The nuclear power industry in the United States has relied on government intervention and support for over fifty years, raising critical questions. Is this the best use of public funds to promote sustainable energy production? Are subsidies distorting the energy market in ways that are excluding more efficient and cleaner energy options?  For answers, Subsidy Watchinterviewed Doug Koplow, founder of Earth Track and one of the leading experts on government intervention in the energy sector.

SW: Can you give us a sense of the scale of public subsidies to nuclear power in the United States?

D.K.: All operating nuclear power plants in the U.S. were built with substantial public subsidies. These included large subsidies to research and development, plant construction, uranium enrichment, and waste management.  Since its inception, the industry has also benefitted from government programs to shift key risks of the nuclear fuel cycle away from investors and onto taxpayers. 

A handful of studies have quantified subsidies to the nuclear-power industry over the decades, indicating aggregate subsidization at well over US$ 150 billion, and a subsidy intensity (government support per kWh output) normally exceeding 30% of the market value of the energy produced.

These subsidies have enabled our existing commercial reactors to remain viable power providers, but only with additional capital write-offs. These write-offs have occurred not only through bankruptcies, but in the form of compensation for "stranded costs" as well. Basically, a cost was considered stranded if it made a plant uncompetitive at the time the electricity industry was being deregulated. Nuclear generation accounted for large share of total stranded costs in the United States, with nearly US$ 100 billion (2007$) of nuclear-related infrastructure deemed uncompetitive transferred as a liability to be bailed out by ratepayers. Although the industry frequently points to its low operating costs as evidence of its market competitiveness, this economic structure is an artifact of large subsidies to capital, historical write-offs of capital, and ongoing subsidies to operating costs. 

Subsidies to the nuclear power industry have gone through cycles. During the early 1980s the industry benefitted from very high subsidies to capital formation. Today the United States is going through another surge in subsidies to nuclear plants, with a slew of new policies to guarantee plant construction capital, insure against cost overruns, reduce the latitude of public oversight on new plant construction, and to provide output-related tax credits for nuclear energy. The industry may also benefit from large windfall profits on carbon credits under some of the proposed credit allocation rules.  Risk transfer on liability insurance and waste management continue.

SW: Can you give us an example of a company currently engaged in building nuclear plants and the subsidies it has received?

D.K.: Working with the Nonproliferation Policy Education Center in Washington, DC, I have looked in detail at subsidies associated with a planned new reactor at Calvert Cliffs in Lusby, Maryland. The plant will be built by a consortium of firms that include Areva, Electricite de France, and Constellation Energy. Interestingly, ownership of these firms means that the governments of France and Germany are also heavily involved. 

Constellation's own presentations indicate that they think the federal nuclear production tax credit and construction loan guarantees alone will be worth US$ 575 million per reactor per year to them. Once one adds in at least some of the other subsidies to the nuclear fuel cycle that Constellation ignored, total subsidies rise to roughly 6-8 cents per kWh, bringing the overall supply cost of new-build nuclear power (subsidies plus private investment) to 9.5-12 c/kWh. In comparison, the average retail price for electricity in the United States in January 2008 was only 9 c/kWh. As plant construction costs have continued to rise since these estimates were made, it is likely that the true level of subsidy would be even higher.

Constellation is quite up-front about the economics of their enterprise. In an article in theNew York Times last year, Constellation’s Co-CEO Michael Wallace said that "Without loan guarantees we will not build nuclear power plants." Another Constellation executive acknowledged in testimony before the California Energy Commission that every planned future reactor would need to receive federal loan guarantees in order to be viable.

SW: The cost of these subsidies is certainly high, but the stakes are too. Governments are under increasing pressure to limit greenhouse gas emissions, and boosting nuclear power generation is one option being pursued in the United States and elsewhere to address this challenge. Which leads to the question: is the public expenditure that you’re describing justifiable as a means to achieve a public good; namely, an energy source that would reduce our carbon footprint?

D.K.: A generic problem in the United States and many other countries is that governments are directing subsidies to specific energy resources. In the United States, political leaders have assumed nuclear energy is a cost-effective way to address climate change, rather than forcing generators to prove it in the marketplace as would be the norm in most other industries.

While nuclear power does generate much lower greenhouse gas emissions than other energy resources, the cost of obtaining those reductions has not been well evaluated. The fact that the nuclear fuel cycle has a variety of unique deficits is also too often ignored. Economics is one of them: very high capital costs combined with large capacity and long construction periods all greatly increase the financial risk of misjudging markets. A variety of more structural challenges remain as well, such as the risk of catastrophic damage that would accompany any significant reactor accident or successful terrorist attack; radioactive wastes that must be managed for thousands of years; and the very likely increase in nuclear weapons proliferation that will accompany the expansion of civilian power.

It is critical that countries move beyond earmarking energy solutions to a more systematic effort to leverage the power of price signals in finding the least costly ways to reduce our carbon footprint. A first step in doing this is to ask how much we are paying in subsidies to new nuclear plants for the carbon reductions these plants will provide; and to evaluate whether it compares favorably with alternative reduction options.

