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How Did $50B Worth of High-Risk, Job-Killing Nuclear Loans Get into the Stimulus?

The same budget gimmicks that got us into the credit mess are creeping into the stimulus.
 
 
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[I urge readers to stick their head in a vise before reading this.]

I have previously discussed the non-job-creating $50 billion in nuclear loan guarantees the Senate put into the stimulus (see " Can Obama stop the nuclear bomb in the Senate stimulus plan?" For the record it was Sen. Robert Bennett (R-UT), which I point out merely because R-UT perfectly describes thinking behind this farce.

Not only won't these loans generate any jobs in Obama's first term, but as Peter Bradford, former member of the Nuclear Regulatory Commission, explained to me, it could actually kill jobs. How?

The capital markets are not swimming in credit. If you have billions in taxpayer backed loans for your project, even for a project that will take years to finalize and see actual jobs, you may well suck up money that might be otherwise be available for, say, wind projects that are shovel ready now. Bradford called the nuke loans "straw ready."

Worse, utilities that actually use these loans to build a nuclear plant would face an all but certain drop in their credit rating — see " Warning to taxpayers, investors — Part 2: Nukes may become troubled assets, ruin credit ratings." That means we are setting ourselves up to take over more trouble assets, since the Congressional Budget Office estimates the likely default rate of these loans at over 50 percent. If you liked nationalizing banks and insurance companies, you'll love nationalizing nuclear utilities!

But here is where it gets particularly farcical: The loans only got snuck into the bill by budget gimmickry that replicates the high-leverage, fraudulent risk analysis that got us into the subprime mortgage and credit default swap mess. Some leading nuclear energy experts explained this to me Tuesday, and I will do my best to explain it to you.

[I must warn you again that continuing to read this post puts you at great risk of uncontrolled cranial expansion.]

The Washington Post explained (not quite completely) last week:

Bennett's amendment took $500 million away from $10 billion initially allotted to a new loan guarantee program for renewable energy and electric transmission projects and moved it to an existing loan guarantee program established under the Energy Policy Act of 2005. The existing program covers a much wider variety of energy projects, including "advanced nuclear" power plants, plants that "gasify" coal or turn it into liquid form, and plants that capture and bury carbon dioxide, a greenhouse gas produced by coal power plants.

Moving the money allows the government to stretch its loan guarantees further. Because of different accounting methods used in the two programs, a $500 million appropriation would permit approximately $5 billion in loan guarantees under the renewable program but $50 billion under the broader, existing program.

Yes, the $500 million switch cost the nation $5 billion in renewable and transmission loans but somehow gained $50 billion in nuclear loans. Does this mean nuclear power plants are 10 times less risky? Does this mean that nuclear power plants have a 1 percent default rate?

No.

The Congressional Budget Office itself explained in a 2003 report:

CBO considers the risk of default on such a loan guarantee to be very high–well above 50 percent. The key factor accounting for this risk is that we expect that the plant would be uneconomic to operate because of its high construction costs, relative to other electricity generation sources.

Ouch!

But wait. The CBO does believe that there is some recoverable value in a defaulted plant. Don't ask my why, since I have no idea how they get value from some uneconomic, half-built plant that is probably the subject of major lawsuits (see " Nuclear meltdown in Finland"). I'm just a physicist, after all, and they are economists: