the end: “CBO
@EL Do some Googling. My search shows numbers in the range of 1000 to 2000 pounds of rare earth magnets per generator (2 Megawatt capacity). Now add in the weight of the magnets in the electric cars, Hybrid cars, etc. And China is raising the price of these now that we are “hooked” on these materials. Mandatory percentages of “renewable” energy only helps China make money. No jobs for USA, and a REAL environmental impact study would show a negative impact. Look at the problems from mining Gold, Lead, and other rare earth materials. Where will these magnets go after use?
Aside: CFL = China Florescent Light bulb. Next time you buy one look at where they are manufactured. How much mercury does the average household through out each year in bad CFLs? And we (USA) worry about the button size mercury battery!
@Rich and Rod. From rare earth investing news
@Rod. I’m having a difficult time figuring out exactly who puts up the money for these loan guarantees? Your explanation makes sense, but I am wondering if you can provide some additional clarification.
FFB “then issues debt instruments that are backed by the federal government to raise that money from the debt market.” This is primarily U.S. Treasury notes, right? So in effect, private capital markets are involved, but not in the direct financing of a particular loan to a new nuclear power plant (but in the financing of the U.S. National debt in general). Is this correct?
@EL My point is that Nuclear MUST, by law, provide a complete environmental impact statement that goes to the depth of even addressing the impact of mining the uranium needed to produce the power for the life of the plant. Effects upon human life and livelihood must also be described. Coal and gas have had a discount pass, but finally they are clamping down on coal, both at the power plant and at the mine (expect higher electricity cost due to this). Gas is still not frowned upon but, at least, they do not get a free pass. The environmental impact studies for wind and solar are a joke. They don’t even worry about the dead birds under the wind turbines. More people have died as a result of wind turbines, or (that is OR not AND) hydro power in the last five years than in the total history of commercial and military nuclear power (including Chernobyl). Google the recent explosion of the hydro power plant in Russia. It was an environmental and human disaster. I would not live down stream of any dam, but I would live as close as allowable to any nuclear power plant. What is the REAL impact of the Hover dam? Do you realize the water of the Colorado river no longer reaches the Pacific ocean? It is a dry river bed at the point it once flowed into the ocean.