Vogtle

1) Earth Track congressional testimony.  Read Earth Track's testimony to the Subcommittee on Energy of the Committee on Energy and Commerce, U.S. House of Representatives: Federal Energy-Related Tax Policy and its Effects on Markets, Prices, and Consumers. 

2) New work on subsidies:  US public lands, European coal, Asian fossil fuels. 

• A review of subsidies to fossil fuel extraction on public lands released by Oil Change International.
• Coal subsidies in ten European countries released by the Overseas Development Institute.
• IEA's review of subsidies within APEC:  Tracking fossil fuel subsidies in APEC economies: toward a sustained subsidy reform

3)  Exelon fails to clear latest capacity auction with two of its reactors.  Exelon's Three Island Mile and Quad Cities nuclear facilities failed to clear the latest PJM auction.  Trade publication Utility Dive noted that Exelon said the loss "stemmed from 'the lack of federal or Pennsylvania energy policies that value zero-emissions nuclear energy,' and, in the case of Quad Cities, not falling under Illinois ZECs program." 

Reliability is the main selling point of baseload nukes facing increasing operating and maintenance costs.  Thus, it is notable that while nuclear blames renewables for its heartache, non-hydro renewables comprise a tiny portion of the PJM capacity market. 

A cynical view of the politics of nuclear power leads one to at least consider that perhaps Exelon is playing a bigger game.  The only way for the firm to extract multi-billion dollar subsidies to keep its aging fleet open is to present as realistic a case of distress as they possibly can.  Strategic losses in capacity auctions could be part of this.  Indeed, the firm's management may well decide that its highest return "new" line of business is extracting subsidies from taxpayers to prop up their old plants.  Here's Crain's, which has long tracked the political strategy of Exelon:

Fresh from winning subsidies in New York and Illinois, Exelon wants ratepayers in other states to pony up more to keep nuclear plants open... In an email, Exelon says only that it "continually evaluates strategic opportunities to add value for our shareholders and customers." Speaking generally of its desire to subsidize nuclear power beyond Illinois and New York, Exelon says, "Right now, active discussions on the economic and environmental advantages of nuclear power are occurring in Connecticut, Ohio, New Jersey and Pennsylvania."

And their strategy seems to be working.  According to Crain's:  "Exelon's stock has risen 36 percent since the Dec. 1 agreement in Illinois, well above the 20 percent increase for the Standard & Poor's 500 Utilities Index."  UPENN's Kleinman Center for Energy Policy noted in a recent blog post that it is quite difficult to ensure the subsidies flowing to old nuclear reactors (which are often part of a complicated corporate network) are actually needed rather than simply juicing corporate returns. 

4)  Sounds of silence: G7 and fossil fuel subsidy reform.  The G7's 2016 pledge to end harmful subsidies to fossil fuels by 2025 was not re-affirmed in their most recent meeting in Italy.  While it was agreed to in April, the issue was not included in the formal ministerial communique in May, an omission bleakly noted by fuel subsidy research NGO, Oil Change International.  These things aren't particularly binding, so the inability even to make clear statements of direction is troubling.

5)  The persistent areas of overlap between civilian and military nukes.  A sobering review of Japan's plutonium stockpile, its civilian origin, and the weapons proliferation risks going forward.

6)  Westinghouse bankruptcy: about that $8.3 billion they owe Uncle Sam...  Turns out the last sliver of the "nuclear renaissance" in the US is at risk due to poor management, fiscal distress, and the bankruptcy of one of the key vendors, Westinghouse.  Gee, if only somebody could have seen something like this coming.  In one of the finest moments of pretend finance in recent years, DOE flagged the risk of these massive loans (roughly sixteen Solyndra's) at zero. 

The bankruptcy affects nuclear projects in both SC and GA, though only the GA project (Plant Vogtle) is receiving federal subsidized loans.  The big question is how much of the DOE loans will end up in the lap of taxpayers.  As of now, Vogtle hobbles on, with Southern Company -- the largest investor in the project -- taking over the lead from Westinghouse.  Whether or not the Vogtle reactors are completed, there are billions in costs to be covered by some combination of customers, taxpayers, and utilities.  Here's the Atlanta Journal-Constitution's summary:

The Plant Vogtle project was backed by $8.3 billion in loan guarantees from the U.S. Department of Energy – during the Obama administration...[T]he Congressional Research Service noted that those loan guarantees came with this price: “If the Vogtle project is terminated, the borrowers must repay the entire outstanding loan amount in five years.”

But the CRS also said that the secretary of energy has the power “to modify the loan agreement terms and take other steps upon a default.”

