Bacon's Rebellion

Democracy Thrives in Sunlight

Dominion Seeks Loan Guarantees for Nukes

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by

James A. Bacon
in

Dominion Virginia Power has submitted an application to the U.S. Department of Energy for a loan guarantee to help finance construction of a third nuclear reactor at the North Anna Power Station. The DOE loan guarantee program was established by the U.S. Energy Policy Act of 2005 to assist companies pursuing the licensing of new nuclear units to finance the first wave of new commercial reactors in the United States.

If a loan applicant’s project is selected under this program, the federal government could guarantee all of the project’s debt so long as it does not represent more than 80 percent of the project’s qualified construction costs. Congress has appropriated $18.5 billion to support the nuclear loan guarantee program.

“Today’s filing is another important step in the process we began more than seven years ago to position ourselves to be among the first to get a license for a new nuclear unit,” said Mark F. McGettrick, CEO of Dominion Generation.

Dominion is on track to become the first power company in three decades to construct a nuclear power generator in the United States. It would utilize novel technology known as Economic Simplified Boiling Water Reactor, developed by GE-Hitachi Nuclear Energy. Dominion anticipates that the project will incur $500 million on regulatory, engineering and design costs before construction even begins. That up-front cost will be split between Dominion, GE-Hitachi and the Department of Energy. Total project costs will run into the billions of dollars. (Cross-posted from R’Biz.)

Bacon’s bottom line: Once again, we have an example of how embroiled government is in the energy economy. Dominion’s nuke will benefit from at least two government programs: (1) support for the up-front engineering/design costs, and (2) loan guarantees that will lower the cost of capital. No wonder environmentalists feel justified in demanding comparable tax breaks for their preferred energy sources, such as wind, solar and biomass.

I fully support nuclear power — as long as it incorporates the full environmental costs of its technology and meets a market test for economic efficiency.

The problem is that there are so many subsidies, loan guarantees, tax breaks and the like that investments in energy resources are determined as much by government incentives as by underlying economics. Instead of investing in new technology, many businesses will invest in rent seeking (lobbying, campaign contributions, Boone Pickens-style advertising campaigns). It is frightening to contemplate how many tens of billions of dollars the United States will squander on ill-considered schemes like the now-discredited ethanol subsidies.

And we think OPEC and/or the oil companies are the enemy?

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18 responses to “Dominion Seeks Loan Guarantees for Nukes”

  1. Groveton Avatar
    Groveton

    Jim is right. This is just another example of a bigger problem – runaway deficit spending. The government is subsidizing the engineering. The government is guaranteeing the loans. Some would say that helping to achieve energy independence is part of government’s mandate. The problem is the level of spending. Medicare, Medicare prescription benefits, subsidized nuclear reactor engineering, Social Security, etc, etc, etc. If you couple the deficit spending with the coming demographic trend of baby boomers retiring – you have the makings of a fiscal catastrophe. All of these programs are popular. All of them garner votes. But the programs are being funded (through the deficit) by generations of Americans that are either unborn or are too young to vote. Somebody once said that compound interest is the greatest force in the universe. It is a force of great benefit for the recipient of compound interest. However, it is a force of great pain if you are the payor of that interest. The United States federal government is the payor. We have passed the point of being able to “grow out of the problem”. We are facing three scenarios:

    1. Dramatically higher taxes.
    2. Massive cuts to government programs – especially entitlement programs.
    3. National bankruptcy.

    Needless to say, if you don’t overtly do 1. or 2. then you get 3.

    Isn’t Dominion a shareholder corporation? Why does the government have to subsidize nuclear power plant design? Why does the government have to guarantee loans? Does the government have the opportunity to financially benefit from success?

    Sometimes I think our elected officials know we are headed for national bankruptcy. When organizations with government guarantees go bankrupt – what happens? They are declared “too big to fail” and they are bailed out or nationalized. Witness Fannie Mae and Freddie Mac. Sometimes I think it’s part of a plan to nationalize almost everything and vest all the power in the government. What happens if the price of oil keeps skyrocketing and the use of nuclear fuel proves prudent? Dominion’s shareholders prosper. What happens if an alternate fuel is found and the nuclear plants become uneconomical? The taxpayers pays.

    If the Americans who fought and sacrificed during World War II are The Greatest Generation then, it seems to me, the Baby Boomers are The Worst Generation.

  2. Anonymous Avatar
    Anonymous

    They are getting support to meet the regulatory costs, too. Greenies have the ability to make that process very expensive and nearly never ending. Considerable design costs will be due to changes to meet environmental criticisms.

