Monday, October 06, 2008

Thoughts on the DOE Loan Guarantee Program

The Department of Energy is moving forward with its clean energy Loan Guarantee program. In a press release last week, DOE announced that it had received applications from 17 companies to build 14 nuclear power plants totaling 21 new units and almost 29,000 megawatts of new electrical capacity. In total, the applications seek $122 billion in loan guarantees, while the program is authorized to commit only $18.5 billion to new nuclear plants. Following the DOE announcement, NEI's Richard Myers, Vice President, Policy Development, noted in an interview with Bloomberg that the oversubscription is a sign that $18.5 billion is not adequate to provide the financing support necessary. In a piece on the loan guarantee program and another on the debt ceiling of the Tenessee Valley Authority, Dan Yurman explains why.

In essence, there are some jobs so big they are beyond what the private sector alone can do. Federal support, such as loan guarantees, enables the private sector to attract more capital to the enormous projects needed than would occur otherwise. Without that public-private partnership, the entire cost of these massive projects would be borne entirely by the federal government (i.e., the taxpayers). With federal encouragement, the private sector is willing to bear a fair share of the risk and put its money on the line to contribute to dealing with the nation's energy and environmental needs. That's what we take from the oversubscription in loan guarantee applications last week.

4 comments:

Martin Burkle said...

Looks like these plants average 7.1 billion each. Would the total cost of the plant be guaranteed or is there more cost than this?

David Bradish said...

Martin, in order to receive a loan guarantee, as much but not more than 80% of the project costs can be financed by debt. The loan guarantee backs all of the debt. The other 20% has to come from equity.

So if the plant costs $7.1B, then the government can guarantee at most up to 80% of the total cost (depending on how the utility wants to finance the project) or $5.7B.

Arvid said...

Of course, one idea is that the government does carry 100 % of the cost, and ownership, like in France...

By the way, does the industry pay anything for these loan guarantees? One could argue that they won't cost the US government a single cent as long as nothing goes wrong, but the government is taking on quite a bit of risk which could end up as real debts. And the guarantees are obviously very valuable to the industry, one could probable even put a dollar value on them.

I propose a bold and (imho) fair plan: give loan guarantees to all serious power projects in the US! That would be fair but would tilt the competitive board so capital intensive technologies (wind and nuclear) become more competitive than they are today.

Of course, you could argue that it wouldn't tilt anything, and that the current system instead is tilted in the interest of low capital plants, that is, gas.

As a matter of fact, that is exactly what I claim: in the power business there is no such thing as a level playing field, just a number of diifferently sloping ones, and it's up to the government to choose the one which is most in the national interest.

David Bradish said...

By the way, does the industry pay anything for these loan guarantees?

Definitely. Here's what Exelon will pay for the loan guarantee on the two proposed reactors in Texas:

"Exelon will pay DOE a program fee of more than $400 million for the application, Nesbit said. There will also be an annual loan maintenance fee of $200,000 to $400,000, a one-time facility fee of about $55 million and a one-time application fee of about $800,000."

One could argue that they won't cost the US government a single cent as long as nothing goes wrong

We try to make that argument, but it doesn't always get heard. Oh well, gotta keep at it.