nuclear subsidies

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.

1)  Don't Prop up USEC.  Henry Sokolski of the Nonproliferation Policy Education Center and Autumn Hanna at Taxpayers for Common Sense weigh in at the National Review Online on a proposed $2 billion dollar loan guarantee to finance new enrichment facilities for the United States Enrichment Corporation (USEC).  USEC is the privatized residual of the government-run Uranium Enrichment Enterprise that ushered in the US nuclear era.  In Another Solyndra: Ohio Republicans join the energy-subsidy racket, they argue that politics are leading the push of put taxpayer money at risk despite an extremely poor business case. 

The business case should matter far more than it seems to in Washington.  And this is so not just for each specific subsidy recipient, but also for how, in the aggregate, these interventions distort price signals and market structure overall.  

With so much focus on solar subsidies, it is useful to point out that even if USEC doesn't get the guarantee in the end, they've already scored up to $300 million in federal money to "help USEC reduce the technical problems that forced DOE to reject USEC’s original application" for a Title 17 loan guarantee.  That's bigger than the face value of many of the loan guarantees granted to renewable borrowers.

2)  Anybody got a light?  The effort to get the blaring light of fiscal conservative oversight now shining on Solyndra directed at least a tad towards the Vogtle nuclear deal proceeds on the dual tracks of litigation and legislation.  Legal action by the Southern Alliance for Clean Energy (SACE) and Taxpayers for Common Sense to expose the terms of the loans continues, as DOE produced only heavily redacted documents in response the last FOIA request.

Of particular interest to SACE is information revealing whether company officials played an inappropriate role in shaping the terms of the loan guarantee. Based on the limited information produced, it appears that the power companies had to put almost no skin in the game, promising to pay a credit subsidy fee of possibly as little as 0.5 or 1.5 percent of the total loan guarantee.

House Democrats have been pushing for greater oversight legislatively as well, with a letter drafted by Rep. Henry Waxman (D-Calif.) and co-signed by Reps. Ed Markey (D-Mass.) and Diana DeGette (D-Colo.) to Chairmen Fred Upton (R-Mich.) and Cliff Stearns (R-Fla) of the House Energy and Commerce Committee.  The letter notes that while they support a broadening of the Solyndra review to include 27 loan guarantees for renewable energy (something that has already been implemented), $10 billion in conditional guarantees to nuclear projects should also be included.  This follows up on a similar push by letter co-signer Ed Markey last month.

In my book, this one is simple: if you aren't willing to look at potential conflicts of interest and corruption in all of the projects, don't call yourself a fiscal conservative.

3) Cash is cash, or don't cry when we invest your money abroad.  Fisker Motors, recipient of a $529 million loan from the US DOE, is doing what any corporation does:  it tries to find capital at the lowest possible cost and deploy that money however it sees fit to meet its own internal objectives.  In this case, that means putting funds into manufacturing jobs abroad (or, per the input from Media Matters below, using the funding domestically to free up other funds to finance foreign manufacturing jobs).  Oops. 

On the other hand, as a major debtor to the firm, wouldn't taxpayers want Fisker to increase their chance of success as much as possible?  Or, if you want to see electric vehicles enter the marketplace, wouldn't you want to maximize operational flexibility as well?  I suppose that's the problem with having multiple objectives (is the loan for making jobs in the US or for trying to develop a new energy technology?). 

Media Matters points out that the overseas construction was known prior to the loan guarantee being approved, implying this controversy is merely a manufactured issue.  I disagree.  The example underscores the core point that promoters of big federal subsidies too often ignore:  in a global economy, building an industry from scratch doesn't mean it will all (or even mostly) be built here.

4)  Risk is risk, or don't cry when bankruptcy or dilution come to call.  The time for pricing risk is before you provide the credit.  Happy talk about guarantees not really being subsidies (yes, we're talking about you, Dick Myers) should always be ignored by taxpayers and Congressmen alike.