    —————————-

    Due to cheap American dollars we are seeing a wave of foreign purchases of American Assets. HOT lanes, Anheuser Busch, The New York Life building, GE appliances,
    Plastics companies, etc.

    Volkswagen is building a plant here with plans to export cars to Germany. Thay figure thay can save $8000 a car by building them here as compared to Germany (Ah yes, but Europe has great transit.)

    Before we go bankrupt, we will have sold ourselves out to foreigners at firesale prices.

    RH

  3. Bob Avatar
    Bob

    So, let’s see:

    (a) “Economic efficiency” is essential for an energy project, but not transportation projects — because toll roads and transit fail both in a big, big way.

    (b) Loan guarantees are bad when it’s for energy, but brilliant forward-thinking when it’s for a toll

    Is there something I’m missing here to account for what appears to be an inconsistency in the bottom lines?

    Moreover, I’ll bet you anything that nuke power gets far less of a subsidy as a percentage of revenue or megawatts generated than greenie windmill and solar boondoggles. I don’t have the numbers on this, but they’d be fun to look at.

  4. Anonymous Avatar
    Anonymous

    What a coincidence. The new power line will loop far south of Remington which means it will be almost halfway from the Loudoun Substation to the new North Anna Plant.

  5. Groveton Avatar
    Groveton

    Bob:

    You got it. That which soaks NoVA is good. That which is paid for by the entire state is bad. Abuser fees are bad. Congestion tolls in NoVA are good. Raising the gas tax is bad. Adding another half percent to NoVA’s sales tax is good. When the HOT lanes fail Flour / Transurban – Virginia will go bankrupt and the state will run the tolls to pay back the loan. Only NoVA will pay. That’s good. When Dominion’s nuke plants are rendered uneconomical the state and nation will have to pay for the bail out. That’s bad.

  6. Anonymous Avatar
    Anonymous

    “Loan guarantees are bad when it is energy”

    Not really. See the story in Time Magazine about the Florida guy who took out a zero down $65,000 fifteen year loan to put in his solar panels?

    His payment on the loan will be $550 a month compared to his electric bill of $300/month.

    But he thinks his electricity willbe “free” after fifteen years when the loan is paid off. Never mind it would take 20 years or more to use that much electricity.

    And he got a $16,000 tax credit.

    Sometimes zero down, government insured loans, combined with a nice fat subsidy are a good thing, right?

    RH

  7. Anonymous Avatar
    Anonymous

    Another example, the Commonwealth’s share of construction costs for Dulles Rail comes from DTR drivers and not from state coffers.

    But what’s worse is that the NoVA governing class happily accepted it. It’s better to screw your constituents than either to fight on principle in Richmond; or to disappoint those who stand to benefit most from Dulles Rail — the contractors and the Tysons landowners.

    I’m living in the wrong part of the state. Someday I want to be a member of the fleecing class, instead of the fleeced class. But I need to work here a few more years.

    TMT

  8. Anonymous Avatar
    Anonymous

    Jim,
    The U.S. nuclear industry has always been very heavily subsidized and protected by the U.S. government. These costs have never been properly factored into the actual per killowatt hour costs of nuke-powered electricity making it seem much cheaper than it really is.
    Examples: much of the development for the reactor vessels themselves was done by DOD for Navy6 subs and surface ships. In fact, in the early days, just about all of the nuke experts at Vepco came from the Navy's nuke program. Reactor makers such as Westinghouse and Babcock & Willcox enjoyed billions in R&D largesse from the taxpayers.
    Back in the 1950s, the Price-Anderson act limited liability for accidents. This federal protection made insurers willing to insure commercial nukes.
    No more loan guarantees.
    The beat goes on.
    Peter Galuszka

  9. Anonymous Avatar
    Anonymous

    Complaining is an American God given right and the posts here attest to that. Industrial societies have leveraged government subsidies for generations to achieve meaningful progress to become “developed” societies. The emergence of the US as a mighty industrial power would have certainly been delayed if not stifled, if not for many a “subsidized” commodity or service. The important question is: should the taxpayers get shares in each entity where subsidies are going so as to get some benefits for taking the risks? I would say absolutely they should. Whether it is Dominion or any other private enterprise, if they need assistance for risk capital, they should be willing to give up part of the upside. I would extend that to farming and suggest that any farmer receiving subsidies should be required to share a portion of their profit with the taxpayer. Perhaps the most efficient solution is to create a sovereign wealth fund which would be responsible to manage all these “investments”.

