Finally – Loan Guarantees

We’ve been discussing loan guarantees for what now seems like years – about five of them in fact, as they were established as part of the Energy Policy Act of 2005, though guarantees specifically for nuclear energy came along a couple of years later – so it’s about time that we saw a few of them.

Here’s President Obama this morning at IBEW [International Brotherhood of Electrical Workers] Local 26 Headquarters in Lanham Maryland:

We are announcing roughly $8 billion in loan guarantees to break ground on the first new nuclear plant in our country in nearly three decades. It’s a plant that will create thousands of construction jobs in the next few years, and some 800 permanent jobs in the years to come. And this is only the beginning.  My budget proposes tripling the loan guarantees we provide to help finance safe, clean nuclear facilities – and we’ll continue to provide financing for clean energy projects here in Maryland and across America.

Why?

Now, I know it has long been assumed that those who champion the environment are opposed to nuclear power. But the fact is, even though we have not broken ground on a new nuclear power plant in nearly thirty years, nuclear energy remains our largest source of fuel that produces no carbon emissions. To meet our growing energy needs and prevent the worst consequences of climate change, we’ll need to increase our supply of nuclear power.  It’s that simple.  This one plant, for example, will cut carbon pollution by 16 million tons each year when compared to a similar coal plant. That’s like taking 3.5 million cars off the road.

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The guarantee goes to the Southern Company, which intends to build Vogtle 3 and 4 in Georgia.

Here is Southern Co.’s press release on the loan guarantees. The company is pleased, naturally, but here’s what caught our eye:

Units 3 and 4 are expected to begin commercial operation in 2016 and 2017 respectively.

That’s fast. And, relevant to the concerns of the day:

The additions of units 3 and 4 are expected to to produce approximately 3,500 jobs during construction and an additional 800 permanent jobs once the units begin operation.

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What are loan guarantees?

Loan guarantees represent no taxpayer outlay – instead, they put the imprimatur of the government behind loan applications made to private banks, reducing risk considerably. It’s really the nuclear interests and the banks that pull the financial freight here.

Now, the government would be on the hook if a project went pear-shaped, but there’s no advantage to letting that happen – any potential nuclear renaissance would wither away if the plants cannot be successfully built and the dream of reversing climate change would wither with it.

So the onus falls on the industry to ensure that the projects do not fail. And industry would not put itself willingly into a position to fail.

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And why is the government interested in loan guarantees?

Established under Title XVII of the Energy Policy Act of 2005, the Secretary of Energy is authorized to make loan guarantees to qualified projects in the belief that accelerated commercial use of these new or improved technologies will help to sustain economic growth, yield environmental benefits, and produce a more stable and secure energy supply.

So the government promotes these projects for the common good, recognizing that a nudge to the financial sector might get the ball rolling on what can be expensive or untested technologies – nuclear falls in the first category, with much of its costs front loaded in construction, and renewables (tend to) fall in the latter category.

NEI’s Jim Slider did a nice job of explaining this:

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.

We’ll have more on this later. DOE Secretary Steven Chu will be speaking this afternoon. We hope to get more from Southern Co.’s CEO David Ratcliffe, too. Stay tuned.

Vogtle nuclear plant – breaking ground.