Nuclear Energy: Does It Make Economic Sense?

On February 16th, President Obama announced that the federal government would guarantee a loan of $8.3 billion to build two nuclear power plants in Georgia. This is the first time new nuclear power plants would be built in the United States since the 1970's. (http://www.nytimes.com/2010/02/17/business/energy-environment/17nukes.html) According to the New York Times article the government takes on all the risk. If the plants operate profitably, they will pay back their creditors, most likely banks, and pay the federal government a fee for guaranteeing the loans. If the plants default, the federal government will repay the creditors with taxpayer money.

President Obama cites nuclear energy as part of his comprehensive energy strategy because it will create jobs, does not require imported fuel, and is "clean" source of energy because it produces no carbon emissions. Opponents to the idea argue that the nuclear waste creates greater environmental hazard. Regardless of the environmental impacts, is the fact that federal loan guarantees are necessary for construction a sign that nuclear energy does not make economic sense?

The answer is no according to a paper produced by Citibank titled "New Nuclear - The Economics Say No." (http://www.ipsnews.net/news.asp?idnews=50308) The report cites five major risks that all parties involved must confront. According to the IPS report, "these risks are planning, construction, power price, operational, and decommissioning." Power price seemed to be of primary concern in the report. The paper cites a case in Britain where the price needed to sustain the plant reached that point only 20 out of 115 months. According to the paper, "It was a sudden drop in power prices that drove British Energy to the brink of bankruptcy in 2003."

There are several other contributing factors, such as construction, decommissioning, and liability in the case of an accident. But for the sake of time, I refer interested parties to the link provided above. However, the Citibank paper concludes that without government assistance, or taxpayers money, there is "little if any prospect that new nuclear stations will be built … by the private sector unless developers can lay off substantial elements of the three major risks. Financing guarantees, minimum power prices, and/or government-backed power off-take agreements may all be needed if stations are to be built."

So if nuclear power is not sustainable economically, is it a viable technology? A pure capitalist would have to say no. However, the government has more to think about than pure profit. The energy market currently has the potential for extreme volatility. Our demand is in right in line with production, meaning if the supply is disrupted we have no alternative but huge price spikes or rationing. Domestic natural disasters, such as Hurricane Katrina, have already shown how susceptible energy markets are. Potential geopolitical strife around key energy resources and trade routes could also violently disrupt energy markets, tension with Tehran being the most glaring example.

Is assisting private developers a smart way the United States government to guarantee itself energy security? Even if the government loses money, is that capacity valuable as a source of energy "insurance?"

The United States government needs to be very careful how it spends taxpayer money. Recently polls suggest trust in the government is at an all time low, with only 21% believing the government is serving the interests of the people. These numbers probably rival the approval colonials would give the English government in the 18th century. Therefore, investing in nuclear energy in this manner has its risks regardless of what happens. The current model seems to put the government in a lose lose situation. If the government has to pay for defaulted plants, those investors do not lose, the taxpayer does. If the plants succeed and profit, then the government does not really get any direct benefits, the investors do. The only benefit to the government would be if those plants guaranteed service to key assets like hospitals and military installations in the case of a full fledged energy catastrophe. I am not sure that is the case at this point.

Our best option would be to start simple by focusing on energy efficiency and reduction. The smaller the better. I recently made a rack outside to air dry my clothes this summer. These small gestures can make a huge difference. Unfortunately, that won't happen en mass without a spike in energy prices.

Regardless, I found this article to be quite insightful and am happy to share it in my first post.