  10. Groveton Avatar
    Groveton

    Peter makes a great point. We really don’t know the true cost of power based on how it is generated. There are subsidies from federal and state governments (maybe local too). The environmental impact costs of different methods of generation do not include the costs of reversing the environmental problems caused by the various generation methods.

    Any well run business knows that true product costs must be understood as a pre-requisite to properly managing the business. Of course, this same truth holds for government budgets. However, since there is no accepted “statement of citizen benefit” (corresponding to the corporate world’s income statement) games can be played. The state of Virginia keeps better books than the US federal government. However, if any corproation kept books like either of those governmental agencies somebody would be going to jail.

    The first step in good fiscal management is good measurement. The second step is effective accountability. Both are missing from the State of Virginia and the US Federal government.

  11. Groveton Avatar
    Groveton

    Anon 10:00:

    Your understanding of macro-economics is worrisome. The United States succeeded over the years by having fewer subsidies than anybody else in the world. The kings, queens and royalty of Europe had a huge system of subsidies. Things like the Stamp Act were among the issues that sparked the American revolution. The Communist countries had their 5 year plans and cultural revolutions. They “instructed” the peasant farmers to build small steel furnaces attempting to subsidize steel prodution in a manner doomed to failure.

    The well documented problem in the United States is the growing level of subsidies today realtive to our past. Honest analysts across the political spectrum agree on this (from Pat Buchanan to Robert Reich).

    The tried and true approach is for government to get out of commerce. However, if our namby pamby world can’t live without the “social fairness” of government intervention then government can at least be well run. Which – it is not.

  12. Anonymous Avatar
    Anonymous

    http://www.treehugger.com/files/2008/08/bill-clinton-10-steps-towards-clean-energy-future.php

    I find it more than slightly ironic that the National Clean Energy Summit is being held in Las Vegas, a city that on environmental grounds and water usage alone probably should not exist, but nonetheless it’s happening. Yesterday evening Bill Clinton opened the event will a speech which, among other things, outlined what he believes the US government should do to support renewable energy

  13. Anonymous Avatar
    Anonymous

    “The important question is: should the taxpayers get shares in each entity where subsidies are going so as to get some benefits for taking the risks? I would say absolutely they should.”

    Me too, although presumably you already get that benefit through lower costs of goods. The problem is, as Groveton suggests that there is no accepted, “statement of citizen benefit” which is the basis for much of my argument with Larry.

    “The United States succeeded over the years by having fewer subsidies than anybody else in the world.”

    Sounds plausible on it’s face, but I don’t know it it is true or not, or how you would decide. We subsidized nuclear power through investments in defense.

    Even if you think it IS true, isn’t it also a primary reason that we have high income disparity?

    RH

  14. Larry Gross Avatar
    Larry Gross

    well how about this.

    if your lights are powered by blasting the off the mountain tops in WVA and then spewing mercury and nitrous oxides across the landscape – isn’t that also a subsidy?

    and a location subsidy to boot..

    We could choose to NOT subsidize nukes or build new coal and instead pay what it would cost for “local” wind and solar – supplemented with existing (but not new plants).

    but then we’d probably pay quite a bit more for “non subsidized” power.

    and I bet the Piedmont folks would object to wind turbines even more than powerlines…

    we have met the enemy….

  15. Anonymous Avatar
    Anonymous

    We can’t really choose not to subsidize nukes because the development has already been subsidized. Unless you want the power plants to send money back to the Navy. We could make nukes buy their own insurance, and finance their way with investor/speculator (our) money, and that would be the end of that.

    We might change our mind if we wind up freezing in the dark.

    ————————

    “if your lights are powered by blasting the off the mountain tops in WVA and then spewing mercury and nitrous oxides across the landscape – isn’t that also a subsidy?”

    No, the cost of mining is part of the cost of coal and that is part of the cost of electricity.

    To the extent that mercury, sulfoxides, and nitroxides are captured in the pollution control devices, that is part of the cost of electricity, too.

    The remainig pollution that escapes is an externality – a cost that is borne by all of us, whether we use electricity or not.

    Likewise, the resulting flat mountains are an externality, if you prefer pointy headed mountains.

    But those external costs are in fact costs that we all pay and not, in fact, subsidies to the power company.

    The problem is that we cannot agree on the value of those external costs. There is no (widely)accepted “statement of citizen benefit” (where a cost is a negative benefit). If there was, we might (or not) find out that enduring the costs of pollution is actually cheaper than building all local wind and solar.

    We could get coal only from subterranean mining, at a higher cost, and eliminate (pay for the right not to have) flat mountains.