This battle will not be resolved soon.  Good thing Southern Company CEO Thomas Fanning sold most of his shares in the company back on 2014.

Update, June 3rd:  a key deadline in the continued financing of Vogtle has been missed, and analysts predict litigation.

Lot's happening with nuclear around the world -- mostly associated with continued problems with market-competitive delivery, seeking alms from taxpayers, and attempts by taxpayer groups and trading partners to block the largest of the subsidies.

1)  Prefab reactors not so cheap.  The Wall Street Journal notes that even though utilities promised modular construction of reactors would bring construction costs down, it has not worked out that way.  Two reactors, Vogtle in Georgia and Summer in South Carolina, both rely on Westinghouse designs, which is owned by Toshiba.  Although the reactors are designed to use modular construction, there are 2,000 separate modules, each of which must meet stringent safety and production requirements.  Proponents say they are still along the learning curve, and soon (yes, very soon) the promise of these new methods will be realized and unit costs will fall.  In the meantime, costs are ballooning.

In other news, Toshiba's top executives resigned last week due to a massive accounting scandal that overstated earnings from multiple divisions (including nuclear) by more than $1.2 billion over the past 7 years.

2)  Small modular reactors not so cheap.  Another main thread of the industry's effort to convince politicians and Wall Street (though mostly, I suspect politicians) that they can build cost-effective reactors has been small modular reactors.  Build them standardized, in a factory production line, and unit costs will fall.  Kind of like, I don't know...photovoltaic panels, though just with way fewer manufacturers, and way, way smaller production runs.  The talking points have had some success.  Bill Gates has dumped a chunk of cash into modular nukes.  Boston-based entreprenuer Russ Wilcox, who's former firm e-ink brought us many of the crisp text displays we take for granted on text readers today, seems to be investing a sizable chunk of his fortune into nuclear startup Transatomic Power.  He acknowledged in a panel discussion I heard at Harvard Business School that any solution he came up with would be more than a decade away, and that the delivery lead time would be a factor in its usefulness for dealing with climate change.   I suppose if these folks are kicking in their own money, best of luck to them.  But the history of nuclear power is that much of the risk and cost always seem to end up in the lap of taxpayers.  The push for small reactors is likely to be the same.

Small nukes have caught the imagination of some of the folks at Harvard Business School as well.  They have written recent business school cases on TerraPower, NuScale Power; Professor Joe Lassiter has been writing a great deal about the topic in other venues, and hosting many panels on it as well.  He summarizes his thinking on nuclear here and here.  In this piece, he articulates his view that new reactors could be the miracle to save the world from climate change.  The reason we've not seen these miracle boxes already?

The barriers to rapid progress in New Nuclear are not technical, not even economic. The barriers are in the outdated nuclear regulations that scare off private investors and in the nuclear industry-regulatory culture that accepts timelines measured in decades as normal.

I don't think NEI could have said it better.  While some of the technologies Lassiter is pushing could potentially provide some benefits to energy markets, he is understating (dramatically) the problems the sector has with cost, waste management, and proliferation should construction and deployment or reactors expand broadly.  He is also underestimating the ability of smaller scale, lower risk renewable technologies to scale in a period far shorter than what the nuclear sector has a prayer of achieving.  Wall Street has already signalled its unwillingness to be the one left holding the bag for missed milestones and cost overruns that make the fully-loaded cost of power to expensive to sell.  I doubt even Bill Gates can carry the ball here; his total net worth of $80 billion seems big until one looks at the history of write-offs in the nuclear sector.

The enthusiam of these folks for modular reactors begs one additional question:  why now?  With more than sixty years of economic trends in nuclear moving the other way -- to ever larger reactors in order to spread massive fixed costs over ever more kWh -- what has suddenly changed?  It's not as though production line manufacturing has just been invented, after all. 

Enter Princeton University nuclear researcher M.V. Ramana with a nice dose of reality.  In the nuclear arena, virtually no path has been left unexplored technologically and trolled for government largesse.  Small reactors are no different -- and Ramana has written the best summary of small reactor economics that I've seen.  He provides a great historical review of past efforts by the industry to build small reactors, why they failed, and why they are likely to fail now.  Read the whole thing.   Here's hoping that at one of his upcoming panels, Professor Lassiter saves a seat at the table for Dr. Ramana so there can be a real debate.

