Review of selected nuclear tax subsidies in the American Power Act

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This memo evaluates three tax subsidies to nuclear power contained in the American Power Act (APA): 5-year accelerated depreciation for reactors; a 10% investment tax credit; and an expansion of a production tax credit for nuclear. The draft Act was floated by Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) in May 2010. Subsidy costs were evaluated using prototype AP1000 and Areva EPR reactor characteristics, and a range of values for cost of capital.

The analysis concludes that the three new subsidies evaluated alone are large enough to distort competitive dynamics in energy markets. The subsidies will be worth between $1.3 and $3 billion per new reactor on a net present value basis, equivalent to between 15 and 20 percent of industry estimates for the all-in cost of the reactors.  Many other subsidies already available to reactors, or that would be added by APA though not evaluated in this memo would further worsen the situation.

The new subsidies will undermine equity requirements of the nuclear loan guarantee program.  Despite significant structural weaknesses in DOE's Title 17 loan guarantee program, the rules at least required investors to hold a 20 percent equity stake in the new project.  A key goal of this requirement is to ensure investors have a strong interest in the long-term success of the venture.  However, the K-L bill would in effect allow investors to recover funds equal to this equity share within the first few years of plant operation. Financial risks from project failure would then rest almost entirely with taxpayers.

The ITC and depreciation benefits alone under K-L are worth 15 to more than 50 percent of the projected value of the power the plants will produce.  Furthermore, the structure of the ITCs allows them to be paid out in advance of plant completion, greatly increasing the chance of taxpayer loss despite bill language that attempts to recapture credits if a project is cancelled.

If six reactors are built (the estimated number that can be serviced with the $54 billion in nuclear loan guarantees subsequent to a K-L bill passage), total new tax subsidies from K-L amount to $9.7-$15.6 billion net present value. If all 22 reactors now in the queue for NRC licensing are built, the total jumps to $36-$57 billion.