Constellation Energy Decision Underscores Need to Revamp Loan Guarantee Program for Clean Energy Projects
Washington, D.C.—The following is a statement by Marvin S. Fertel, president and chief executive officer at the Nuclear Energy Institute, on the announcement by Constellation Energy that it cannot move forward with the loan guarantee process regarding UniStar Nuclear Energy's Calvert Cliffs 3 loan guarantee application because the proposed terms and conditions are unworkable.“Constellation Energy’s action is further recognition that the federal government’s loan guarantee program for clean energy sources is in serious need of reform. Absent changes advocated broadly by the low-carbon energy sector, the loan guarantee program approved by Congress in 2005 faces significant challenges that will limit its effectiveness. For the nuclear energy industry, one of the most significant challenges involves accurately determining the credit cost of the loan guarantees.
“Borrowers receiving loan guarantees for nuclear energy projects are expected to pay the cost associated with those guarantees, but the formula used by the Energy Department and Office of Management and Budget (OMB) to determine this cost is seriously flawed. This fault will continue to hamper both nuclear energy and renewable energy project development—exactly the opposite intention of Congress when it passed the 2005 law.
“In today’s economy, there are challenges associated with financing large-scale energy projects. Nonetheless, these facilities are essential if our nation is to meet our goals for clean energy and future economic development, as evidenced by the bipartisan support of Congress and national labor and business organizations for Calvert Cliffs 3 and other nuclear power plant projects.
“Clearly, the loan guarantee methodology used by the Executive Branch inflates the credit subsidy cost well beyond the level required to compensate the federal government for the risk taken in providing the loan guarantee. The Calvert Cliffs 3 project was quoted an unrealistically high credit subsidy cost, which ignored the project’s strong credit metrics and the robust lender protections built into the transaction.
“The formula used for all clean energy projects eligible for loan guarantees limits the estimate of recovery rate to 55 percent, significantly lower than the recovery estimate in the credit assessment of the Calvert Cliffs project by an independent rating agency. The 55-percent recovery rate is an arbitrary number, and bears no relationship to recovery rates observed over several decades for regulated electric utility debt or project finance debt.
“Consistent with the Federal Credit Reform Act, NEI believes that the most accurate and equitable process for calculating credit subsidy costs is a detailed, project-specific assessment. The current approach—which relies on standard assumptions applied to all technologies, with limited project-specific flexibility—cannot produce accurate results, and will not support the development of clean energy technologies in such a manner that the risk to the federal government is fully offset by fees paid by the borrower.
“It is vitally important that credit costs be calculated accurately. If current practices continue, DOE and OMB will continue to produce inflated credit costs. Project sponsors, in turn, will abandon otherwise creditworthy energy projects, and the nation will forego the clean energy and thousands of well-paying jobs represented by these facilities. As I said in testimony on this issue before the Senate Energy and Natural Resources Committee in September, there must be drastic changes in the method for calculating credit fees for nuclear and renewable energy projects. Only with these changes can the loan guarantee program operate efficiently and effectively for all clean energy technologies that are eligible.”
To read testimony from Sept. 23 by Marvin S. Fertel before the Senate Energy and Natural Resources Committee on the federal government’s loan guarantee program, visit http://www.nei.org/publicpolicy/congressionaltestimony/september-23-2010.
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