A.  The Belly-Up Club:  Beacon Power becomes member number two.  Flywheel producer (for bulk power storage) went belly-up today.  Taxpayers were on the hook for $43 million.  This, and Solyndra, will be good tests for the claims put forth by program promoters in years past that recoveries in bankruptcy will be substantial.  Let's hope so.

Recoveries aside, expect more members in the Belly-Up Club soon.  If we take the loan guarantee program to be what it really is -- investments with risks similar to venture capital or start-ups, expect failure rates of around 30-40%.  If you expand the outcomes to include failure plus no return, we're up to 70-80% of the pool, according to Harvard Business School senior lecturer Shikhar Ghosh.  Since Ghosh is talking private firms, and the incentive alignment within the Title 17 program between managers and the long-term performance of the firm is much worse, I'm expecting loss rates within the funded portfolio to be even larger absent big changes in the market (e.g., implementation of a large carbon tax).

B.  Diluting the feds.  Andrew Stiles raises concerns at the National Review Online that the restructuring of financing for Solyndra prior to its bankruptcy, a process that subordinated the Treasury's position in any subsequent bankruptcy, was illegal. He links to a series of e-mail chains on the restructuring, which are quite interesting in their own right:

• Discussion of subordination starts on PDF page 14.    
• Page 21 notes that since July 2010 DOE was refusing to provide information on the Solyndra loan guarantee even to Treasury (which, of course, was backing the financing).  This type of behavior underscores the concerns I had with program transparency and accountability back in 2007.
• Page 22 indicates that Lazard was the firm providing independent review to DOE, perhaps of the original deal or perhaps only for strategic options for Solyndra at that point in time.  There has been very little visibility on who the financial advisors to DOE have been on the Title 17 program, and therefore on the real or potential conflicts of interest these advisors may have.  This is a problem.
• Page 29 raises the intriguing possibility that investors may have been interested in keeping Solyndra alive longer to allow them to strip more assets from the firm (thereby reducing the government's collateral). Artificially high discounting of accounts receivable was one area mentioned.

While the lawyers will toil back and forth on the legality of subordination under the Title 17 authorizing legislation, to a great degree (and assuming there was no fraud or gross negligence within the government in the restructuring) it seems besides the point.  If the government wants to do high risk investments, those investments go bad with surprising regularity.  Any new money won't go in at the old terms.  Either accept the risk of dilution, or don't play in the market.

Congressman Ed Markey (D-MA) sent an interesting letter to Fred Upton (R-MI) late last week.  The correspondence outlined some of the history of the Title 17 loan guarantee program and the nuclear industry's push to make it their own.  It also included examples of the role the Nuclear Energy Institute played to weaken federal recourse in a loan default, and the pressure it brought to bear to expedite loans to its members.  These are indeed crass examples of political lobbying that put billions (and potentially tens of billions) of dollars of taxapayer money at risk. 

However, the most troubling element of this event to me was the political intervention with OMB's traditional role in financial oversight of federal programs by then-Senator Pete Dominici.  This is from Markey's letter:

Additionally, at the July 26, 2007 Senate Budget Committee hearing on the nomination of Congressman Jim Nussle to be the Director of the White House Office of Management and Budget (OMB), then-Senator Peter Domenici raised the pace and problems associated with DOE's implementation of the loan guarantee program:

"But OMB has been dragging their feet and I do not know which cabinet members have been involved.  I surmise as of now the Secretary of Treasury is himself involved.  But I can tell you, Mr. Nussle, that this is one of the most important provisions of the Energy Act.  It should have already been done and it should have had $25 billion to $30 billion in the loan guarantee fund.  It is still not ready and the recommended amount by OMB is $9 billion.  That will not fly...It seems to me all the work that has been done, you have got about 48 hours, to sit down and get this fixed."

On August 2, 2007, Senator Domenici lifted his hold on Mr. Nussle's nomination and voted to confirm him after receiving "a commitment from the Office of Management and Budget to fulfill the vision of Congress with regard to the Department of Energy loan guarantee program."