3)  More cracks in the French model.  The US industry often claims a pernicious regulatory environment is behind their cost travails; if only they didn't have to waste money on the needless bureaucratic meddling and civilian attempts to slow their work via lawsuits, the projects would be cost-competitive and operating years earlier.  France is held up as the model for appropriate regulation, allowing reactors to succeed.  Alas, it turns our letting businesses get on with business doesn't always work so well, even in France:

Areva, France's nuclear giant, has been aware since 2006 that the steel vessel of its flagship new-generation reactors that confines radioactivity is faulty...Until now, it was thought that Areva had only recently become aware of "very serious" anomalies in its 9 billion Euro (6.5 billion pound) European Pressurised Reactor, or EPR -- the same model sold to Britain.  The EPR is being built in Falmanville on France's Channel Coast.

In April, it was revealed that excessive amounts of carbon in the steel in the top and bottom of the reactor's vessel, which forms a shell around it, could cause cracks which could prove disastrous, since the vessel, which houses nuclear fuel, cannot be replaced during the lifespan of the reactor.

Oops.  Areva, of course, says it did nothing wrong and hid nothing.  But what do you do when there are basic engineering flaws that a company knew about for nearly 10 years and said nothing -- continuing to collect money from customers and potentially putting millions of people at risk?  Well, this France and Areva is a national champion:  they plan to bail them out with public money by effectively merging Areva and EDF:

The deal would not make the order books look better by ramping up international demand.  Instead, it would absorb losses by spreading them across the merged new company -- and eventually transferring them (at least in part) into tax budgets...[T]he bailout may eventually add up to more than 10 billion euros.

4)  Third Vogtle partner gets its free government nuclear loan guarantee; costs to ratepayers continues to rise.  The US Department of Energy finalized the third and last tranche of its $8.3 billion loan guarantee to build Vogtle 3 and 4 in the US state of Georgia.  Backstopping the borrowing of the first two partners (Georgia Power and Oglethorpe Power) was done with zero credit subsidy fee based on justifications that remain secret to this day.  The third partner, the Municipal Electric Authority of Georgia (MEAG) closed on its $1.8 billion piece of the action last month.  No word yet on whether it, also, received a guarantee with zero credit subsidy fee. 

MEAG the borrower is actually different from MEAG the Electric Authority, as it created three separate special purpose vehicles for the Vogtle project.  How these separate entities benefit from the loan guarantee, how they have demonstrated financial strength, and how the project company assets would play out in a bankruptcy is buried somewhere in the final agreement documents that remain a closely held secret of DOE. 

Minority partner Dalton Utilities did not apply for a share of the federal loan guarantee that is protecting all of the other project investors.  Time will tell whether that oversight will be a painful one for the ratepayers in Dalton's service area.

The Vogtle project cost overruns and time delays continue to mount, and will result in additional charges to customers both from financing costs and replacement power since the promised power from the new reactors is delayed by years.  Alison Chiock, Georgia Power's director of resource policy and planning acknowledged the cost increases, but pushed back on criticism noting that "You lose sight of the 60-year benefit when you sit here in 2015 and focus on those schedule changes."

She noted that customers will still come out $3 billion ahead over the life of the plant relative to a natural gas plant.  Walter C. Jones of the Athens Banner-Herald noted in return "that lifespan benefit shrunk by $2 billion just since the last semiannual construction-monitoring report due to a drop in the price of natural gas." It is highly likely that continued delays and cost overruns will erode this benefit still further before opening day.

4) Octogenarian reactors.  Hey, we all hope to live to be 80 or older, and still be spry in mind and body.  Who can fault your friendly neighborhood reactor for wanting the same?  How many more happy days and nights these reactors could share with us, lighting up our world, avoiding carbon, accruing 0.1 c/kWh for the cost of the government taking care of their nasties (oh, forget that; the fee was canceled), and lots more time to build those decommissioning trusts funds and continue to provide retrospective premiums under the government's subsidized accident liability scheme.  The additional four decades just might even be enough to keep the industry alive so the next generation (the better, safer, cheaper ones) enter the market. 

Alas, like the human body, reactors don't tend to age too well.  Indeed, the aging process drives up both the maintenance costs and the risks of serious problems.  Hopefully the former would trigger closure before the latter.

Here's a nice summary of the issue at the GreenWorld Blog, as well as the mandatory NEI happy quote:

Much work remains to be done, but early results indicate that there are no generic technical reasons to prevent well-maintained nuclear power plants from operating beyond 60 years…

Let's review the all of the hedging language in this one mere sentence:  "early results" mean we haven't studied the problem that carefully yet, though clearly many aging reactors have had problems with brittleness and cracks; "no generic technical reasons" leaves the many site-specific issues associated with the wide variety of US installations wide open as a source of problems; "well-maintained nuclear power plants" -- I'm guessing the horse has already left the barn on this issue for some US reactors.

While waiting for the NRC to do the "much research," we ought to be starting to track maintenance spending and insurance costs for the oldest reactor cohorts.  Those financial signals will be taken a great deal more seriously than industry PR pieces.

