Loan Guarantees

Under a loan guarantee program, the cost to the guarantor is only the cost of administration of the program unless a default occurs. The U.S. Department of Energy proposal or the guarantee program planned for the U.S. would pass along all of these administrative costs to the borrower whose loans are guaranteed. If the guarantees work as expected, there is no cost to the guaranteeing government. However, a non-government guarantor would need to put on its financial books a contingent liability in the amount of the guarantee and disclose and discuss the risks of default which might give rise to having to pay out on the guarantee. How the government would determine its liability in advance is not clear.

Previous financing of U.S. nuclear power plants all relied upon leveraged leasing tax advantages (sale-leaseback) as well as the credit worthiness of the fully integrated electric utility which ran the plant. Today, except for those few remaining fully integrated utilities, most applicants for construction and operating licenses in the U.S. do not have the credit to warrant the debt of the size expected to be incurred, and even with respect to those fully integrated utilities, it is doubtful they could afford a new nuclear power plant. The owner would not be able to obtain a reasonable credit rating. The relevance of a low credit rating is that it translates into high interest rates (higher cost of debt service) and requires lowers profit or a larger percentage of equity.

Use of the government guarantee would reduce the interest rate to a small margin above a long-term U.S. Treasury Bill rate (or a small margin over LIBOR8 plus the cost of an interest rate swap to "fix" the interest rate) which may not be available in today's market. One might rely upon funding from the vendors (AREVA, Toshiba, GE-Hitachi, Westinghouse, or Mitsubishi Heavy Industries) for the components and services they provide, but this would not cover construction costs and probably not the costs of farmed out components. Therefore, that would leave a large portion to be funded by an entity such as the government.

It is likely that guarantees would only be needed for the first few plants of each type. Once experience is gained and there is some certainty as to their cost and construction schedule, it is likely that private investment would be easier to obtain, obviating the need for guarantees. While not inconsequential, the financing problem is only a short term hindrance, one that can be solved by the use of loan guarantees as part of a commitment to the reduction of greenhouse gas emissions through the use of nuclear power as one of the means.

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