The most advantageous situation for nuclear power in terms of carbon displacement is if we assume it replaces baseload coal. Under this scenario, public subsidies to build a nuclear plant are roughly US$ 80 per mtCO2-equivalent avoided.  Total investment (subsidies plus private funding, though not including externalities) is roughly US$ 120 per mtCO2-eq avoided.  

Adding in the costs to address issues such as weapons proliferation, discounting to account for the long deployment period, or comparing nuclear energy to lower-carbon non-coal energy resources would all worsen the trade-offs for nuclear energy. It appears evident that achieving greenhouse-gas reductions via nuclear power generation is a very expensive path to follow. Carbon offsets can be purchased for roughly US$ 4 per mt CO2e on the Chicago Climate Exchange; and for under US$ 30 on the European Exchange. Also less expensive are a whole array of carbon-reduction strategies involving improved building and equipment efficiency, systems management, alternative energy, and cropping techniques that were documented and quantified in a recent report by McKinsey & Company.

SW: Are the costs not justifiable if they are temporary measures that are necessary to help transition from high-cost to lower-cost technologies, particularly in the case of nuclear power, where the technology is extremely expensive to develop? Is there any merit to the claim that once the technology advances and becomes competitive, the subsidies can be withdrawn?

D.K.: The nuclear power industry has received subsidies for more than 50 years, and has always argued they were almost at the point of being competitive without government involvement. I have a great advertisement from General Electric from 1954 stating with certainty that by the mid-1960s their reactors would be operating "at about the same cost as those using coal," and that they would be "privately financed, built without government subsidy." Obviously, they are making the same claims today.

There are many smart people working in the sector, and it is certainly conceivable that the nuclear power industry will be cost-competitive at some point. That point is unlikely to be soon, however. Cost escalation in nuclear plants has been severe ― far higher than for other technologies. Early attempts at building new generation reactors abroad, even with highly supportive governmental and regulatory structures, have not been going well. A plant being built for TVO in Finland (quite similar to the one planned for Calvert Cliffs), for example, is more than two years late, and US$ 2 billion over budget, with additional losses estimated above US$ 1 billion from lost electricity sales. 

The critical issue from my perspective is not the abstract question of whether nuclear power will someday be competitive, but rather what public policy most effectively addresses our concerns about climate change or energy security in the most cost-efficient and time-efficient manner. It is clear that leveraging whatever time and funding we do have requires that governments take a technology and sector-neutral role, and one that forces all viable alternatives to compete against each other for whatever public subsidies are being provided. Unfortunately, this is not what is happening, and these are not the types of policies that are presently being advocated by either U.S. presidential candidate.

SW: When we talk about “subsidies”, we are referring to a range of different types of government intervention and support. What are some of the most common forms of subsidies to nuclear power?

D.K.: The Calvert Cliffs case study identified more than 20 subsidies to the nuclear fuel cycle, supporting every stage of production. Unlike the situation with many small-scale renewable energy resources, the most important subsidies to nuclear power are not direct cash payments or easily measured tax breaks. Rather, they come from shifting risks from investors and owners onto taxpayers or the surrounding population. Some of these risks are financial, such as the risk of defaults on debt or costs associated with construction delays from regulatory oversight. Others are operational, such as not requiring facilities to purchase appropriate insurance levels for offsite damages to people and property from nuclear accidents, or to fully internalize the costs of long-term management of high level radioactive waste. These interventions are extremely valuable to the industry, but are also more difficult for people to understand than a direct cash transfer would be.  This is likely one of the main reasons why the industry has been so successful in getting these subsidies enacted and renewed.

SW: Going beyond the question of the financial costs being born by the American public, how are these risk-type interventions, like loan guarantees, distorting the energy market?

D.K.: Capital markets provide a critical function in market economies by rationing scarce funds across all of the potential investment options. This rationing process does not always work perfectly, but in general does a good job to push innovation in ways that can provide particular goods and services more quickly (reducing the financial risk from changes in market conditions), with less investment per unit output, and with fewer risks. 

Government loan guarantees, such as those authorized for "advanced" energy facilities under Title XVII of the Energy Policy Act of 2005, replace this market vetting process with a political selection of winners. Unfortunately, this political process is often murky, with limited disclosure to outsiders of possible conflicts of interest or why particular funding decisions were made.  Critically, the politicized allocation of funds also suffers from a poor alignment of incentives. In contrast to most private-sector funding models, for example, the government officials vetting the projects will not incur large financial losses if they make bad choices. Nor will the government employees share in the success of good decisions, which may reduce the ability of the responsible agencies to attract the highly specialized staff needed to carefully vet these decisions.

Were the loan guarantees small, the program might waste money but the broader effects could perhaps be ignored. However, US$ 38.5 billion in loan guarantees under Title XVII were authorized by Congress in December of 2007, and the U.S. Department of Energy began moving the funding process forward in late June. 