5)  Sordid tales of political deceit in the Uranium industry.  This stuff is hard to make up.  According to the New York Times (kudos to reporters Jo Becker and Mike McIntire for their detailed sleuthing), the following events have unfolded:

• Russian atomic agency Rosatom gradually acquired a majority stake in Canadian uranium company Uranium One.  The deal gave Russia substantial uranium assets in many parts of the world, including Canada, Kazakhstan, and South Africa.  The deal also gave Russia control of 20% of the US' uranium reserves.

• Background work to facilitate the first deal in this industry roll-up was done by former President Bill Clinton back in 2005, when he and Canadian mining financier Frank Guistra met privately with Kazakh president Nursultan Nazarbayev.  Clinton expressed support for Nazarbayev president to head an international elections monitoring group, counter to US policy.  Days later, Giustra's company UrAsia Energy Ltd. got a deal allowing it to buy stakes in three state-controlled mines.  In 2007, Guistra's firm merged with South African company Uranium One, gaining additional stakes around the world.  It continued to acquire additional uranium minin interests around the world in the ensuing years.
• Uranium One ran into financial and legal trouble as markets shifted and its Kazakh purchases were declared illegal and a key official arrested.  Leaked documents indicated a concern of the US government that Russia had orchestrated the arrests as a way to achieve control of the uranium assets, noting that Vladimir Putin was concerned Russia's domestic uranium reserves were too low.  Rosatom bought a minority stake in Uranium One in 2009; a year later, it moved for control (at 51%).  Because of the US holdings, the controlling interest required approval by the US government -- specifically by the Committee on Foreign Investment in the United States.  Key cabinet members, including then Secretary of State Hilary Clinton, were on the committee. 
• Significant direct contributions to, and fundraising on behalf of, the Clinton Foundation were done by a variety of players involved with Uranium One.  A fundraiser for the Foundation led by Guistra five months after the deal with Kazakhstan was completed brought in $16 million.  Ian Telfer, the chairman of Uranium One after the Russian's assumed control, dontated directly and through his family's Fernwood Foundation millions of additional dollars.  Between $1.3 million and $5.6 million of these donations were not disclosed by the Clinton Foundation as had been required under a deal Mrs. Clinton made with the Obama administration prior to taking up her role as Secretary of State.  There was also a large speaking fee paid to Bill Clinton by one of the Russian banks with ties to the deal. The Clinton Foundation says the lack of notification on some of the donations was an oversight, and that they did nothing untowards. 

There are a number of interesting aspects of this story beyond the fascinating details:

• Nuclear power is never a "normal" market and never will be.  The connection between the power sector, weapons, and perceptions of state power from nuclear capabilities mean that governments will continue to intervene in market structure and make all sorts of decisions to keep them "in the game".  The economics of nuclear power will be distorted in significant ways from these decisions, interfering with the risks and returns of competing forms of energy and other energy sector objectives. 
• The control of known uranium reserves sought by Russia probably doesn't mean that much in terms of market power.  Uranium markets have been depressed for a long time, and investments into finding, re-establishing, or improving known deposits has not been robust.  Here's a story from 2012 indicating that, indeed, there is more uranium than people think; rising prices would further accelerate that process.  Further, significant value-added arises at the enrichment stage, and even after enrichment, the uranium component is not a significant fraction of the cost of nuclear power.  The risks to me from this deal seem fairly low.
• The failures of disclosure associated with the Clinton Foundation are quite troubling, and a more robust system should have been in place not only to report donations retrospectively, but also in a way that links activities of the foundation to possibly related contributions from parties or countries related to those activities.  That said, the fact that the Clinton Foundation reports donations from foreign entities at all is uncommon.  It is a huge improvement over what nearly all other foundations and trade associations do.  How interesting it would have been to see flows of money to the Carter Foundation, for example, when it releases particular books, or observes elections in particular (democratically-challenged) countries.  Or to see flows of foreign donations to the Nuclear Energy Institute when foreign firms were applying for large federal loan guarantees or hoping to get approval for US-based reactors or enrichment facilities a few years ago. 

6)  Austria files challenge to UK nuke subsidies to Hinkley Point C.  This follows a similar challenge launched two weeks earlier by ten German and Austrian energy companies.  All argue that the UK funding to build two new reactors, including 35-year above market price guarantees for the power the reactors produce -- the UK's so-called "contract for difference" policy.  The UK was adament that this policy was not a subsidy (see my parsing of the bull here); it's nice to see so many others disagree.  Austrian chancellor Werner Faymann minces no words:

Subsidies are there to support modern technologies that lie in the general interest of all EU member states.  This is not the case with nuclear power.

