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Constellation Pulls Out of the Loan Guarantee Process

me_nuke7 Constellation Energy surprised many by pulling out of the loan guarantee process for the Calvert Cliffs 3 project in Maryland.

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."

Specifically, Senior Vice-Chairman and COO Michael Wallace said in a letter to DOE’s COO Larry Poneman:

As you know, however, as our application went through preliminary credit review during the Summer, we were surprised to be presented with a shockingly high estimate of the credit subsidy cost that we and our partners would have to pay the U.S. Treasury in order to obtain the loan guarantee: 11.6%, or about $880 million. Such a sum would clearly destroy the project's economics (or the economics of any nuclear project for that matter), and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be.

That’s the crux of it. NEI President and CEO Marvin Fertel expands on this point:

“Clearly, the loan guarantee methodology used by the Executive Branch inflates the credit subsidy cost well beyond the level required to compensate the federal government for the risk taken in providing the loan guarantee. The Calvert Cliffs 3 project was quoted an unrealistically high credit subsidy cost, which ignored the project’s strong credit metrics and the robust lender protections built into the transaction.

“The formula used for all clean energy projects eligible for loan guarantees limits the estimate of recovery rate to 55 percent, significantly lower than the recovery estimate in the credit assessment of the Calvert Cliffs project by an independent rating agency. The 55-percent recovery rate is an arbitrary number, and bears no relationship to recovery rates observed over several decades for regulated electric utility debt or project finance debt.

Fertel goes into considerably more detail here. This is testimony delivered to the Senate Energy and Natural Resources Committee in late September, so consider that group up to speed on what just happened. It’ll be interesting to see what Chairman and Ranking Member Jeff Bingaman (D-N.M.) and Lisa Murkowski (R-Alaska) have to say.


The fallout? What you’d expect:

Here’s Maryland Governor Martin O’Malley:

A spokesman for Gov. Martin O'Malley (D) said in an e-mail to The Gazette on Monday that O'Malley "is disappointed but remains committed to working with EDF to ultimately save the project, and the thousands of jobs that come with it. The Governor personally lobbied the White House and the President on this project, and remains committed to it."

And Rep. Steny Hoyer (D-Maryland):

House Majority Leader Steny H. Hoyer (D-Dist. 5) of Mechanicsville said he had spent the last year "working very hard to secure a loan guarantee to enable the construction for a new reactor at Calvert Cliffs that would bring jobs to our area and protect the taxpayer's investment in the next generation of nuclear energy. We were able to ensure that the companies had a full and thorough hearing from the [Obama] Administration."


Hoyer said he will continue to seek resources to get the reactor built. The nuclear industry relies on federal loan guarantees to build reactors because private financing is hard to come by.

Calvert Cliffs. Two reactors for now, not three.


gunter said…
NEI is either looking for interest free or ridiculously low interest debt instruments for tens of billions of federal taxpayer dollars.

Given the recognized high default risk, that OMB can not apparently ignore, this collosal scheme has hit the wall.
David Bradish said…
NEI is either looking for interest free or ridiculously low interest debt instruments for tens of billions of federal taxpayer dollars.

No, we're just looking for accurate estimates of the credit subsidy costs.
Anonymous said…
Again, this is not about the interest on the loan, but a large upfront fee (like points on a mortgage). The industry is looking for a reasonalbe loan interest rate, and are not even looking for no fee, just a reasonable one.

Meanwhile, renewables (which have a higher default risk) get the same low interest loans with no fee at all. That along with a host of other larger, more direct subsidies, and an outright govt. mandate for their use, just in case even those huge subsidies are not enough.

Jim Hopf
Anonymous said…
There is another important point about the Constellation loan. The EPR is now well known to be an expensive, difficult and time-consuming plant to build, compared to competing designs (particularly AP-1000).

Areva's "low-risk" strategy of relying on an evolutionary Franco-German reactor design has clearly backfired, and far fewer EPRs will end up being sold that Areva had originally projected. This means that Areva will end up needing to write off at least some of its considerable investment in standing up production capacity for EPRs. Areva's position is not enviable, but it shows that nuclear is a field today where vendors need to be willing to take some technological risk, as Westinghouse did with the passive safety systems and modular construction methods in the AP-1000, if they are going to be able to be competitive.
Its time to realize that the loan guarantee program for the commercial nuclear industry in the US is a failure!

China's has 23 nuclear power plants currently under construction, Russia has 11, Europe has 6, South Korea has 5, India has 4, and the US only has one nuclear power plant under construction: ONE! This is ridiculous! Don't we want to create clean carbon neutral energy and high tech jobs in this country?

What we really need, IMO, is a simple Federal nuclear energy bank willing to offer low interest loans to finance up to 49% of the cost of a project. Like a bank, the Federal government would simply be offering a loan that has to be paid back with interest as an alternative to the complexities of offering a Federal insurance policy in case of default.

Such a Federal Nuclear Energy Bank should offer at least $10 billion a year in loans to utilities and energy companies attempting to finance commercial nuclear energy projects within the United States. And the Fed Bank should have a preference for projects with the highest percentages of self financing. I also believe that a public power utility like the TVA should be allowed to compete for such Federal loans.
gunter said…

You don't do your cause's credibility any good with statements like "renewables (which have a higher default risk) get the same low interest loans with no fee at all."

These fees are supposed to be based on financial risk.

The fact that the cost of bringing thousands of megawatts of wind and solar energy on line each year is coming down rather than as in the case of new nuclear power plants still foundering on rising costs with zero megawatts, makes such a statement baseless and ludicrous.

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