As I noted in my earlier blog post on Solyndra, this default is not just about subsidies to one industry or another.  It is about what role governments should play in the marketplace; and whether we are able to set up governmental structures that align the incentives of parties properly, and that both establish and retain appropriate checks and balances to reduce the risk of corruption and taxpayer loss. 

Domenici has always felt passionate about nuclear power in this country.  Yet even if we grant him that his promotion of nuclear has been rooted only in his belief of what was good for the country, his actions are inexcusable.  Undermining the program structure for something he likes creates flaws that quickly spread more widely to all sorts of programs, bleeding the country in the process.  Will the appointment of competent fiscal management for OMB now rest upon the whims of key Congressional members pushing for OMB to reinterpret financial reviews in their favor?  What other tests for how many other positions will crop up in its wake?  Parochial interests can very quickly corrode the basic structures we need to govern effectively if they are allowed to run unchecked.

In the Solyndra bankruptcy, Congressman Upton has been given an opportunity to put the loan guarantee program overall under scrutiny that was not possible back in 2007.  There are records of decisions, a number of commitments, and a broader context of financial failure and recession against which to judge the initiative.  Because I know the Congressman cares about the country, he would do us all a service to ensure his review looks not only at Solyndra, but at the way the other deals were struck as well.  That includes the the $10.3 billion in nuclear deals that Congressman Markey has asked be reviewed, and of course the next largest single commitment as well -- $5.9 billion to Ford Motor Company. 

Under the terms of Title 17, many of the borrowers must pay advance funds to cover their "credit subsidy."  This has been roughly estimated as the probability of default times the net losses to the feds (after any recoveries in bankruptcy) should one occur.  The industry has consistently pushed for lower credit subsidies, arguing that not only did their deal have a low risk of default, but even if it did default, taxpayer recoveries in bankruptcy would be high.  The Solyndra bankruptcy provides a real-world case study to put test these claims.  Congressman Upton's review of Solyndra should look very carefully at how high those recovery rates really are.  Will they be 50% of the investment?  25%?  Close to zero?  This will provide quite important information by which we can judge credit subsidy estimates in any future deals.

Kayla Ente at Ente Consulting has recently released a summary of current subsidies to nuclear power in the UK (summary discussion - full report).  The analysis joints a number of other recent studies (US, France, and Japan) that tabulate government subsidies to the civilian nuclear industry around the world.  A general overview of common subsidy features to the nuclear fuel cycle globally is included as Section III.6 of World Nuclear Industry Status Report 2009.  Section III.6.4 in particular (page 81), written by economist Steve Thomas at the University of Greenwich, provides a historical review of nuclear subsidies within the UK.

Highly capital intensive industries are often global, with similar attributes throughout the world.   Primary metals refining, for example, tends to be co-located to inexpensive sources of energy even if that location is not rich in the ore being processed.  Often, as in the case of primarily aluminum production, the inexpensive power source is a publicly-owned, taxpayer subsidized, large scale hydroelectric dam.

For civilian nuclear power, other factors matter more.  These include large scale government-provided subsidies to financing, plant decommissioning, and uranium mining and enrichment, as well as shifting of key risks of the fuel cycle relating to accidents and long-term management of highly radioactive wastes. 

Ente's review of the UK government's role in the nuclear sector highlights problems similar to those I've found in the US.  Government-owned assets are not run well, resulting in substantial operating losses over time and large legacy costs.  Government-intervention in markets to regulate civilian enterprises, decommission facilities, or manage radioactive wastes have resulted in large losses to taxpayers even in cases where industry is charged some user fees.  For example, the Office for Nuclear Regulation claims that fees on industry cover 98% of its costs.  However, Ente notes that review of new reactor designs is being entirely financed by taxpayers, at a cost of 62 million British pounds/year.