    And we could improve pollution control technology (pay for the right) to have no pollution released. We would still have to decide where to put it, after we capture it.

    And we can probably improve (pay for) the new cloaking materials that bend light so that we can’t see wind turbines or powerlines.

    Or, we can just get real.

    There is no known technology that will allow us at any rational price to pay what it would cost for “local” wind and solar, supplanted by only existing power plants.

    That technology is almost of the same order of magnitude, difficulty, and expense as capturing all pollution or “cloaking” wind turbines.

    And it will have externalities of its own. Just consider the cell tower fight, or the battle over hanging clothes outside.

    But, if we just agree that blasting the top off of mountains, spewing mercury, and blocking your neighbors wind turbine with your wind turbine, and shading you neighbors solar cells with yours, are all property rights that can be bought and sold, then the market can figure out what the appropriate “costs” are that will bring us the most electricity at the lowest total cost.

    ———————-

    We have met the enemy

    “There is one way to deal with an enemy, you can offer a deal that you can both agree to and live with, and when he won’t agree, then you kill him.”

    ——————–

    “Social net benefits, and not the benefits and costs to the Federal Government, should be the basis for evaluating government programs or policies that have effects on private citizens or other levels of government. Social benefits and costs can differ from private benefits and costs as measured in the marketplace because of imperfections arising from: (i) external economies or diseconomies where actions by one party impose benefits or costs on other groups that are not compensated in the market place; (ii) monopoly power that distorts the relationship between marginal costs and market prices; and (iii) taxes or subsidies. “

    http://www.whitehouse.gov/omb/circulars/a094/a094.html#6

    RH

  16. Larry Gross Avatar
    Larry Gross

    I would submit that the reason nukes are so expensive, at least in part, is the cost of keeping radioactive “pollution” from escaping and for sequestering the waste.

    I would submit also that when you blast a mountaintop and spew mercury and other pollution – that this is a subsidy.

    Whey do we say that we have to pay to keep from releasing radiation but we don’t have to pay to not destroy WVA landscapes and pollute mercury and other damaging pollutants?

    Those pollutants cause health impacts as well as economic impacts such as restricting new roads in urban areas.

    The answer is that we consider radioactive pollution unacceptable because of its “costs” but we consider coal-burning pollution, in essence, because we don’t calculate the costs and consider it to be “grandfathered”.

    To say that it is not reasonable or feasible to power home from wind and solar flies in the face of the thousands of people who derive 25 to 50% of their power needs from wind/solar even as they pay for regular grid power to supplement it.

    If we did the same strategy – we’d not need new plants – coal or nukes.

    here’s the bottom line – we don’t want to pay for that cost.

    We want instead to spend our money on a better standard of living – because we don’t judge that standard of living on a degraded environment and economy.

    If coal pollution is determined to be unacceptable in terms of greenhouse gases and it ends up costing significantly to re-work coal plants so they pollute far less than now – and in the process – it drives the cost up such that wind/solar are much more competitive – then why would we still choose polluting technologies?

  17. Anonymous Avatar
    Anonymous

    “Why do we say that we have to pay to keep from releasing radiation but we don’t have to pay to not destroy WVA landscapes and pollute mercury and other damaging pollutants?”

    We do not prevent all radiation from escaping, and neither do we prevent all of any pollutant to escape, mercury or any other. To do so, we would have to spend, literally, an infinite amount of money to reach infinite cleanliness. We reach an accomodation. We could always get a little cleaner, but each step gets exponentially more expensive.

    We decide what is the appropriate and cost effective amount of control to conduct, but whatever still escapes amounts to a hidden cost. You can, if you prefer, look at the clean-up expenses avoided as a subsidy, but it isn’t a very productive point of view, because in that case the subsidy to EVERY inustry is near infinity, and therefore it isn’t a discriminator as to what is “best”.

    In the end, you simply have to decide how much pollution cost you can accept, in exchange for what. In the case of CFL’s we have accepted some Mercury pollution, because it is a lesser evil than producing more electricity and more mercury pollution someplace else.

    Of course we consider the costs of burning coal. We consider the costs of mining, of mine reclamation, of lives lost in mining, transportation, combustion, pollution controls, electricity delivery, line losses, conversion losses, and ultimately outright waste. Some people think we don’t consider those costs careully enough, or palce the values high enough, but they are considered. People accept jobs in the mines knowing that it is a hazardous occupation, and they expect to get paid well for doing so. They get paid for that additional risk.