More than half of this amount (US$ 20.5 billion) is earmarked for the nuclear fuel cycle. This is a huge amount of money, and seems likely to rise much higher.  Republican presidential hopeful Senator John McCain has advocated support for 45 new nuclear power plants. At roughly US$ 6 to US$ 9 billion per plant and rising, of which 80% would be federally guaranteed, the McCain plan would add another US$ 220 to US$ 325 billion in undiversified, concentrated federal exposure to the nuclear sector.  Democratic presidential hopeful, Senator Barack Obama, has plugged US$ 150 billion in federal support into his energy plan. Though it appears more tilted towards biofuels (not a great solution either, though perhaps to be expected given the Senator's base in ethanol-rich Illinois), it includes nuclear energy as well. 
  
These are enormous sums of taxpayer money to be directing towards private enterprises. To put it in perspective, the bailout of Chrysler in 1979 was US$ 2.6 billion (2007$), where the federal government actually participated in a successful recovery through stock warrants. In contrast, if the high-risk energy ventures guaranteed by taxpayers are successful, taxpayers get no share of the plant's returns.  A few other benchmarks further illustrate this point. The US share of loans to bail out Mexico during its currency crisis of 1995 was US$ 26 billion, of which only $16.5 billion was actually used (2007$). This is less than the first round of earmarked guarantees to the nuclear sector now moving forward. The entire loan guarantee portfolio of the US Export Import Bank in 2006 was only US$ 36 billion, though supporting a far larger number of borrowers.

The loan guarantees to the nuclear power industy represent some of the largest bets the U.S. government has made on single industrial facilities in its history. Given the scale and the risk of this initiative, the public oversight and accountability now in place are woefully inadequate. 

Even if companies do not default, the loan guarantees create a number of important potential problems. The first is selection bias and crowding out. As the federal government becomes the major funder of new energy technologies, allocating funds based on political selection criteria, it risks starving the non-selected (often less politically influential) industries of capital. A second and related problem involves the pricing impact of these subsidies on competing technologies. As noted in the Calvert Cliffs example, the industry acknowledges that the loan guarantees are worth hundreds of millions of dollars per year per reactor. These subsidies artificially depress the cost structure of nuclear power, making it more difficult for less subsidized forms of energy to compete. 

A final critical problem is the taxpayer losses. These are likely to be quite large, despite the requirement for the borrower to "prepay" the expected default rate on the loans. When I spoke to the DOE's Office of Loan Guarantees in January, they indicated that they saw the risk of the advanced energy loan guarantees as on par with the Export-Import bank portfolio, at roughly 1.5%. Yet Eximbank has a much larger number of smaller financing commitments, cutting across many countries and industries. In contrast, loan guarantees to nuclear power are much larger bets on single facilities, and subject to a wide range of systemic industry and technology-related risks. There is a reason the private sector won't finance these plants on their own:  accurate pricing of the risk would drive up construction costs high enough so the plants wouldn't be competitive. 

In fact, the risk premium on high-risk private firms are usually well above 1.5%. Credit default swaps (CDS), which are basically insurance contracts against corporate defaults on debt, provide a useful illustration of how much higher the market can price the default risk. As of early June, CDS on MBI, the largest municipal bond insurer in the United States, required an upfront payment of 23% for a five-year contract, with an additional payment of 5% per year subsequently. While the bond markets are in severe distress right now, the example may not be so far afield from newly built nuclear power plants: an evaluation by the U.S. Congressional Budget Office — even before the recent sharp escalation in construction prices — pegged the default risk of federally guaranteed bonds for nuclear power at 50%.

SW: We’ve focused our discussion on the situation in the United States. Are the levels of government support, and the resulting risks and distortions, peculiar to the U.S.?

D.K.: All countries face similar issues related to accident risk, radioactive waste management, and plant financing. All have adopted a range of subsidies that attempt to make the new plants appear financially viable, though some countries, such as France and China, do not publish enough information to get a good handle on how big the public support really is. Also quite important is the historical linkage between the growth of the civilian power sector and the expansion of weapons capabilities. Unfortunately, this linkage has thus far also been mostly ignored, with countries like France and the United States promoting nuclear power development in countries that do not have particularly transparent, democratic, or accountable governance systems. 

Governments may well be justified in keeping the nuclear power option "on the table" as we try to address our energy challenges. However, retaining the ability of nuclear power to enter the marketplace as an option is not the same thing as tilting the market response in its favor. Government neutrality to foster the most robust energy solutions is critical.

SW: Subsidies can be notoriously difficult to dismantle once they are in place.  Given the fact that nuclear power has been heavily subsidized for 50 years, is there any sign of hope that more sensible policies will prevail in the short term?

D.K.: There are mixed signals in this area. On the one hand, many governments have responded to energy market turmoil with wave after wave of new subsidies.  On the other, there is increasing recognition ― both among non-governmental organizations and large energy funders ― that subsidy reform is a critical element of a rational climate change plan, but one that has not yet been systematically addressed. These organizations are now discussing a variety of responses that include both assembling robust, updated information on energy subsidies and addressing the deficits in transparent government reporting that make such high subsidization possible without instigating a public backlash.