Will 50% of Nuclear Loan Gurantees Default?

Critics of DOE's loan guarantees for new nuclear construction are fond of pointing out that the Congressional Budget Office reported in 2003 that it expected that "over 50%" of nuclear loans would default. For instance, this piece in the Washington Monthly trots out the figure as a means of pouring cold water on the prospect of new nuclear builds.

But what are the assumptions behind the 50% figure?

To find out it is merely necessary to refer to the CBO website. Reporting on the Energy Policy Act of 2003, the CBO found that:

CBO considers the risk of default on such a loan guarantee to be very high--well above 50 percent. The key factor accounting for this risk is that we expect that the plant would be uneconomic to operate because of its high construction costs, relative to other electricity generation sources. In addition, this project would have significant technical risk because it would be the first of a new generation of nuclear plants, as well as project delay and interruption risk due to licensing and regulatory proceedings.

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.

Assuming the nuclear plant is completed, we expect it would financially default soon after beginning operations, however, we expect that the plant would continue to operate and sell power at competitive market rates. Thus, over the plant's expected operating lifetime, its creditors (which could be the federal government) could expect to recover a significant portion of the plant's construction loan. The ability to recover a significant portion of the value of the initial construction loan would offset the high subsidy cost of a federal loan guarantee. Under the Federal Credit Reform Act, funds must be appropriated in advance to cover the subsidy cost of such loan guarantees, measured on a present-value basis. CBO estimates that the net present value of amounts recovered by the government on its loan guarantee from continued plant operations following a default and the project's technical and regulatory risk would result in a subsidy cost of 30 percent or about $375 million over the 2011-2013 period. Based on information from DOE, we expect other loan guarantees would not be issued for nuclear power plants until after 2013.

Basically, the CBO determined that nuclear plants would default because they would be uneconomical compared to conventional coal and natural gas generators. The former, it appears, are not going to be in the picture due to government regulation. The latter's costs will depend considerably on future natural gas cost trends, but by the time new nuclear plants enter operation in the 2018 timeframe chances are that natural gas prices will have returned to high levels due to resurgent worldwide demand. Furthermore, electricity prices are definitely going to go up in the next decade. The EIA is predicting that retail electricity costs will be about 12 cents kw-hr one decade from now. Finally, many of the new nuclear plants are being planned by regulated utilities that can use rate-recovery to finance construction, and so long as they convince regulators that they have incurred costs prudently they are allowed to adjust electricity rates to cover costs. The scenario outlined by the CBO--nuclear being uncompetitive with coal-fired electricty--is exceedingly unlikely to cause a default at a regulated utility, and given projected increases in retail electricity rates, deregulated utilities as well.

The assumptions behind the 50% loan default figure were dubious in 2003 and are indefensible now. It's time to consign this "fact" to the scrap heap.