Hillary Clinton's use of her personal email account for official government business has been all over the news lately.  The concern is that the approach escapes the normal channels of accountability regarding official government business, and makes it much more difficult to protect government records for historical purposes.  

If an email is sent from a private address, does it make a noise?

Clinton is not alone.  Jonathan Silver, the former head of DOE's Loan Programs Office, did too.  He was clearly not as high up in the Obama administration as Secretary Clinton; and unlike Clinton, he seems also to have used his DOE email address.  Nonetheless, Silver did oversee the granting of some of the largest non-bailout loans to individual private corporations in US history.  And, like Secretary Clinton, he had a penchant for using his private email a lot. 

Great investigative work by Carol Leonnig and Joe Stephens in the Washington Post back in 2012 highlighted the issue.  They wrote that Silver frequently reminded staff not to include personal emails in DOE correspondance for fear of making the account subpoenable.  But it seems that if one just used private email, without having it appear alongside DOE addresses, that would be fine.  Indeed, he often relied on this less visible method for his own key correspondence.  Leonnig and Stephens: 

Silver repeatedly communicated about internal and sensitive loan decisions via his personal e-mail, the newly released records show, and more than a dozen other Energy Department staff members used their personal e-mail to discuss decisions involving taxpayer-funded loans as well. The Washington Post received the e-mails from Republican investigators on the committee.

"The frequent use of non-government e-mail accounts and the contents of e-mails leaves little doubt that DOE officials participated in an intentional effort to shield their communications from legal scrutiny and the public," committee Chairman Darrell Issa (R-Calif.) and subcommittee Chairmen Jim Jordan (R-Ohio) and Trey Gowdy (R-S.C.) wrote to Chu.

You can review examples of Silver's emails here.

And although the impetus for this Congressional review was concerns over loan guarantees to solar projects, most notably to ill-fated Solyndra, the problem is hardly isolated.  In terms of program risk to taxpayers, the  massive loan to the Vogtle nuclear plant in Georgia is the Mother of All Solyndra's.  With taxpayer exposure topping $8 billion, it is clearly a critical deal to review. 

And review it, I have.  As part of a project with the Southern Alliance for Clean Energy, I went through thousands of pages of documents and emails related to the Vogtle loan guarantee submission and evaluation.  These documents saw the light of day only due to roughly ten separate rounds of FOIA requests over multiple years -- submitted by SACE and the Emory University School of Law’s Turner Environmental Law Clinic . 

Yet the released information had very little linked to Silver's private email.  One can only speculate on why that correspondence was left out, and what important information related to the Vogtle deal we may be missing.  

Taxpayer exposure on Vogtle - some troubling trends

So how's the program doing?  Will taxpayers or others ultimately bear a heavy financial burden because of poor accountability on the review and pricing of massive federal credit support to Vogtle reactors 3 and 4?

If you ask DOE, their loan program overall is going swimmingly well.  In their November 2014 progress report, the Office of Loan Programs' current director Peter Davidson noted that loss ratios are low, and interest and principal payments are running above losses.  Many of the principal payments are back-loaded, so we shall see.  And interest, even if repaid, is still provided at a significantly subsidized rate for many of the borrowers. 

What about the Vogtle loan itself?  The trends don't look very good, actually.

• DOE determined the credit risk on $6.5 billion in government loans to Southern Company, the largest investor in the new Vogtle reactors (through its Georgia Power subsidary), was zero.  It is hard to imagine Peter Davidson's former employer, Morgan Stanley, reaching a similar decision.  The advance credit subsidy fee was one of the key risk management tools available to the Department to reduce losses.  By setting the credit subsidy figure to zero, DOE greatly increased the likely magnitude of taxpayer loss on this deal and established a bad precedent for future solicitations.  The irony here is that they didn't need to give the loan at all and the plant would still have been built:  Southern had said multiple times that they could proceed without the federal credit support. 
  