Losses related to the Sellafield MOX reprocessing plant were estimated at 90 million pounds/year in June report.  This is largely the result of a very capital intensive process built to handle 560 mt of waste per year actually processing only 15 mt -- a capacity utilization rate of less than 3 percent.  Any capital-intensive private facility, be it in timber, paper, metals,  or energy, with such an abysmal utilization rate would have been shuttered long ago.  However, Sellafield announced it was closing only last month, a result of the Fukushima accident in Japan.  As Fiona Harvey notes, the Japanese were the only customers of the Sellafield plant, and that demand has been significantly reduced and may never recover now that the Japanese are rethinking their reliance on nuclear power.  

Harvey notes that the potential closure of the UK's Thorp reprocessing facility (receiving much larger subsidies according to Ente at 500 million pounds/year) due to similar market pressures is being denied.  Stay tuned.

(Thanks to Simon Carroll for the link to Ente's analysis)

Japan's Mainichi Daily News has a very interesting article looking at the price of Japanese nuclear power.  Like in the US and many other countries, government sources and reactor owners have long touted nuclear as the least expensive source of power in Japan.

However, Kenichi Oshima, a professor of environmental economics and policy at Ritsumeikan University, has done some calculations and has reached a completely difference conclusion. Oshima says that the cost for a kilowatt-hour of electrical power between fiscal 1970 and fiscal 2007 was 10.68 yen for nuclear, 3.98 yen for hydroelectric, and 9.9 yen for thermal generation, with nuclear-generated power coming out as the most expensive. These calculations were even presented at a meeting of the government's Atomic Energy Commission last September.

What did Oshima include that the others did not?  Large government subsidies, for one.  Oshima estimates that 70 percent of the subsidies given out by the national government have gone to nuclear.  He also used actual data on operating levels (closer to 70% than the 80% assumed in government costing), and on plant construction and operating costs (which were also higher in actuality than in the pro-forma examples often cited).  Costs of nuclear waste management were also left out of the government's estimates; and they overestimated the costs of power competitors such as hydro by assuming a shorter asset life than reality (40 rather than 60 years or more).

A counter-position is presented by Takeo Kikkawa, a professor of business history at Hitotsubashi University.  He points out that the lowest power costs in Europe are in France, which embraced nuclear energy; and the highest are in Italy, which abandoned nuclear energy.  I'd suggest some prudence in taking this ancedotal comparison too seriously.  Many things in Italy cost more; it has among the most expensive petrol in the world, for example.  But the efficiency and intervention of government plays a big role here; it is not simply which mix of power sources they have chosen.  Further, the costs of French nuclear power are hardly an open book either.  Kikkawa is worried that rising power prices on the Japanese mainland will make domestic industrial firms uncompetitive.  An important concern, to be sure; but not one that has any bearing on the real price of Japanese nuclear power.

(Thanks to Henry Sokolski at NPEC for forwarding the Mainichi article).

Ben Gemen over at The Hill describes as "hardball" the effort by House Republicans to bring to light documents and decision making behind a $535 million loan guarantee for a new facility to be built by Solyndra. Hardball is appropriate for an unprecedented level of taxpayer exposure for investment into individual, privately-owned assets. 

I hope the Congressional effort is successful in teasing out real documents that would allow real oversight of DOE's loan guarantee program.  DOE's Loan Programs Office has been notoriously resistant to transparency, despite operating at a scale that already runs into the tens of billions of dollars of commitments ($39.8 billion as of July 2011).  Proposals to extend this federal-financing approach through a "clean energy" bank of sorts have been floated with figures in the hundreds of billions. This is not a program to be glossed over.

Gemen reports that

In a letter to [Rep. Cliff] Stearns Tuesday, OMB Deputy General Counsel William Richardson, Jr. notes that OMB "made available" 1,400 pages of emails and attachments this week, which follows hundreds of other pages made available earlier.

