Nuclear

Making the Cut

Issue 4 and Volume 4.

By Brian Wheeler, Editor

In early August, Standard & Poor’s (S&P) downgraded the United States’ credit rating to AA+, one level below the top tier of AAA, knocking the U.S. out of the elite class and sending the stock market into a frenzy.

S&P is one of three agencies that rate credit issues (Moody’s Investor Service and Fitch Ratings are the others) and the only one to downgrade the U.S. In the same month, Congress passed a deficit reduction mandate that created a super-committee charged with finding ways to cut spending from Cabinet-level agencies by $971 billion over the next decade. The super-committee is supposed to come up with a plan by November for an additional $1.2 to $1.5 trillion in savings. With the national debt hovering in the area of trillions of dollars, U.S. taxpayers can only speculate as to what will be cut next.

One of those Cabinet-level agencies facing budget cuts is the Department of Energy (DOE), where loan guarantees for nuclear power projects are expected to increase $54 billion next year. Could these loan guarantees for nuclear power projects be impacted by the downgrade and potential cuts to federal spending?

A director at Standard & Poor’s Ratings Services said that financing of new nuclear projects generally requires federal support whether in the form of loan guarantees through appropriations or direct equipment financing.

“With the federal government likely looking everywhere to make cuts, the loan guarantee program could suffer,” said Aneesh Prabhu, director at S&P, in an email. “I see that as the most significant headwind for new nuclear stemming from the fiscal deficits.”

He added that the push for new capacity may decline leaving utilities that are contemplating nuclear power projects to abandon those investments.

Just last year, Constellation Energy pulled out of negotiations for a $7.5 billion federal loan guarantee to build a new 1,600 MW reactor at Calvert Cliffs in Maryland with French partner EDF. Constellation said a required credit subsidy would force Constellation and its partner to pay the U.S. Treasury 11.6 percent, or $880 million, to obtain the loan guarantee. Faced with that potential expense, Constellation decided to pull out of the new-build venture.

Leslie Kass, Nuclear Energy Institute senior director of business policy and fuel supply, said the loan guarantee program is actually a money maker for the government. She cited fees that must be paid to cover the program office and fees associated with due diligence, in addition to the credit subsidy fee.

“The loan guarantee program was designed to help use the federal government’s excellent credit rating to get lower interest rates,” she said. “The government gets to keep (the fees) at the end of the loan.”

For the two leading projects in the U.S. ( two units at the V.C. Summer station in South Carolina and another two at the Vogtle site in Georgia), neither would be affected even if the loan guarantee program was cut. Southern Co., one of the committed parties to the Vogtle project, already has a conditional commitment for an $8.3 billion loan guarantee, which it received in February 2010. The loan guarantee has not been closed since the project has not yet received its combined construction and operating license from the Nuclear Regulatory Commission, which is expected some time this year. Because state incentives for cost recovery are in place in Georgia and South Carolina, Kass said both projects could move forward without the assistance of the federal government.

“Both of them have said that if the loan guarantee programs offers some savings for their ratepayers then obviously they would pursue it,” she said. “But we have made it clear that for merchant projects, if the loan guarantee program is not viable those projects cannot right now move forward.”

In March, Nuclear Innovation North America LLC, a joint venture between NRG Energy and Toshiba Corp., said it was reducing the scope of development of the South Texas Project units 3 and 4 to take time to learn lessons from the events at the Fukushima Daiichi nuclear power plant. The company said that it would still pursue securing a federal loan guarantee, “upon which the project depends.”

Economics will continue to pose a challenge for building new reactors, but at this point it does not appear the U.S. nuclear loan guarantee program will be affected by the country’s credit downgrade. Kass said that it is possible that the government could indeed cut the program, “but that it would be unfortunate because it is cutting off your nose to spite your face in terms of revenue.” Of course it is speculation as to what programs Congress will or will not cut to reduce federal spending.

But the administration still says publicly it supports nuclear energy and the projects that are moving forward will continue down that path. As far as merchant projects, as Kass alluded to, both the Calvert Cliffs and South Texas projects have been shelved for now as the power industry searches for the next step in the financing. And as they do, it is necessary for the federal government to continue its support of nuclear power and the loan guarantee program for those utilities who would like to make use of them.

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