Group3, Week1: Topic: A Government's Opportunity Cost of Subsidizing the Financing for Nuclear Plant CAPEX.

Group3, Week2:  Topic:  A Government's Opportunity Cost of Subsidizing the Financing for Nuclear Plant CAPEX.  Peter Horne, Trey Johansen, Aaron Plitt. 

The Energy Policy Act of 2005 revitalized the nuclear power industry in the U.S.  Before the Energy Policy Act was enacted, the new construction of nuclear facilities was largely dormant.  The shadow and paranoia of the 1979 Three Mile Island Incident, which was the closest the U.S. ever came to a nuclear meltdown, still cast fear across the general public's perception of the value versus safety of nuclear power.  This fear also engendered new legislation that promulgated onerous restrictions and safety protocols for the construction of new facilities.  This political climate paralleled with the more general rising costs in the nuclear construction industry stifled new construction for more than 25 years.  The initial CAPEX required to build a new nuclear facility was simply and overwhelmingly cost-prohibitive.  The Energy Policy Act of 2005, however, changed the construction economics for nuclear power generators.  The Act provided government funding (particularly for developing hydrogen fusion reactor technology) and created a series of taxpayer-financed subsidies to reduce the capital commitments power companies had to make to build new plants.  The Energy Policy Act offered loan guarantees, extended liability insurance, tax-favored treatment for decommissioning old plant assets, and, significantly, tax credits based on each kilowatt-hour of nuclear electricity generated.  

Many power companies took advantage of the Energy Policy Act's incentives and began to build new reactors, mostly in the Southeastern U.S.  The net benefit, even net neutrality, of the Energy Policy Act, however, is still up for debate.  Several studies reported that taxpayers were at a loss under the Act's new programs, and the subsidies were "valued at as much as 60 to 90 percent of the levelized cost of power from a new nuclear reactor" --i.e. taxpayers are paying a large portion of the construction costs.  Source: http://www.ncpirgedfund.org/reports/ncp/high-cost-nuclear-power.  The legislation eliminated the CAPEX financing dilemma for power companies, but did it create an overall net loss for taxpayers?  Lest we forget, taxpayers are also employees and consumers.  These new nuclear facilities created jobs, generated (relatively) cheap electricity, and emitted no fossil fuel byproduct.  All taxpayers, workers, and consumers welcome these non-government budget benefits, but could the same results or similar benefits have been achieved without the purported budget hit?  Could these taxpayer dollars have been "better" spent on other energy programs?  

At present, the U.S. Senate is again considering legislation that could add more government funding, incentives, and subsidies.  (The bill is still in the Senate Committee stage, so it is uncertain what the final provisions will be).  The Advanced Nuclear Technology Act of 2017 is poised to “foster civilian research and development of advanced nuclear energy technologies and enhance the licensing and commercial deployment of such technologies."  Source: HR 590 and https://www.forbes.com/sites/jamesconca/2017/02/05/can-nuclear-power-rise-from-the-chaos-in-washington/#1ef0f6ad499f.  What remains to be seen, however, is whether the opportunity cost of allocating funds under the Advanced Nuclear Technology Act will be analyzed.  Facilities for wind, solar, biomass, and other renewable energy sources, while by no means are insignificant, have much less initial CAPEX outlay requirements than nuclear power plants.  These energy alternatives also create jobs, generate (relatively) cheap electricity, and reduce carbon emissions.  Would the NPV of x dollars allocated to a new wind farm be greater than the NPV of the same x dollars allocated to a new nuclear reactor?  Politics of course clouds this study, and the exercise of doing so and the resulting decision(s) are not easy.  

In terms of energy finance, legislation seems to be the only answer to reduce initial nuclear CAPEX commitments.  The price of electricity (unlike oil) will likely never rise to a level where a power company could expect to recover its nuclear plant construction outlays. The solution, therefore, at least from an opportunity cost perspective, is to propose legislation that aims to reduce the true costs of construction instead of shifting those costs.  In this regard (and at least in its current pre-Senate Committee state), the Advanced Nuclear Technology Act of 2017 appears to be much better suited to accomplish this goal as compared to the Energy Policy Act of 2005.  The 2017 Act differs because its target is to allocate the funding of research to develop new technology (smaller modular reactors) and new ways to recycle nuclear fuel (uranium). As a result, assuming the American public is willing to dedicate its tax dollars to nuclear power over wind, solar, and other alternatives (which is an important assumption), the 2017 Act offers a much more direct and economically-measured approach to the U.S. Government's opportunity cost problem of financing nuclear CAPEX. 

  

Other Sources Consulted:  

https://nuclearstreet.com/nuclear_power_industry_news/b/nuclear_power_news/archive/2017/01/26/in-bipartisan-moment_2c00_-house-passes-smr-advancement-bill-012601#.WN7Uym_yvcs 

http://www.world-nuclear-news.org/V-Innovative-ways-of-funding-nuclear-power-projects-18021601.html 

http://www.world-nuclear.org/information-library/economic-aspects/economics-of-nuclear-power.aspx