    It is true that thousands of people derive part or all of their power off grid, but it is generally true that they pay more for the power they make than the power they buy. Then there are two question syou have to ask: 1) How much pollution prevention could they (did they) buy with the same amount of extra money? 2) What did they do to earn that extra money, and how much pollution did THAT cause?

    After you figure those two things out, then you can decide if what they did was feasible. I’ve wouted the case of the california man who spent $65,000 with a loan payment of $550 a month in order to eliminate a $300 a month electric bill. Most people won’t find that feasible, any more than they would pay for 20 years of phone minutes up front.

    In short, we don’t want to pay for that cost, just as Larry says. In other words we (generally) don’t judge the value of a degraded environment as much as some others do. There is no accepted measure of social benefit, yet. We know we have a degraded environment, but we also know what we are trading it for. We just don’t agree on the relative prices.

    Wind and solar prevent some kinds of pollution and cause others. We can figure out fairly precisely how much pollution wind and solar prevent, and we can analyze that over the full life cycle of a system. In the end, they have some level of inherent efficiency.

    But arbitrarily increasing the coat of using coal until it is less efficient is always possible, by demanding a cleaner and cleaner product. By itself that does not make wind/solar more competitive, only relatively more competititive. And only if you ignore the externalities of wind and solar while you demand payment for the externalities of coal.

    That is whay the government says you must consider the “net social benefits” of any government policy in order to discover its true cost.

    And, despite what Larry says, what is feasible for a few thousand people is not (yet) feasible for millions. We can increase wind and solar substantially, but we would still need new back up plants, and those plants will burn the most valuable and expensive fuel first. And the cost of those back-up systems need to be added to the cost of just producing wind and solar power. So will the cost of transmitting it long distances, because transmission is part of the cost of avoiding intermittancy.

    Why would we choose polluting technologies? We would choose polluting technologies if the cost of living with the pollution is less than the cost of avoiding it. otherwise, you do not have the best “net social value”.

    Finally it is not true that a green economy is necessarily a better economy. We can pay a nearly infinite amount of money to live in a clean environment, but what would we have left to live on? If wind and solar cost a lot more, then they cost a lot more, and making coal more expensive by rule, won’t change that.

    We may be paying too much to live well, and not enough to live clean, but again, it is a pure judgement call at this point. We can allways move to the next level of cleanliness, but each step costs exponentially more and leaves less to live on. And there are many kinds of cleanliness, so we clearly cannot afford to go very far up the power curve on ALL of them.

    Somewhere along the line we have to pick and choose, just as we have done with CFL’s.

    If coal pollution is determined to be unacceptable in terms of greenhouse gases we will need to decide who makes that determination, and on what basis. Simply declaring unacceptability won’t do.

    RH

  18. Anonymous Avatar
    Anonymous

    “Public economics has well developed tools for analyzing the incidence and distributional effects of … taxes. … Yet most pollution policy does not involve taxation at all. Instead, it employs permits or command and control (CAC) regulations such as technology standards, quotas, and other quantity constraints. …

    CAC environmental restrictions do impose costs, and an important question is who bears those costs. Moreover, those restrictions provide benefits of environmental protection, and another important question is who gets those benefits. Thus, full analysis of environmental policy could address all the same questions as in the tax incidence literature. …”

    Consider a simple requirement that electric generating companies cut a particular pollutant to less than some maximum quota. This type of mandate is a common policy choice, and it has at least the following six distributional effects.

    1.It raises the cost of production

    2.It may reduce production, reduce returns in that industry, and place burdens on workers or investors.

    3.Generate scarcity rents. Normally a producer would like to reduce production, in this case he is required to, allowing higher prices. If there is a fixed amount of pollutant per unit of electricity, the only way to meet the mandate is less production. Just as tradable permit systems hand out valuable permits, the non-tradable quota also provides scarcity rents – to those given the restricted “rights” to pollute.

    4.If it cleans up the air, this policy provides benefits that may accrue to some individuals more than others.

    5.Many individuals could be greatly affected through capitalization effects, especially through land and house prices. These effects can be huge, time dependent, and highly uneven. Like changes in zoning, the entire capital gain(loss) goes to those who happen to own property at the time of the change.

    6.Strong distributional effects are felt during the transition. If workers are laid off by the impacted firm, their burden is not just the lower wage they might have to accept at another firm. It includes the very sharp pain of disruption, retraining, and months or years of unemployment between jobs. “

    All six of these effects are likely to be regressive towards those with lower incomes.

    http://economistsview.typepad.com/economistsview/2008/08/distributional.html#more

    RH

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