DOE Loan Guarantees: Jonathan Silver Falls on Sword, Joins Third Way, Likely to Continue Washington Way
As fallout from the Solyndra bankruptcy continued to build, Jonathan Silver, Executive Director at DOE's Office of Loan Programs finally stepped down. This outcome couldn't have been a total surprise for him: Silver came from a venture capital background, knew the failure rates of DOE's projects would likely be high, and understood that the bets DOE was making were orders of magnitude larger than what had been done before. In an interview with Politico earlier in the year, Silver noted that the scale of credit supports his office was providing were massive. “These are the biggest transactions in our industry," he said. "No one is working at a scale like this — anywhere.” Maybe even DOE will stop now.
Silver is leaving DOE to become a distinguished visiting fellow at DC policy shop Third Way. Having played many years ago as a (not very good irregular) on Rep. Chet Atkin's (D-Mass.) softball team, led at the time by Third Way founder Jim Kessler, I've no doubt that Third Way will be a fun place to work. In terms of energy policy though, I'm expecting more "Washington Way" than "Third Way" from Silver there: a continued focus on large scale government subsidies to favored energy sources.
This philosophy seems to be much in line with Third Way's own thinking on these issues, at least in regards to nuclear. In a January 2010 policy piece on nuclear financing Third Way advocated for "at least $100 billion" in loan guarantees to nuclear (p. 1), a figure in line with the most extreme industry boosters such as NEI. The paper further noted that even this wouldn't be enough, and that other types of supports would also be needed. A paper later that year on small reactors again advocated for large amounts of earmarked government subsidies to nail down designs and build the first set of reactors. As soon as you do that, they argued, prices would fall with experience and reduced perceptions of risk. Yet the fact that these exact same arguments have been made by the nuclear industry since the mid-1950s, and the reactors are still uncompetitive without very large subsidies, did not seem to carry much weight.
Back in April of 2010, I was researching nuclear subsidies in depth for this report, and Third Way's presentation of nuclear finance as a critical path item for clean energy seemed off to me. I sent the authors a series of questions to help clarify their position on the high risk and costly recommendations they were making:
1) It seems as though your support for larger loan guarantees for nuclear is predicated on the grounds that nuclear power is needed to address climate change. If it could be shown that other mechanisms of pulling carbon out of the economy were less expensive, faster, and lower risk, would your support for large credit subsidies to nuclear change? Would you favor competitive tendering of subsidies to carbon-reducing energy technologies in order to minimize the public cost per mt of CO2e avoided over earmarked subsidies to specific forms of energy?
2) The US economy quite regularly develops innovative risk syndication approaches to bring high risk/high reward ideas to fruition. Venture capital, for example, brings millions of dollars into enterprises with no existing assets. In evaluating the argument that low market cap for utilities precludes the ability to privately finance nuclear plants, did you explore the variety of alternative risk sharing mechanisms -- from joint ventures and power purchase agreements -- that could have overcome the market cap constraint?
3) Your paper repeatedly states a need to bring financing costs down for the nuclear sector. Does this reflect a belief that these capital costs are not reflective of real market risks, and therefore unimportant to reflect in delivered power prices? I would argue that far from shifting these risks on to taxpayers, you want to be able to differentiate high capital risk power sources from low ones; and that removing this differentiation creates large barriers to entry for smaller scale, more rapidly deployable technologies.
The large nuclear projects require third party credit assessments of the project absent the loan guarantees. Would Third Way support making those documents public to the parties (i.e., taxpayers) taking on the credit risk?
4) You advocate CEDA [Clean Energy Deployment Administration] as the best path forward. Has Third Way done any formal review of institutional checks and balances in the CEDA proposals, and assessed the incentive alignment of key decision makers? If so, could you please send it to me? My reviews of these issues have found the schemes quite wanting and at high risk of failure.
As an aside, your mention of CBO's scoring of the nuclear loan guarantee program at only 1% seems inaccurate. One nuclear-specific review of nuclear economics scored the subsidies via loan guarantees at zero, under the assumption that the credit subsidy would fully prepay the default risk. That author has acknowledged to me that this represents an assumption rather than a certainty. Later CBO reviews did assume a 1% net interest rate subsidy (after credit default payments), but did so as a place holder because they were concerned DOE would try to represent the guarantees as zero cost. CBO has not done any type of scenario modeling of this, due to a requirement on them to produce point estimates. However, in conversations I've had with some of the staff they do recognize that losses could be far higher. In fact, a 2003 review by CBO of nuclear loan guarantees surmised a 50% default rate and about 25% net loss after post-default recoveries.
5) Do you have any examples in which the federal government has successfully selected and monitored highly concentrated credit support (on the order of $5-8 billion for a single investment) for private investment? I'd very much appreciate if you could send me the example, as I've not yet found one. Note that bailouts to large, diversified firms such as AIG or Goldman Sachs would not meet this criteria because (a) they were initiated for very different reasons; and (b) they are supporting a wide range of activities not a single industrial facility. Furthermore, these and other historical bailouts normally give the taxpayer stock warrants to compensate to some degree for the risk taking. To my knowledge, these are not being considered in any of the lending programs.
Initially, I got no reply. A follow-up query ten days later did generate a fairly perfunctory response from report author Josh Freed. He noted that the paper "stands on its own," and suggested that I look at their website (he sent their main url, not links to specific pages) to find their thinking on nuclear and clean energy issues. He did not respond to a single specific question.
Note that in August 2011, Wendy Kiska and Deborah Lucas at CBO did a much more detailed look into subsidies associated with nuclear loan guarantees (see item 4 above), and found that the subsidies were substantially higher than the 1% placeholder value that Third Way referenced. A half-billion dollar default on the Solyndra loan guarantee, use of subsidized credit to export jobs by electric car company Fisker, and the massive damages (and systemic cost increases to nuclear reactors around the world) from the Fukushima accident have all underscored that the loan guarantees Silver and Third Way have been advocating we distribute like candy really are high risk, expensive instruments for which funds are often deployed in ways different than what the policy wonks initially envisioned. It is a lesson worth remembering.