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Loan Guarantee Foolishness by the Folks With Green Eyeshades

On Monday, October 4, 2010, the ANS Nuclear Cafe published a DC Perspective column discussing the complex topic of loan guarantees for new nuclear power plants. It is not exactly a page turning topic; understanding the nuances requires a good deal of research into legal language and an understanding of the way that decisions get made in a politically charged environment. (Disclosure: I wrote that article.)

Union Supporters of Calvert Cliff Unit 3

This morning, the Washington Post published an article titled Constellation Energy shelves plan for Calvert Cliffs reactor that demonstrates why an effort to better understand the loan guarantee program would have been worth more time and energy by people who want new nuclear plants to be built and operated in the United States in the near future. After many months of wrangling with the green eyeshade folks at the Office of Management and Budget who claim to believe it is their duty to protect American tax payers from risky ventures, Constellation Energy has walked away from the negotiating table. The analysts at that for profit company simply could not make the numbers work.

The people at OMB and DOE have expressed surprise that the company would not take the offer and are trying to lay the blame for the lost opportunity on the company. Here is a quote from the article:

Constellation Energy has shelved its proposal to build a new reactor at its Calvert Cliffs nuclear power plant, Obama administration officials said Friday, even though the administration had decided to award the project a $7.5 billion loan guarantee.

Senior administration officials said Constellation’s decision was “a surprise,” but a Constellation Energy spokesman Larry McDonnell said that the administration’s loan guarantee terms were “unworkable” and that Constellation had told the Energy Department “we can’t move forward.”

The article concludes by describing a more successfully concluded loan guarantee effort.

Separately, administration officials said they had approved a $1.06 billion loan guarantee for an Oregon wind farm, the world’s largest, after project developers waged a vigorous lobbying campaign to bring the year-long application process to a conclusion.

“We’re gratified that this lengthy process has come to an end, and we look forward to closing the transaction shortly,” said John McNamara, chief financial officer of Caithness Energy, the project developer.

The wind project, known as Shepherds Flat, will provide 400 jobs, 845 megawatts of power and avoid emissions of 1.2 million tons of carbon annually.

I added the following comment to the thread associated with the article.

Just in case anyone wonders why the wind farm project accepted its loan guarantee while Constellation refused, the key is in understanding the terms and conditions.

For a project that would have produced 4,000 jobs for 4-5 years in Maryland, the companies involved were being told that they had to PAY the US government a non refundable fee of $880 MILLION dollars in order to BORROW $7.5 billion for a project where they would have to invest at least 20% of the project cost as their own equity, thus giving them at least $2.0 billion in reasons to make sure the project succeeded.

In contrast, the wind farm, which will produce 400 jobs for a relatively short period during construction, was able to obtain a $1.06 billion dollar loan with NO CREDIT SUBSIDY COST at all. The ARRA has provided all of the money required for the credit subsidy cost for politically defined “renewable” energy via a change in section 1705 of the Energy Policy Act. In addition, section 1603 of the ARRA provides a CASH GRANT in lieu of a production tax credit of 30% of the cost of the project via a check within 6 months after the project closes. The wind project thus gets a $1.06 billion loan with no closing cost and the sponsors have no equity in the project at all since they get their 20% down payment back with a 50% kicker less than a year after the project starts.

We live in VERY strange times.

Rod Adams, Publisher, Atomic Insights

The space in that comment thread is limited, so I wanted to add a few more numbers for consideration. Assuming that the loan guarantee for the wind project is limited to 80% of the project cost – the maximum allowed by the Energy Policy Act, the total project will cost at least $1.325 billion. The 30% cash grant in lieu of a production tax credit will cost the federal government almost $400 million.

That project will employ 400 people for perhaps 2 years, leading to a direct cost per job of $500,000 per year.

The power plant cost is $1600 per kilowatt capacity using a technology that has an average capacity factor of less than 30% in the United States.

In contrast, the Calvert Cliffs project would have had to pay the government $880 million to employ an average of 4,000 people for a construction project that would last for 4-5 years. It would also repay the $7.5 billion loan at an interest rate higher than the government’s cost of funds.

After the construction project was complete, the plant would have employed 400-500 highly paid operators, engineers and security personnel for 60-80 years – two to three generations. The total project cost, assuming an 80% loan guarantee, would have been $9.4 billion and produced 1600 Mwe using an emission free technology that has an average capacity factor of 90% in the United States.

Additional Reading

Constellation Energy Press Release on Market Watch

Constellation Energy Letter to DOE

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