  If DOE staff were confident in their decision, one would assume they would be proud to demonstrate its basis.  No such luck:  DOE has blocked repeated attempts to get detailed information on how they concluded that zero credit subsidy assessment was warranted. 
• Cost of the project has ballooned to as much as $18 billion and counting, and battles over who pays for the overruns are heating up.   The project's problems (likely in conjunction with a softening market for power) has led Southern Company to delay a second reactor project. 
• Southern Company CEO Tom Fanning sold the vast majority of his shares in the firm last fall, according to Barrons.  This was years prior to the expiration of the associated options.  He sold 275,600 shares in January 2014, and an additional 1,049,185 in September.  At that point, he had less than 40,000 left.  A spokesperson for InsiderInsights.com, a firm that tracks trading activity by corporate insiders, viewed the sales as "bearish" and suggested people avoid the stock.  The sales subsequent to DOE approval of a zero credit subsidy fee; in excess of historical sale patterns; and leaving only a tiny stake in the firm he is in charge of are all problematic.  Sometimes such a pattern precedes CEO replacement or retirement.  In this case, however, Fanning is still there. 
• While nukes were always sold as expensive to build but cheap to run, turns out they may not be very cheap to run either.  Exelon has taken the lead among current reactor owners in begging for alms in order to keep their plants on line.  And the alms, apparently, are quite substantial.  Tim Judson of NIRs has a good summary here.  Of course, these reactors have all been subsidized their entire lives, so perhaps begging for taxpayer handouts comes naturally.  They were subsidized when they were built; when they were deemed uncompetitive during power deregulation; for their accident risks, their waste management, and their accruals for plant decommissioning.  The list goes on.  But a key point is that if even the old reactors that have already paid off their capital can't operate competitively, what hope does a bloated Vogtle 3 & 4 have with cost recovery hurdles continuing to rise?

So how will this play out?  Southern Company rate payers are already feeling the pinch.  SACE notes that:

Georgia Power ratepayers are currently paying an additional over 9.4% on their bills for the Nuclear Construction Cost Recovery (“NCCR”) Rider due to anti-consumer state legislation passed in 2009 to incentivize building new reactors. Since 2011 customers have paid over $1 billion since the Company began collecting the NCCR tariff for financing costs and taxes that would normally be recovered over the normal life of the facility.

Oh, and if I were one of the town administrators in the Vogtle service area who had signed on to one of the take-or-pay, hell-or-highwater power purchase agreements for power from Vogtle 3 and 4, I would be starting to sweat.1

• 1Here's some representative wording for MEAG: "The Conditional Commitment provides that the Project Entities will be the borrowers of the Guaranteed Loans. On or prior to entry into the Definitive Agreements, MEAG Power will enter into a take-or-pay, "hell or high water" power purchase agreement with each Project Entity for all of the power, energy and other services generated by such Project Entity's ownership interest in Vogtle Units 3&4. These power purchase agreements between MEAG Power and each Project Entity will be "back-to-back" arrangements requiring MEAG Power to make payments to the Project Entity to the extent that MEAG Power has received payment under its corresponding power purchase or sale arrangements."

Homeowners are lucky if they get a 60 day rate lock on their mortgage application.  Nuclear reactor developers seem to have no such problem:  agreements for multi-billion dollar subsidized loans to build two new nuclear reactors at Plant Vogtle in Georgia have been repeatedly extended for four years.1   A credit market meltdown didn't stop the extensions.  Nor did the rise of fracked gas and a recession, both undercutting nuclear plant economics.   Nor did the cancellation of one nuclear project after another, and large cost-overruns at those projects still being pursued.  Every six months or so, the required date of execution would simply be extended, offering a free option contract to project participants. 

Today a smiling Ernest Moniz, Secretary of the US Department of Energy, will be heading to Georgia for the signing ceremony as these loan agreements are finally executed.  He will likely talk about how this is the type of partnership that makes America strong; how the loans are the result of hard work by so many, and all should be proud; and how the US wants to buy and build every form of energy because, well, that's what we need to do.

What ultimately got this agreement to "yes" is not likely something any of the parties will discuss in their prepared remarks.  Perhaps it was because DOE finally got a backbone and refused to extend the original agreement any further.  Maybe the borrowers were getting pressure from shareholders to offload the risk, or because interest rates are creeping up and Southern Company (the parent co. of Georgia Power, the largest partner in the Vogtle consortium) won't be able to roll its short-term financing for next to nothing.  

We'll likely never know the truth.  But regardless of the drivers, the completion of the loan guarantee agreement is really quite a shame.  It puts a tremendous amount of risk on taxpayers and gives nothing in return.  Southern Company's CEO Tom Fanning said they didn't need the public funds, could finance the project privately, and would still build the reactors without the federal guarantee.  So when DOE's press release notes that "[t]he nuclear facility is eligible for loan guarantees since it is expected to avoid nearly 10 million metric tons of carbon dioxide emissions annually, which is the equivalent of removing more than two million vehicles from the roads," the statement of eligibility is technically correct.  But the connection between the loan and CO2 reductions is specious given that even the borrower says the project would have been built anyway; there are many ways to reduce carbon; and our public policy ought to be competing options against each other to buy the lowest-cost reductions first.  South Carolina Electric & Gas is privately financing its construction of two reactors, after all.  Surely the Vogtle team could have done the same. 

