Politics & Policy

It’s an Al Gore Christmas

Congress hands out energy-loan guarantees.

As is so often the case, close to Christmas, Congress this week skipped the formality of authorizing and appropriating separate spending bills and instead passed a monster omnibus spending bill. This year, however, there was one major difference: Congress approved a spending package that will effectively make the U.S. Treasury the bank of first resort for virtually any large commercial energy project that can claim to be “innovative” and “clean.”

How? By granting nearly $38.5 billion in guaranteed federal loans for a variety of energy projects that no private bank would touch with a ten-foot pole (under the “Innovative Technology Loan Guarantee Program, described here, page 121) . Mind you, none of these efforts have anything to do with research and development. Instead, they are commercial ventures using technology that has already been proven but that are too uneconomic to secure private backing.

What kind of projects are we talking about? Nuclear reactors, plants so expensive to build — Moody’s estimates between at least $5 and $6 billion dollars each — that no private bank is willing to use their own money to finance them for fear that the operator will go bankrupt simply trying to pay the interest on the loan.. These plants are slated to get $18.5 billion in federal loan guarantees. Clean coal plant construction and conversion, meanwhile got $6 billion. Converting coal into fuels for trucks and cars, which could go bust if oil prices decline, is slated to get $2 billion in guaranteed loans and renewables, improved energy-efficiency projects, and distributed energy programs got another $10 billion collectively. Finally, another $2 billion went to the United States Enrichment Corporation (USEC) to finance a Department of Energy designed uranium-enrichment centrifuge plant that is so risky USEC was unable to get any private bank to back it.

What’s the problem with guaranteeing such large loans to these commercial projects? First, the last time our government did this, during the Carter years, it picked a series of turkeys. Ten of the 14 coal gasification and ethanol projects it backed went bust. And one — the synfuels project — produced nothing and left U.S. taxpayers with a $13 billion hole in their pockets. Count on history rhyming. As the inspector general of the Department of Energy pointed out in his evaluation of the loan-guarantee program “This [program] will result in significant risk to the Government and, therefore the American Taxpayer.” The Congressional Budget Office estimated that the odds of default on the proposed federal loans to be 50 percent.

Second, this is precisely the kind of corporate give away that would make Ronald Reagan turn over in his grave. He had the good sense to kill the synfuels project as a matter of principle: Government, he insisted, should not be in the business of backing commercialization projects. Research and development might make sense for the federal government to pursue if only because state-run utility commissions will not allow most utilities to invest much in such activities. But getting the government into picking commercial winners or losers is almost always bad business. When government picks a loser (and with the Department of Energy, it’s a frequent occurrence), nobody pays or goes bankrupt but the U.S. taxpayer and then only after the government has kept the project alive years beyond when it should have been terminated.

What’s embarrassing (and a bit weird) is that the only prominent group to complain about these loan guarantees are liberal, environmental opponents of nuclear power. They certainly, have cause: Nobody either in the nuclear industry or financial world believes nuclear power has a ghost of chance of being revived unless the federal government subsidizes it to the hilt (they refer to these subsidies as being “incentives” — same difference). A study recently done for my center found that the value of the loan guarantee program for just one new proposed reactor was worth roughly $13 billion to a nuclear operator over the plant’s lifetime. That’s real money.

Some environmental economists, however, have a more basic complaint, one that fiscal conservatives have long propounded. Whether for nuclear or non-nuclear energy projects, these loan guarantees (which also include some of the environmentalists’ favorites) are certain to distort the market.

First, the most wasteful, questionable projects tend to crowd out smaller more worthy contenders in gobbling up the subsidies. This means that projects like USEC’s multi-billion dollar enrichment program, a project that cannot compete against other enrichers, who have already successfully raised private capital to operate in the US — will get far more guaranteed loans than any micro wind project might.

Second, the largest of these projects all involve central nuclear or coal fired electrical generating stations that will last between 50 and 75 years and that depend on an electrical grid distribution system. If it turns out that it is more economical to produce electricity locally in smaller generators or to rely less on the grid to distribute the electricity or its products, we will be stuck with their polar opposites (i.e., the loser centralized systems the government chose to subsidize heavily rather than the ones the market might pick). In this case, the loan guarantee program for “clean” and “innovative” systems will only get in the way of the real innovation that reliance on market mechanisms and private capital would otherwise propel.

Congress, of course, is not likely to see matters this way, at least, not initially. At a bare minimum, however, anyone concerned about our nation’s energy future should press Congress to oversee the loan guarantees to determine just how much they are going to end up costing the U.S. taxpayer and to be ready to turn them off just a soon — as is almost certain to be the case — applicants default or mismanage their projects. Until Congress gets a handle on what it has done here, it certainly should do nothing to expand the program. Indeed, failing this, Congress will only guarantee the growth of government into our economy in a manner that would make even Al Gore blush.

Henry Sokolski is executive director of the Nonproliferation Policy Education Center in Washington, D.C. working on a two-year, international study of the economics of nuclear and non-nuclear power.

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