It is impossible from the outside to tell how material this information is, and whether the critical items on risk management, potential conflicts of interest, and likelihood of market success have been provided. 

Nonetheless, I'm guessing that the data dump on Solyndra is about 1,400 pages more than what has been provided for DOE's commitment to the Vogtle nuclear power project in Georgia.  At roughly $8.3 billion (which is really a direct loan, as program rules require a loan of this scale come from the Federal Financing Bank), DOE's support for Vogtle is nearly 16 times as large as what taxpayers are risking for Solyndra.  Surely if a subpoena is warranted for gathering data on the Solyndra project, it is warranted for Vogtle as well.

I have been critical of the weak structure of DOE's foray into large scale loan guarantees for energy infrastructure since the program's inception.  It is not as though the Department has a robust and successful history of this type of capital deployment.  Here are the my formal comments to DOE on the proposed program structure back in 2007.  They were ignored then; DOE focused mostly on loosening program rules during that round of comments based on input from interested investment banks, firms that did or would represent many of the beneficiaries of the guarantee program itself.  Some of these banks (e.g., Merrill and Lehman) imploded soon after due to the very types of conflicts of interest and weak oversight that remain a concern in the DOE lending initiative. 

Though DOE remains under pressure to push money out the door, and in the process continues to ignore most of these structural issues today, the problems -- and the financial exposure -- remain.  It would be a service to all taxpayers if Cliff Stearns extended his interest in fiscal prudence and oversight beyond a single project and to the program overall.

Though there have been very few quantitative estimates of the subsidy value of the accident liability cap under the Price-Anderson Act, it is clear that this value has not remained static.  On the positive side, increases in required coverage over the past 20 years have provided some  additional insurance, and sharp increases in plant load factors increase total kWh of nuclear-generated electricity, helping to reduce the subsidy per kWh of power.

Working in the opposite direction are a number of other important factors that more than overwhelm these positive trends.  Higher damage awards in accident cases of all sorts reduce the share of total damages that individuals incur in an accident that can be met by the required coverage levels under Price-Anderson's.  Surging populations, the real estate they live and work in, and the value of that real estate, all make the magnitude of damage from any accident scenario substantially larger than thirty years ago.

The Associated Press has modeled just how much population has surged around the nation's nuclear plants, dramatically illustrating this point.  Using a computer-assisted population analysis, they conclude that the population surrounding plants is 4 1/2 times larger than in 1980.  Roughly 120 million people -- 40 percent of the US population -- live within 50 miles of a reactor.  This is the radius that the US government suggested people evacuate from in the recent Japanese accident.  The AP notes that the evacuation zone at US reactors has remained frozen at only 10 miles since 1978.  Many of the evacuation scenarios remain poorly updated and untested, particularly given the enormous changes in the affected populations since those plans were first developed. 

It is useful to remember that the emergency plans for the BP Horizon rig were also poorly constructed, boilerplate, and untested; and that this was a factor in the resultant problems.  The situation with nuclear plants seems even worse:

Last week, the AP reported that federal regulators, working in concert with industry, have repeatedly weakened or failed to enforce safety standards so old reactors can keep operating. The records review included tens of thousands of pages of government and industry studies, test results, inspection reports and regulatory policy statements.

A nice piece of work by AP, though certainly a sobering read.  It seems unlikely that the NRC plans to do much about this problem, though it is certainly a core part of its regulatory mission.

The debate on US energy policy continues to rage.  The reminder from Japan that nuclear reactors can, and sometimes do, have accidents is merely the worst of a number of examples in recent years about the risks and potentialities of various energy pathways.  Coal mine and oil rig accidents do kill people and harm the environment; large scale biomass production for energy takes land and water from other uses (including baseline carbon sequestration), and can compete with food consumers as well; there is more natural gas than we thought, but there might be some negative surprises when we fracture bedrock to get it.  In short:  there is no free lunch, complicated systems break down, and what seems the best way forward can change quickly.

