The Energy Policy Act of 2005 established incentives to encourage private investment in innovative technologies, including advanced nuclear energy facilities. Much of the government’s support for the construction of nuclear power plants is offered in the form of federal loan guarantees. Those guarantees, which are administered by the Department of Energy (DOE), promote investment in nuclear energy by lowering the cost of borrowing and possibly increasing the availability of credit for project sponsors. In exchange, DOE is authorized to charge sponsors a fee that is meant to recoup the guarantee’s estimated budgetary cost. However, because budgetary cost estimates are not a comprehensive measure of the taxpayer resources committed, and because of concerns about the accuracy of the methods and assumptions that DOE uses to estimate expected losses, some commentators have suggested that federal loan guarantees for the construction of nuclear power plants are being systematically underpriced, whereas others believe they are being overpriced.
A CBO study, which was prepared at the request of the Ranking Member of the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, identifies the main factors that influence the cost of federal loan guarantees for nuclear construction projects. It provides illustrative estimates of the costs of such guarantees, using both the methodology specified in the Federal Credit Reform Act of 1990 (FCRA) and a more comprehensive fair-value approach.
CBO finds the following:
Using a single recovery rate tends to increase the variability of estimated guarantee costs relative to their true values, which increases the government’s exposure to a phenomenon known as adverse selection. Adverse selection occurs when borrowers are better able than the government to assess the value of a guarantee offer and take advantage of their superior information at the government’s expense.
Historical experience suggests that investing in nuclear generating capacity engenders considerable risk. One study found that of the 117 privately owned plants in the United States that were started in the 1960s and 1970s and for which data were available almost all of them experienced significant cost overruns and 48 of them were cancelled. (In its analysis, CBO relied on a credit-ratings-based approach to evaluate the probability of default rather than on the historical experience of the nuclear industry, for which not enough data exist to draw quantitative inferences.)
Most of the utilities that have undertaken nuclear projects suffered ratings downgrades—sometimes several downgrades—during the construction phase. However, bondholders experienced losses from defaults in only a few instances. Losses for the most part were borne by the projects’ equity holders, the regions’ electricity ratepayers, and the government. Some analysts argue that newer plant designs and changes in the regulatory environment make nuclear investments less risky now, but recent experience abroad suggests that cost overruns and delays are still common phenomena, and concerns remain about an uncertain regulatory environment and changes in demand for electricity.
The study was written by Wendy Kiska and Deborah Lucas of CBO’s Financial Analysis Division.