And Fanning had complained he didn't like changes DOE had made to loan terms:  "Those terms and conditions just aren't suitable for our application, so we'll just have to see." Did DOE cave and sweeten the terms (most likely by reducing the credit subsidy payment below it's already too-low level), putting taxpayers at even greater financial risk?  Or did the Vogtle investors realize the terms really weren't so bad after all as they saw Wall Street steering well clear of nuclear new build?  Though these are the details that drive taxpayer risk, subsidy magnitude, and competitive distortions across different energy options, it is safe to assume that this area, as well, won't get broached by the smiling faces at the signing.  Nor, absent yet more litigation to force disclosure, will DOE likely reveal them at all. 

Our review of the thousands of pages of internal documents related to DOE's loans to Vogtle that were forced out by litigation (see above link) clearly indicated a messy process with decisions driven by well more than just deal economics and proper financial risk management.   The resulting agreement is no case study in good oversight or democracy.  And yet the result is taxpayer funding equal to 15 Solyndras and 43 Fiskers (an electric car marker that also went bust owing DOE money).  If things go wrong on Vogtle, taxpayer losses on Solyndra and Fisker will be mere footnotes in comparison.

Looking in the crystal ball: what Fisker's bankruptcy can tell us about Vogtle

My colleague Ron Steenblik of OECD recently linked to an article on how Chinese autoparts giant Wianxing just won its bid for the bankrupt assets of DOE-funded electric carmaker Fisker Automotive.  This same firm also bought the distressed assets of DOE-funded battery maker A123 (cleverly renamed B456).  Reporter Katie Fehrenbacher notes that

As with Wanxiang’s deal with A123, controversy will follow the realization that a Chinese conglomerate will likely be taking over an electric car maker that got substantial funding from the U.S. government.

And yet, should this be the point of controversy?  If DOE is going to play the Big League Venture Capitalist game (Secretary Moniz has restated they will), this type of occurrence is part of the drill.  Early money gets diluted in new investment rounds when things aren't going well (as they often don't). Original equity holders get wiped out, and debt holders may as well when the firm goes bankrupt. Getting something back is still better than losing everything. 

DOE's only leverage point here was at the beginning ("to lend, or not to lend, that is the question"). People ought not be surprised that the corporate carcass is sold on the cheap post-default or during a pre-packaged bankruptcy.

In private markets, venture capitalists line up to play this game because enough of their portfolio companies break even or nearly so to stem losses; and, far more importantly, every once in awhile they get back 100x or more with a blockbuster new company such as Google or Facebook. Even a handful of home runs can offset the losers with enough left over for them to buy a summer place in the Hamptons.

Alas, when governments are the investor, this upside disappears.  The government deals, including for Vogtle, are structured to extend huge chunks of debt to borrowers -- often far more than a private lender would extend given the project risks.  And yet, taxpayers get no equity at all:  even if a project receiving $500m or $8.3 billion in taxpayer support is wildly successful, generating Google-like returns, taxpayers still get squat. In a private firm, the partners who decide which firms to fund do well when the firms they've funded do well; if their investments tank, so does their pay.  In public progams such as the Vogtle mega-loan, public dealmakers have no financial tie to how their decisions play out over time; indeed, they have often moved on by then.  Socialized risks, privatized profits is the model that the Vogtle deal seems to have followed to the letter.

The Chinese buyouts of US government-funded firms on the cheap have stirred anger.  But second movers often get the benefit of buying up the residuals of first-mover firms that have failed.  Perhaps we ought not get too teary-eyed about the misplaced $192 million loan to Fisker given that the Vogtle loan puts more than 40x as much taxpayer capital at risk.  The nukes industry has repeatedly said there is nothing to worry about. These are good projects (though not so good, of course, that they just build them with private money), and won't go bust, they repeat again and again.  So we can rest easy -- just like ratepayers facing a $1.5 billion loss from Duke Energy's recent cancellation of the Levy nuclear project in Florida. They weren't supposed to lose money either.

• 1While the Vogtle credits are commonly referred to as loan guarantees, they are actually direct loans since the originator is the Federal Financing Bank, an affiliate of the US Treasury.

1)  Nuclear economics continue to worsen.  In addition to widespread cancellations of new nuclear reactors and an increasing number of announced closures of older plants too expensive to repair and keep running (Crystal River in FL, Kewaunee in WI, and San Onofre in CA in the past six months), power uprate projects are also being terminated.  Exelon is taking a $100 million charge associated with ending planned expansions in Illinois and Pennsylvania due to weak market demand.  The firm cancelled two other power uprate projects in 2011.

