In reading stories that the Obama Administration will provide loan guarantees to backstop the construction costs of new nuclear power plants, I’ve been struck with how detached they are from the political debates about climate change and cap ‘n trade proposals. Do the nuke loan guarantees really escape the dreaded “national energy tax” and other anti-climate science diversions from Luntz-brained demogogues?

According to the Times — US Supports New Nuclear Reactors in Georgia — the President wants to provide loan guarantees to spur nuclear power development for both policy and political reasons:

In his speech, Mr. Obama portrayed the decision as part of a broad strategy to increase employment and the generation of clean power. But he also made clear that the move was a bid to gain Republican support for a broader energy bill.

“Those who have long advocated for nuclear power — including many Republicans — have to recognize that we will not achieve a big boost in nuclear capacity unless we also create a system of incentives to make clean energy profitable,” Mr. Obama said.

Some Republicans, however, said that the announcement would have little effect on their votes.

Don Stewart, a spokesman for the Republican Senate leader, Mitch McConnell, said that Mr. McConnell had repeatedly praised Mr. Obama for favoring additional loan guarantees for nuclear power plants. But, he said, this would not translate into support for a cap on carbon dioxide emissions.

“It won’t cause Republicans to support the national energy tax,” Mr. Stewart said.

So, the Republican stated opposition to cap ‘n trade is because it’s a “national energy tax,” even though the substantially watered-down bill that squeeked out of the House and remains trapped in the dysfunctional Senate grants a substantial portion of the value of the carbon credits to the coal utilities and their customers precisely to prevent the implicit “tax” from raising electricity rates.

But what happens when large utility, Southern Company, builds two large reactors in Georgia to serve its multi-state electric power pool that covers several southern states? Well, first, Southern Company has refused to create open electricity markets in the South; they remain the supply monopolist for the region and do everything they can — with federal regulators’ help — to discourage competitors.

Everything that Southern builds to serve their customers goes into electricity rate base in the pooled states. That means once the plants are approved by the affected state regulators — and they don’t often say “no” — all the construction costs of those plants must be recovered through higher rates imposed on all electricity customers. You know, sorta like a “tax.”

And since the capital/construction costs of nuclear plants have grown dramatically over the years and remain highly uncertain (i.e., likely to grow even more while a plant is under construction), that means ratepayers could be on the hook for (1) the rate shock when the plants first go into rate base and (2) further rate increases if the regulators allow the utility to pass through the virtually inevitable cost increases while the plants are under construction. Sorta like a big tax now, and more tax increases later.

The federal loan guarantees are a way of shielding Southern Company investors, but not necessarily the ratepayers, from the expected cost escalation. But the Times confuses this further:

The loan guarantees were authorized by the Energy Policy Act of 2005. If the reactors are built and operate profitably, the borrowers will repay the banks and pay a fee to the federal government in exchange for the guarantee; if the borrowers default, the federal government will repay the banks. Critics have argued that the chance of default is high, and the loans have been delayed by protracted negotiations over what the fee should be.

Uh, Southern doesn’t allow markets or market prices, so the notion there’s some means to determine whether “the plants are built and operate profitably” doesn’t apply here. Unless Southern changes it’s long-held opposition to organized markets — like those common in the Northeast, Midwest, Mid-Atlantic, Mid-Southwest, California and Texas, but not the South — at no time will these plants ever be at risk of being “unprofitable” under market pricing.

If they were at risk, it’s unlikely the plants would ever be built without even greater federal subsidies, because the risks of market prices failing to cover the fixed/capital costs are too high for investors to accept, a conclusion the market has been delivering for 30 years and the Congressional Budget Office has acknowledged.

The South should be asking itself whether it sees a major commitment to nukes as a way to avoid the explicit or implicit taxes from a meaningful carbon reduction plan. The South’s [electricity demand] had been growing (before the Great Recession), so the region will have to add new power plants and/or better demand-reduction/efficiency measures just to keep up. Adding new nukes won’t do much to displace existing coal-fired generation for a long time. And if the plan is to displace coal-fired emission more quickly, then you’d need a lot more nukes — and a lot more subsidies — to do the job.

Since nukes aren’t the cheapest way to solve these problems (try demand-reduction/efficiency measures first), the South is heading down a path whose implicit “tax” on electricity customers is likely to be higher than anything they’d face under a direct carbon tax or an indirect tax via a cap and trade system. Good luck.

And do you think Republicans care? Because I doubt it matters to Southern Company.


Update: According to this article, Georgia is willing to allow the utility to put the construction/capital costs of the plants to be put into rate base during construction, which means ratepayers will be paying part of the construction costs for years before the plants are completed and begin to produce electricity. (h/t Aladdinslamp, cmt #54)

Disclosure: I once worked for a state regulatory agency with authority over nuclear plant construction and handling licensing matters. Later, and before retiring, I also consulted on electricity industry issues, including for clients in the nuclear industry, though not on nuclear issues.

More:
Helpful background from alank at Seminal
For skeptical views on nuclear plant costs, see David McClelland at SolveClimate, here, and Sue Sturgis, here; also this from Climate Progress.
NYT, Georgia Power still raising rates