Key Issues
Financing New Nuclear Power Plants
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Industry Must Invest Up to $1 Trillion in Electric Power Infrastructure
Consensus estimates suggest that the electric power industry must invest between $750 billion and $1 trillion in new generating capacity, new transmission and distribution infrastructure, and environmental controls by 2020. This new capital spending represents a challenge to the electric power industry.
The Energy Policy Act of 2005 recognized this financing challenge and provided limited investment stimulus for construction of new baseload power plants. In the case of nuclear energy, that stimulus includes:
Of the three major incentives for new nuclear power plant development provided by the Energy Policy Act, the loan guarantee program is the most effective in addressing the major challenge facing new nuclear power plant construction—construction financing.
Properly Priced Loan Guarantees Provide Efficient Financing Structure
A properly priced loan guarantee program would enable companies to employ project financing on a non-recourse basis. The ability to use non-recourse project finance structures offsets one of the most significant financing challenges facing new nuclear power plant construction—the cost of these projects relative to the size, market value and financing capability of the companies that will build them.
A new nuclear plant is a multibillion-dollar project (including interest during construction). Although such projects are not unique in the energy business, they are typically built by consortia of major oil companies with market values many times larger than the largest electric companies.
Project financing, supported by loan guarantees, also allows a more efficient, leveraged capital structure, which reduces the weighted average cost of capital and thus provides a substantial consumer benefit in the form of lower electricity prices. Loan guarantees also mitigate the impact on the balance sheet of these large capital projects that would otherwise place stress on credit quality and bond ratings.
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Industry Must Invest Up to $1 Trillion in Electric Power Infrastructure
Consensus estimates suggest that the electric power industry must invest between $750 billion and $1 trillion in new generating capacity, new transmission and distribution infrastructure, and environmental controls by 2020. This new capital spending represents a challenge to the electric power industry.
The Energy Policy Act of 2005 recognized this financing challenge and provided limited investment stimulus for construction of new baseload power plants. In the case of nuclear energy, that stimulus includes:
- A production tax credit of $18 per megawatt-hour for 6,000 megawatts of new nuclear capacity for the first eight years of operation.
- A form of insurance (called standby support) under which the federal government will cover debt service for the first few plants if commercial operation is delayed. This coverage is capped at $500 million for the first two reactors, and $250 million for the next four reactors. The delays covered include NRC failure to meet schedules and litigation.
- Federal loan guarantees for clean-energy technologies for up to 80 percent of total project cost.
Of the three major incentives for new nuclear power plant development provided by the Energy Policy Act, the loan guarantee program is the most effective in addressing the major challenge facing new nuclear power plant construction—construction financing.
Properly Priced Loan Guarantees Provide Efficient Financing Structure
A properly priced loan guarantee program would enable companies to employ project financing on a non-recourse basis. The ability to use non-recourse project finance structures offsets one of the most significant financing challenges facing new nuclear power plant construction—the cost of these projects relative to the size, market value and financing capability of the companies that will build them.
A new nuclear plant is a multibillion-dollar project (including interest during construction). Although such projects are not unique in the energy business, they are typically built by consortia of major oil companies with market values many times larger than the largest electric companies.
Project financing, supported by loan guarantees, also allows a more efficient, leveraged capital structure, which reduces the weighted average cost of capital and thus provides a substantial consumer benefit in the form of lower electricity prices. Loan guarantees also mitigate the impact on the balance sheet of these large capital projects that would otherwise place stress on credit quality and bond ratings.
Next Page: "Loan Guarantees Are Important"
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