Against this backdrop, politically-directed subsidies to most forms of energy continue to escalate.  To map the distortions, the U.S. Energy Information Administration is presently at work on an update to its earlier review of subsidies to the US energy sector.  Their updated analysis is supposedly due out later this spring.  Given that the EIA is the most respected government source of energy data, their subsidy data will again we widely read and cited. 

Unfortunately, few specifics on the new analysis have been made public at this point.  I've been told that Senator Lamar Alexander (R-TN) has again put in the request for the study and set the research terms.  However, attempts to confirm this, and to get a copy of his actual request, have been met by a wall of silence from Conrad Schatte, Alexander's energy point person.

Past EIA Subsidy Numbers Have Suffered from Limitations in Their Research Mandate

I have been critical of past EIA reports (see here and here).  Some of the Administration's simplifying assumptions and definitional rules have led them to exclude very large subsidy programs and to understate the magnitude and uncertainty of some of those they have included.  As illustrated in the table below, this is not a small problem.  Appropriate adjustments to their research scope and methods would have increased EIA's aggregate subsidy estimates by billions of dollars per year and greatly altered the relative subsidy shares to different fuels.  Both absolute subsidies and relative shares of total support to oil, coal, nuclear would rise substantially.  Absolute subsidies to wind would likely have been substantially higher as well, though aggregate support would have remained much lower than for conventional fuels.

One of the problems here is that at least some of these large omissions seem to have been driven by the allowable scope of research.  These terms were set by Senator Alexander in his letter to EIA. 

Because Alexander holds strong preferences for some forms of energy and animosity for others (hates wind, loves nukes, for example - see discussion after the table), there is some risk that the scoping of the research mandate can be shaped to support his desired outcomes rather than to neutrally assess the impact of subsidies.  Because of this potential risk, the research mandate for EIA's current subsidy work be made public now, rather than just published along with the final study.  Should there be gaps in their allowed work program that would again skew their results, at least there would be time to fill them without undue delays in the report's timeline.

Table ES-1.  Expected Bias Resulting from EIA Subsidy Definition and Valuation Conventions

' Going to War in Sailboats' and Lamar's other thoughts on our nation's energy future

Too often the federal government seeks to pick energy sector winners via targeted subsidies to favored fuels and industries.  This approach is not one likely to achieve robust or efficient solutions, but appears to be a central element in the way Senator Alexander approaches energy markets.

The Senator is not shy about his preferences.  Wind energy is "going to war in sailboats" according to a 2010 compilation of five addresses Alexander has given in recent years outlining his energy vision.  True, the cover graphic is amusing, what with the brave soldier using his dulled sword to fight the bombers and all (Lamar couldn't even give the guy a musket?)  But as a road map for our energy future, it leaves much to be desired.

The preface, written in early 2010, cites the numbers from EIA on the relative subsidies to nuclear versus wind based on the research criteria that Alexander himself crafted. The document notes:

At current rates of subsidy, taxpayers would shell out $170 billion to subsidize the 186,000 wind turbines necessary to equal the power of 100 reactors. While federal government loan guarantees should jump-start the first few reactors, the subsidy cost to taxpayers of building 100 reactors would be one-tenth as much.

A striking phrase contrast, to be sure -- if it weren't flat out wrong.  EIA's study ignored all subsidies to new reactors if they weren't yet costing the treasury money (none were).  Yet the 100 plants the Senator is pushing to build would clearly tap into that support in a big way.  Alexander may believe that only the "first few" reactors would need loan guarantees, but there has not been any evidence to support such a conclusion, though much evidence to refute it.  Lobbying expenditures spiked when loan guarantee programs were being formulated; and nuclear projects have been regularly cancelled when reactors were culled from the loan guarantee finalist list or term sheets came out that actually required appropriate premiums for default risks.   

Alexander's research mandate to EIA also excluded an array of other important supports such as favorable accelerated depreciation schedules and caps on nuclear liability. 

