Hooked on Subsidies


Jerry Taylor and Peter Van Doren

Why conservatives should join the left's campaign against nuclear power.

When it comes to politics, we don't often find ourselves in agreement with Bonnie Raitt or Graham Nash. But now that they are campaigning against new nuclear plants, they're our friends. Raitt, Nash, the Indigo Girls and other vocal rockers are attacking a provision in pending Senate legislation that would award what they call "massively expensive loan guarantees--potentially a virtual blank check from taxpayers" for nuclear power plant construction.

Even without the new legislation there's plenty of federal money being doled out. In September NRG Energy, an energy wholesaler in Princeton, N.J., applied to the Nuclear Regulatory Commission for a license to build and operate a two-reactor nuclear plant near Bay City, Tex. The NRC is expecting 19 similar applications in the next 18 months. If approved, they will be eligible for loan guarantees under the Energy Policy Act of 2005.

Pro-nuclear groups herald the coming flood of applications as proof that nuclear energy makes economic sense. Nonsense. The only reason investors are interested: government handouts. Absent those subsidies, investor interest would be zero.

A cold-blooded examination of the industry's numbers bears this out. Tufts economist Gilbert Metcalf concludes that the total cost of juice from a new nuclear plant today is 4.31 cents per kilowatt-hour. That's far more than electricity from a conventional coal-fired plant (3.53 cents) or "clean coal" plant (3.55 cents). When he takes away everyone's tax subsidies, however, Metcalf finds that nuclear power is even less competitive (5.94 cents per kwh versus 3.79 cents and 4.37 cents, respectively).

Nuclear energy investments are riskier than investments in coal- or gas-fired electricity. High upfront costs and long construction times mean investors have to wait years to get their money back. The problem here is not just the cost per watt, several times that of a gas plant, but the fact that nuclear plants are big. Result: The upfront capital investment can be 10 to 15 times as great as for a small gas-fired turbine.

A nuclear plant's costs are not only higher but more uncertain. Investors have to worry that completion will take place late--or never (witness the abandonment of the reactor at Shoreham, N.Y.). Accordingly, nuclear power would have to be substantially cheaper than coal- or gas-fired power to get orders in a free market.

So why does NRG want to build a nuclear plant in Texas? Two factors are in play. First, the license costs a relatively small amount compared with the cost of construction. Second, the federal government would guarantee up to 100% of the $6.5 billion to $8.5 billion NRG might borrow from capital markets (as long as it doesn't exceed 80% of the project cost). Without such guarantees no investor would lend significant amounts of capital to NRG.

How do France (and India, China and Russia) build cost-effective nuclear power plants? They don't. Governmental officials in those countries, not private investors, decide what is built. Nuclear power appeals to state planners, not market actors.

The only nuclear plant built in a liberalized-energy economy in the last decade was one ordered in Finland in 2004. The Finnish plant was built on 60-year purchase contracts signed by electricity buyers, by a firm that scarcely seems to be making good money on the deal.

What, then, should government do to overcome nuclear's economic problems? Absolutely nothing. There is no more to the right-wing case for nuclear subsidies than there is to the left-wing case for solar subsidies.

If the permitting process is broken, then by all means fix it. If plant safety regulations are excessive, then by all means reform them. If greenhouse gas emissions prove to be a problem, then impose a reasonable carbon tax across the board. But once those tasks are complete, the role for government ends.

We like nuclear power as much as anyone else on the right. But friends don't let friends get hooked on subsidies. We're glad to see Raitt and her rocker compadres agree.

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