There has been a push to expand the clean energy loan guarantee
program established by the Energy Policy Act of 2005. Despite there
already being tens of billions authorized for guarantee, some are
pushing to add up to $100 billion more in the stimulus bill.
Although most alternative and renewable energy sources are
eligible, only nuclear energy has the near-term promise to actually
achieve America's economic and environmental goals. Therefore, it
is critical to the future of the nation to understand how loan
guarantees will help or hinder nuclear power.
The program, under which the government guarantees bank loans
for power projects, was originally sold as a way to help move new,
clean energy sources toward market viability. Regarding nuclear
power, given the past role of organized political opposition and
overzealous regulators in making the industry uncompetitive, some
limited, near-term help to reduce government-imposed risk seemed
appropriate. In support of including nuclear energy as part of the
program, former Secretary of Energy Spencer Abraham argued, "I am
not calling for massive ongoing subsidies to the nuclear industry,
[but] I do believe some federal financial participation is in order
to help defray a percentage of the high, first-time costs
associated with new generation construction." The same was argued
for other energy sources as well.
But as America edges toward a $150 billion loan guarantee
program, not all of which will go to nuclear, this starts looking
very much like an ongoing subsidy.
And it is a subsidy that does not need to be extended. Consider
an exchange between Senator Richard Burr (R-NC) and Secretary of
Energy Steven Chu during his recent confirmation hearing. Senator
Burr suggested that the existing loan guarantee program was so
poorly run that utilities were being forced to build reactors
without the loan guarantees.
Emblematic of the subsidy-first mentality of modern U.S. energy
policy, Burr and Chu deduced not that this demonstrates the market
viability of nuclear power but that the subsidy program should be
more workable. They are inviting government dependence.
And that is the problem with loan guarantees: They distort
normal market forces and encourage government dependence.
One problem with the larger national economic debate is the
notion that money--or, more accurately, savings or capital--does
not grow on trees. It comes from real people who have saved and
invested and exists in finite amounts. By subsidizing a portion of
the actual cost of a project through a loan guarantee, the
government is actually distorting the allocation of resources by
directing capital away from a more competitive project.
This signals to industry (be it nuclear, wind, clean coal,
natural gas, or anything else) that it does not have to be
competitive. It reduces incentives to manage risk and be
independent, innovative, and efficient. The end result will be a
new nuclear industry that is built for the short run and not
While a loan guarantee may be good for the near-term interests
of the individual guarantee recipient, it is not good for
consumers, taxpayers, or long-term competitiveness.
How Loan Guarantees Distort the
They remove incentives to decrease costs. The loan
guarantee discounts the cost to build a project, and this
artificial price reduction allows the recipient's project to be
market viable at a point where it otherwise would not be. The
consumer will eventually have to pay for this artificial reduction
either through higher prices once the subsidy is removed or by
being denied access to the less expensive technology that the
guarantee recipient displaced. Eventually, these inefficiencies
will result in higher electricity prices for consumers.
They stifle competition and innovation both between sectors
and within sectors. The loan guarantee artificially reduces the
cost of capital, which allows a recipient to offer its product at
below actual cost. This removes the incentive to look for less
expensive or more competitive options. If a product is not
competitive in a free market, then it should be allowed to adjust
Part of the success of nuclear energy will depend on competition
within the industry. While a utility might not be able to afford a
single large reactor without subsidies, it might be able to afford
multiple smaller rectors or a reactor based on some other
technology. This would create competition, and the subsidized
technologies would have to either reduce costs or lose market
share. This competitive environment, with other energy sources and
within the nuclear sector, would force the entire industry to
become more efficient, innovative, and cost effective.
They perpetuate the regulatory status quo. Nuclear energy
could transform how the nation produces energy. But one of the big
problems with the success of nuclear power in the United States is
not that it lacks subsidies but that the regulatory environment for
nuclear power does not promote growth, innovation, or
Assuming the permitting process works perfectly, it takes the
Nuclear Regulatory Commission four years to permit a new reactor.
That is too long. Furthermore, the commission is prepared to permit
only one type of reactor, essentially limiting competition to a
handful of companies and one technology.
Another regulatory obstacle is the nation's dysfunctional
nuclear waste management strategy. The federal government has taken
responsibility of nuclear waste (or used fuel) management, allowing
nuclear power users to ignore waste production--a critical element
of the nuclear fuel cycle--when developing their business models.
Because each nuclear technology produces a unique waste stream that
has its own characteristics, some reactor types would be more
attractive than others depending on how the waste was being
managed. But so long as nuclear operators do not have to consider
waste management, reactors with attractive waste characteristics
can be ignored.
Furthermore, developing a sound approach to waste management
would substantially reduce investor risk, which would be reflected
in lower financing costs. Guaranteeing the loans reduces near-term
pressure to fix this ongoing problem.
They suppress private-sector financing solutions.
Companies invest in major projects with substantial risk all the
time and do so without government loan guarantees. If they believe
that the potential reward justifies the risk, they figure out a way
to secure financing. This might include forming a consortium with
other firms to share risk or developing an industry insurance
scheme of some sort. Numerous companies exist in the private sector
to insure large projects. Finding a way to develop an investment is
at the heart of capitalism. But loan guarantees distort this
process and remove the incentive to come up with better long-term
Encouraging Government Dependence
While the significant costs of the program are paid by the
applicants and limited subsidies can have a role in overcoming some
initial regulatory uncertainty, expanding the loan guarantee
program as part of the stimulus bill is not appropriate. It is
detrimental to taxpayers, consumers, and long-term
It seems that business models are being based more on subsidies,
preferences, and protections rather than on sound market
principles. The result is that the prospect of a rebirth of the
American nuclear industry is coming dangerously close to being
completely dependent on government largesse before even one plant
And that is why adding a massive, long-term energy loan
guarantee program is just one more example of how the stimulus
package has gone awry. Instead of a series of short-term incentives
that promote real and sustainable economic growth, it is a massive
spending bill with provisions that should go through the normal
Jack Spencer is Research
Fellow in Nuclear Energy in the Thomas A. Roe Institute for
Economic Policy Studies at The Heritage Foundation.