Constellation Pulls Out of the Loan Guarantee Process

Constellation Energy surprised many by pulling out of the loan guarantee process for the Calvert Cliffs 3 project in Maryland.

Senior administration officials said Constellation's decision was "a surprise," but a Constellation Energy spokesman Larry McDonnell said that the administration's loan guarantee terms were "unworkable" and that Constellation had told the Energy Department "we can't move forward."

Specifically, Senior Vice-Chairman and COO Michael Wallace said in a letter to DOE’s COO Larry Poneman:

As you know, however, as our application went through preliminary credit review during the Summer, we were surprised to be presented with a shockingly high estimate of the credit subsidy cost that we and our partners would have to pay the U.S. Treasury in order to obtain the loan guarantee: 11.6%, or about $880 million. Such a sum would clearly destroy the project's economics (or the economics of any nuclear project for that matter), and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be.

That’s the crux of it. NEI President and CEO Marvin Fertel expands on this point:

“Clearly, the loan guarantee methodology used by the Executive Branch inflates the credit subsidy cost well beyond the level required to compensate the federal government for the risk taken in providing the loan guarantee. The Calvert Cliffs 3 project was quoted an unrealistically high credit subsidy cost, which ignored the project’s strong credit metrics and the robust lender protections built into the transaction.

“The formula used for all clean energy projects eligible for loan guarantees limits the estimate of recovery rate to 55 percent, significantly lower than the recovery estimate in the credit assessment of the Calvert Cliffs project by an independent rating agency. The 55-percent recovery rate is an arbitrary number, and bears no relationship to recovery rates observed over several decades for regulated electric utility debt or project finance debt.

Fertel goes into considerably more detail here. This is testimony delivered to the Senate Energy and Natural Resources Committee in late September, so consider that group up to speed on what just happened. It’ll be interesting to see what Chairman and Ranking Member Jeff Bingaman (D-N.M.) and Lisa Murkowski (R-Alaska) have to say.

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The fallout? What you’d expect:

Here’s Maryland Governor Martin O’Malley:

A spokesman for Gov. Martin O'Malley (D) said in an e-mail to The Gazette on Monday that O'Malley "is disappointed but remains committed to working with EDF to ultimately save the project, and the thousands of jobs that come with it. The Governor personally lobbied the White House and the President on this project, and remains committed to it."

And Rep. Steny Hoyer (D-Maryland):

House Majority Leader Steny H. Hoyer (D-Dist. 5) of Mechanicsville said he had spent the last year "working very hard to secure a loan guarantee to enable the construction for a new reactor at Calvert Cliffs that would bring jobs to our area and protect the taxpayer's investment in the next generation of nuclear energy. We were able to ensure that the companies had a full and thorough hearing from the [Obama] Administration."

And:

Hoyer said he will continue to seek resources to get the reactor built. The nuclear industry relies on federal loan guarantees to build reactors because private financing is hard to come by.

Calvert Cliffs. Two reactors for now, not three.