March 4, 2010
Recently the Department of Energy (DOE) announced that, subject to certain conditions being met, it would guarantee $8.3 billion in loans for the construction of two nuclear reactors in Georgia. Those guarantees would be made under title 17 of the Energy Policy Act of 2005. As with any loan guarantee, the government would run the risk of losing money if the borrowers were to default on those loans.
In 2003, CBO prepared a cost estimate for legislation (S. 14) that would have established a similar loan guarantee program. The Congress subsequently enacted a loan guarantee program for advanced nuclear energy facilities and other innovative energy technologies in title 17 of the Energy Policy Act of 2005. Since that time, CBO has estimated the cost of appropriation acts and two other pieces of legislationS. 1321and S. 1462related to DOEs title 17 loan guarantee program. A number of people have inquired as to whether the information in those estimates is relevant to estimates of the credit risk of the announced loan guarantees. The short answer is: not necessarily.
CBOs 2003 Cost Estimate. S. 14 would have authorized loan guarantees for up to 50 percent of the construction costs of new nuclear power plants and would have authorized the government to enter into long-term contracts to purchase power from those plants. At that time, CBO concluded that the risk of default would be well above 50 percent, primarily because high construction costs would make such plants uneconomic to operate given the economic outlook at that time. CBO also expressed concern about the technical risks associated with a new generation of nuclear plants and the possibility of delays and interruptions that might result from licensing and regulatory proceedings. After taking into account the amounts the government would recover from continued plant operations after a default, CBO estimated a net subsidy cost to the government equal to about 30 percent of the amount guaranteed. S. 14 was not enacted into law.
CBOs Recent Cost Estimates Related to the Title 17 Program. DOEs authority to guarantee loans under the title 17 program is subject to annual appropriation action. Under those appropriation laws, the subsidy cost of the guarantees must be paid by the borrower. For a number of reasons, CBO has concluded that it would be difficult to set the fee so as to entirely cover the estimated cost to the government and has therefore estimated that the fees charged to borrowers would be at least 1 percent lower than the likely cost of the guarantees. As explained in CBOs 2007 cost estimate for S. 1321, setting the fee accurately is difficult because there is a large degree of uncertainty about the cost and performance of innovative projects. In addition, requiring the borrower to pay the subsidy cost shifts most of the risk back to the project, which may limit how large the fee can be. Borrowers also may turn down a guarantee if they believe DOEs fee is too high but may go forward if they consider it too low, increasing the likelihood that DOEs portfolio will include more projects for which the subsidy fee has been underestimated than overestimated. Consequently, CBO assigned a cost of $470 million to the provision of the Omnibus Appropriations Act, 2009 (Public Law 111-8) that authorized DOE to guarantee debt totaling $47 billion under the title 17 program.
Applicability of Those Estimates to Specific Projects. CBOs 2003 estimate was intended to represent the possible costs of loan guarantees to build the first units of the next generation of nuclear power plants. The estimate reflected the average financing costs, construction costs, and other project characteristics that were anticipated at that time. The assumptions and analyses supporting that estimate reflected information about the technical, economic, and regulatory environment as it existed in 2003, almost seven years ago. Such generalized estimates of credit risk may not apply to a guarantee for any particular power plant because of variations in the technical, economic, regulatory, and contractual characteristics of each project. Without such information, much of which would be proprietary, CBO has no basis for estimating the cost to the government of any specific loan guarantee of this type.
CBOs recent estimates address a wide variety of possible projects involving both nuclear and non-nuclear energy sources. Whether the government will incur subsidy costs for the program as a whole, or for individual projects, will depend not only on the characteristics of the projects, but alsocriticallyon what fees the Department of Energy will charge to cover the governments potential costs. From a practical perspective, there is probably a limit on how large a subsidy fee can be charged without jeopardizing the projects financial prospects. What fees will be charged for the guarantees for the two reactors in Georgia is not yet known.