With federal guarantees already on the table for up to 100% of project debt for new reactors ($18.5 billion) and front-end enrichment investments ($2 billion), the Obama administration's decision today to push for an additional $36 billion in loan guarantees to new reactors is puzzling. Taxpayer investments in a single reactor could approach $8 billion based on recent cost estimates. While such an amount may seem unspectacular given recent bailouts to insurers and banks, it is actually an unprecendented stake in a single-asset private commercial entity.
There is more than just the scale of investment at play here; program structure is also quite weak. In fact, basic lessons on poor incentive alignment so evident in the mortgage industry meltdown are going unheeded in this latest foray of "free" money to private nuclear firms. Subsidies to new reactors are large enough so taxpayers will actually be putting more capital at risk in the new plants than the owners themselves. Alas, should the risky investment into new reactors prove successful, taxpayers will not share in the upside. In addition, the handful of decision makers selecting the nuclear lottery winners within DOE have no private capital at risk and no financial stake in the ultimate long-term success or failure of their decisions.
The Wall Street Journal quotes DOE Secretary Steven Chu as stating that "I personally think that nuclear power has a place" because "it is carbon-free." Having a "place" in the future of energy is hardly the issue at hand. I'm all in favor of nuclear having a place -- but not with me footing the bill. Let them pay for their own investments and bear the risks of those investments -- financial and otherwise -- rather than dumping them on the taxpayer.
What is really at stake here is whether we will have an energy industry that rewards technological innovation and prudent risk taking as we seek to innovate our way towards lower carbon; or whether we allow the federal government to increasingly socialize our energy investments based on their own personal views of the best way forward. More on the importance of pricing here.
Somewhere inside of DOE there must be a model looking at the expected total cost (private investment plus public subsidy) per mt CO2e abated; and hopefully the timing and certainty of those abatements as well. Perhaps Secretary Chu ought to look at it, and focus on building a neutral policy environment that forces carbon mitigation solutions to compete against one another rather than filling one trough after another with cash for the chosen. More on how to use government effectively in energy markets here.