By Mark Cooper and Rep. Nancy Young Wright

A recent announcement of an $8.3 billion loan that guarantees the construction of two new nuclear reactors in Georgia should send the red flags higher up the pole for fiscal conservatives than conservationists.

Federal loan guarantees put the government on the hook for huge, risky investments, and they induce the utilities to make investments that are proven market failures.

Georgia is the perfect illustration, and right here in Arizona we can learn a valuable lesson.

Consumers in Georgia are already paying for the two new reactors, years before the plants produce a kilowatt of electricity. Electric rates in that state will increase by an estimated total of $1.6 billion.

Problems arise when projects backed by federal loan guarantees go into default -- taxpayers are obligated to make the lender whole. The assets in default -- a half-built reactor, for example -- can be sold to try to cover the cost, but there is certain to be a shortfall, which comes directly out of the U.S. Treasury.

Public handouts to nuclear reactors are necessary for one simple reason: Private capital markets have refused to provide loans with manageable interest rates because the risks are too high. Moody’s Investor Service recently called new reactors a “bet the farm” investment. Utilities that are pursuing nuclear projects have seen their financial ratings lowered.

Wall Street’s refusal to fund these projects reflects a clear-eyed assessment of the economics of nuclear reactors. The nuclear construction boom of the 1970s and 1980s resulted in half of the orders being canceled, and those completed cost even twice as much as originally estimated.

Many utility executives want to minimize shareholder exposure and put the risk on taxpayers and consumers, but shifting the risk doesn’t eliminate it.

Government subsidies encourage utilities to build high capital-cost generating capacity and forego lower-cost alternatives, such as energy efficiency and renewable energy.

The 2005 Energy Policy Act already provided huge subsidies to nuclear power; so far, $18.5 billion in loan guarantees for new reactors have been authorized from the Act.

But those subsidies still aren’t enough to restart the industry. So, nuclear proponents want even more.

The federal government now proposes tripling the loan guarantee program to $54.5 billion – enough to cover six to eight reactors. Meanwhile, a pending Senate energy proposal would literally give the nuclear industry a blank check of loan guarantees to back new reactors.

Nuclear power projects clearly face financial difficulties. Instead of investing in a market failure, the government should look toward new and innovative ways to make energy a market success.

Those of us in Arizona should know.

The state House of Representatives wisely rejected a bill that would have reclassified nuclear as renewable energy, draining resources away from incentives for job creation through solar companies setting up shop in Arizona.

Arizona is the best state in the nation for solar energy and boasts the best potential for new companies and new, high-paying jobs, something the state economy desperately needs right now.

It’s simple: a smart, job-creating investment is in something that will succeed with the plentiful resources available, not in something that is a proven market failure.
Cooper is senior fellow at the Institute for Energy and the Environment at Vermont Law School. Wright is a state representative (D-District 26).
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