Specific clauses of concern in the 2007 research mandate include:

• Look only at "energy-specific" energy subsidies..."Broad policies or programs that are applicable throughout the economy need not be considered."  EIA interpreted this to exclude a wide range of energy-specific asset classes receiving special depreciation schedules if the Treasury didn't present those subsidies in a separate line item in its tax expenditure budget.  Billions in tax-exempt bonds widely used for energy-related purposes were ignored as well since the same instruments were used for non-energy purposes.  Subsidized bulk water transport, heavily used to move oil and coal, was also excluded.  As noted in my critique, there are few bright lines here, and many of the provisions EIA included are also used by non-energy sectors.  

• Look only at subsidies "that provide a financial benefit with an identifiable federal budget impact."  If all that one cared about here were budget outlays, this strategy might make sense.  But Alexander clearly has a much bigger energy mission:  to expand conservation and build 100 new nuclear plants.  EIA, as well, is concerned with the impact of federal policy on broad energy market trends.  Alexander notes that construction of his reactors should go ahead even if the government needs to make it happen "because conservation and nuclear power are the only real alternatives we have today to produce enough low-cost, reliable, clean electricity to clean the air, deal with climate change, and keep good jobs from going overseas."

There's no mention of using competitive energy markets, the price system, or pursuing the lowest carbon abatement strategies first.  Rather, we should proceed based on the Senator's view of the optimal path.  But political beliefs do not a vibrant market make, and others -- hardly anti-nuke partisans -- do not share his optimism for nuclear as the primary greenhouse gas abatement strategy.  Exelon CEO John Rowe, for example, despite operating the largest fleet of merchant reactors in the country, found in 2010 (see PDF page 8) that new nuclear power plants were the fifth most expensive option.  By last month -- though before the Japanese earthquake and tsunami -- new reactors had fallen further still in attractiveness, becomming their third most expensive option (see PDF page 11).

The limitation to "identifiable federal budget impact" excludes the large intermediation value of federal loan guarantees on high risk energy investments (valuable even if they don't default because they allow high risk enterprises to tap large amounts of low cost debt); increasingly large consumer subsidies triggered by the Renewable Fuel Standards; outlay equivalent values of tax breaks where the tax breaks themselves are not taxed; the provision of very expensive, high risk energy services (such as nuclear waste management) by taxpayers on a break-even basis at best, and with no built-in return on investment; and assuming energy-related trust funds that are running operating surpluses but actuarial deficits are not conveying subsidies.

• Stipulation of what types of subsidies to include.  The list of program types to review, provided by Alexander to EIA, included tax expenditures, direct expenditures, federal R&D, and federal electricity programs.  It did not include federal credit and insurance programs not linked to federal electricity programs; government-owned energy service organizations other than electricity generators; tax-exempt organizational structures; and regulatory mandates such as the Renewable Fuel Standards that force consumers to buy specific goods and services at above-market prices.  While EIA did touch on some of these categories, the report authors did not cover them systematically or in-depth last time around.  The challenge is that some forms of support are very important for one type of energy and irrelevant for another.  Thus, without systematic capture of all subsidy mechanisms, the relative subsidies by fuel will be highly inaccurate.   
• "The report should include an estimate of the size of each subsidy over a recent, representative year."  This phrase may have been one factor in the decision for EIA to look at energy-related trust funds in terms of their operating balance rather than their long-term actuarial adequacy. Subsidized insurance programs or caps also need to be viewed over a long time horizon.
• "If a valid methodology can be developed, a forecast of subsidy impacts would be very informative at well."  This sentence seemed to give an opening to evaluate how subsidies now on the books are affecting marginal investment decisions; however, there was little detail in this area in EIA's 2007 report.  Stan Kaplan, who did a great analysis of this issue while at CRS, is presently at EIA.  This may be a sign that the distortionary role of subsidies on the country's energy path by skewing marginal investment decisions will be systematically addressed this time around.  That would be a good thing.