Wednesday, December 19, 2007

Loan Guarantees for New Nuclear Could Total $20.5B

That's what the Washington Post is reporting:

The report on the omnibus bill says the Energy Department should guarantee, among other things, $18.5 billion in loans for new nuclear plants, $10 billion for renewable energy and efficiency, $6 billion for carbon capture at coal plants and $2 billion for uranium enrichment.
The $18.5B would go towards the construction of potentially 3-5 new nuclear plants. Keep in mind, though, this is not actual money the industry is receiving. The monies are a "guarantee" the bankers (the ones who provide the loans for a new plant) receive their payments in case an electric company defaults on a new nuclear plant. Critics, though, don't seem to understand how the loan guarantee program works:
But Peter Bradford, a policy adviser and former member of the Nuclear Regulatory Commission, said that the fees are "a pittance compared to the taxpayer exposure" and that "scoring the loan guarantees at zero is financial chicanery of a low order."

Bradford said electricity customers "spent tens of billions of dollars saving nuclear power plant owners from large losses, even bankruptcy" during the 1990s. "The loan guarantees arrange the next multibillion-dollar rescue before the fact and charge it to taxpayers instead of customers," he added.

Mr. Bradford obviously hasn't read the posts on loan guarantees by Richard Myers. Otherwise, he would know electric companies who build a nuclear plant are taking a greater risk with their shareholders' money then the government is with taxpayers' dollars. From Myers:

We can’t speak for the other nine technologies eligible for loan guarantees, but in the case of new nuclear plants the probability of default is pretty close to zero. Why? Because the companies building these new nuclear power plants will have one billion dollars or more of their own equity (actually, their shareholders’ money) invested in the project, side-by-side with the guaranteed debt. In the event of default, the company loses that investment: The government will seize it to help repay the loan. There’s not an electric power company in the United States that can sustain a billion-dollar loss on a single project. That’s why these projects are so well-planned. Why all necessary safety and regulatory approvals are obtained before construction begins. Why due diligence is so disciplined and exhaustive. Why successful completion and operation is (forgive the word) guaranteed.

This is one of those rare cases when the public interest and the private sector’s interest are perfectly aligned, when both parties have a single common interest in success.

That pretty much sums it up.

8 comments:

don kosloff said...

Peter Bradford has been an anti-nuke for decades. So any inaccurate comments he makes are not due to lack of knowledge.

Doug said...

All well and good, however there is a risk that the utilities have a hard time planning for - political risk. Endless delaying tactics by activists, brought after construction has started, can kill a project financially, as the utility bears high debt-service costs while earning nothing from an incomplete plant. This is straight from the anti-nuclear playbook circa the late 70s and early 80s. It is mitigating this risk, one that is completely outside the control of project planners, that IMO justifies the government loan guarantees.

Matthew66 said...

I am pretty sure that the anti-nuclear lobby will have a pretty tough time this time around. The utilities are picking their sites very astutely, going for places that welcome them. As we've seen, they have had no success in preventing a license extension, although they are trying with Indian Point and Vermont Yankee. I don't think the government will lose any money on these loan guarantees because the plants will be licensed, built and put into operation on schedule on budget.

Anonymous said...

Peter Bradford is a former public service commissioner (Maine, I believe). So you can't blithely dismiss him as ignorant simply because you don't agree with him.

David Bradish said...

Anonymous,

Peter Bradford was also an NRC commissioner. So he should have no excuse not knowing how the loan guarantee program works.

I didn't "blithely dismiss" him. I provided arguments and facts rebutting his claims.

Anonymous said...

The antinukes understand finance about as well as they understand any other technical aspect of nuclear power, which is to say that they hardly understand it all. Computational finance has changed by leaps and bounds since the last nuclear plant was built, and it's no surprise that nuclear opponents do not understand the risk management applications made possible by these advances.

A "loan guarantee" is technically considered to be a credit default swap. The fair value of a CDS is much, much less than the notional value of the CDS, or $20 billion in this case. CDS value depends on the probability of default and the likelihood of any recovery, but it is a tiny fraction of the notional. If you've ever paid mortgage insurance, you know that the cost of mortgage insurance is only a modest fraction of the cost of the loan.

It's a nice trade for the federal government. Provide a CDS that you will in all likelihood never have to make good on, and likely has a fair value in the tens of millions, in exchange for the very real possibility of a steady annual stream of tens of millions in nuclear powered federal taxes. Nice deal.

The antinukes will continue to quote the value of the notional, thereby implying that the CDS is worth 50 or 100 times more than its risk-neutral fair valuation. Whenever you spot this, be sure to tell them you're on to this trick.

Anonymous said...

IMO Bradford knows full well what the loan guarantees are about. We aren't "blithely dismissing" him as "ignorant" The opposite is true. We know he knows the truth, but he is purposefully spreading misinformation (some would label it a different but accurate term).

The first mortgage I ever had came with a "loan guarantee" in the form of mortgage insurance. All I know is if I didn't pay the mortgage the guarantee would not get me a free house. I'd still be on the hook for the debt. The mortgage holder would be covered, but someone else would come after me.

Anonymous said...

More on CDS...

A credit default swap is priced like this:

CDS = PD * (1 - Recovery) * Notional

This conservatively ignores discounting, which is immaterial for showing why antinukes are playing fast and loose with their fair valuations. As I posted previously, the antinukes like to quote the value of the Notional rather than fair value of the CDS.

I finally got my hands on some data from Deutsche Bank, JP Morgan and the like. For utilities, PD ~ 2% and Recovery = 0.5, meaning that CDS = 1% x Notional is a pretty good estimate. Needless to say, 1% of $20 billion is scarcely pocket change for the federal govt., and a pittance in relation to the financial and environmental good that resuscitating the nuclear power industry will provide.