Increasing output at existing plants, and keeping older plants running longer are two strategies that have historically been financial wins for plant owners.  The power output achieved required much lower overall capital investments than building a new facility with far lower risks of large cost overruns.  Both reduced financial risks substantially.  The continued cancellation and closure trend across the board of nuclear projects is another indication that the long-hyped nuclear "renaissance" is unlikely to happen.

2)  Southern Company CEO Tom Fanning upset government money isn't cheap enough.  One of the only remaining new reactor projects in the US is Vogtle 3 and 4 in Georgia.  Southern Company, through its Georgia Power Subsidiary, is a big player in that effort both in terms of ownership stake and its role in project management.  The Vogtle construction is by no means a case study in market economics:  the project benefits from a host of subsidies, including tax exempt debt, construction work in progress rules that shift financing costs onto current customers, long-term power purchase agreements with municipal customers that require payout even if the reactor is never completed or the power is above-market, and multi-billion dollar loan guarantees. 

But Southern is upset that DOE money in the form of a $3.5 billion loan guarantee (separate loans with different terms apply to the other Vogtle owners) is too expensive.  CEO Fanning refers to changes in the terms following the Solyndra loan guarantee default as being unwarranted.  A reasonable observer might instead suggest that the Fukushima nuclear accident, credit market meltdown, and plunging demand for electricity (as well as lower prices) due to recession and fracked gas, were also factors.  Such an observer might also point out that such changes on the part of a lender were both prudent and reasonable; and that Southern had been an important player in dragging out negotiations with DOE long enough such that the worsening market conditions could be addressed in the terms of the open loan. 

Or at least we can hope they were.  The most recent available version of the draft loan agreement between DOE and GPC (from January 2013) can be accessed here.  It is long and detailed, but still has some important gaps.  For example, much remains unknown about specific credit subsidy amounts DOE has proposed (2010 was the latest release of credit subsidy cost figures) and how collateral and owner repayment obligations would play out in a real bankruptcy.

The draft agreement includes a number of clauses about an obligation to repay the feds in the case of a Vogtle default.  However, a corporate guarantee from Georgia Power would provide less solace to creditors about being made whole than would one from its Southern Company parent.  Detailed clauses on collateral continue to suggest that there may be limits well short of the entire firm on what the borrower would be on the hook to use for full repayment in the case of a default.  It is notable that at least through the middle of 2012, many of the open issues between DOE and Georgia Power involved disagreements over what collateral DOE could tap into in the case of a project failure.

If the federal money is really too expensive, Fanning always has the option to forgo the federal loan entirely and tap private capital markets instead.  That is a course of action I personally would be quite happy to see.  It might actually be in the long-term best interest of the nuclear industry as well were it to demonstrate that new reactors could be (mostly) privately financed.

A review of issues related to the proposed Vogtle loans by Earth Track and Synapse Energy Economics released in January can be accessed here.

3)  Maybe this is one factor in why their reactor costs are so low.  Multi-country reviews of nuclear power costs, such as this one by OECD in 2010 quoted by the World Nuclear Association, regularly show South Korea as the lowest or near-lowest in the World.

Nuclear overnight capital costs in OECD ranged from US$ 1556/kW for APR-1400 in South Korea through $3009 for ABWR in Japan, $3382/kW for Gen III+ in USA, $3860 for EPR at Flamanville in France to $5863/kW for EPR in Switzerland, with world median $4100/kW. Belgium, Netherlands, Czech Rep and Hungary were all over $5000/kW. In China overnight costs were $1748/kW for CPR-1000 and $2302/kW for AP1000, and in Russia $2933/kW for VVER-1150. EPRI (USA) gave $2970/kW for APWR or ABWR, Eurelectric gave $4724/kW for EPR.

The figures for countries with extensive state involvement in particular sectors -- Eastern Europe and much of Asia are common examples -- are hardly clean market metrics.  Governments routinely provide large amounts of direct financing or credit support, and often underwrite accident, operating, and post-closure risks.  Where supplier firms are state-owned, economic murkiness grows still further.

But far more troubling than the role of an opaque state is the recent disclosure of corruption within the South Korean nuclear sector, deploying sub-standard equipment in reactor projects around the world.  The firms involved include core industry players, raising the obvious question as to whether the corruption and parts problem have been a factor in the domestic nuclear market as well.

4)  UK Parliament broad review of energy subsidies.  The UK Parliament has recently launched a significant information gathering effort on energy subsidies to inform the country's energy policy going forward.  The main link to background reports and testimony is here.  A brief submittal by Energy Fair, a UK organization focused on nuclear issues, covering UK nuclear subsidies, can be accessed here.