Friends of the Earth Bailout Ad: A Response

Friends of the Earth, a grassroots environmental activist organization, has initiated a new national ad campaign focused on nuclear energy. Against the backdrop of the nation’s banking crisis, the campaign alleges that the Energy Department’s federal loan guarantee program will necessitate a “preemptive government bailout” for the nuclear energy industry.

The campaign kicked off with a YouTube ad claiming that federal loan guarantees for new nuclear power plants will risk billions of taxpayer dollars on projects that have a 50 percent default rate. The ad likens this potential “bailout” to the proposed $700 billion rescue package being considered by Congress to alleviate the financial stress caused by the subprime mortgage crisis.

What our Friends don’t mention is that the loan guarantee program is not just for nuclear power – in fact, the program allows DOE to grant federal loan guarantees to all projects that avoid, reduce or sequester greenhouse gas emissions by employing a new or significantly improved technology. New nuclear power plants qualify for the loan guarantee program, as do renewable generation facilities, clean coal plants, and other low-carbon energy-related projects.

The program is intended to encourage the construction of low-carbon energy projects that will help the nation achieve its energy and environmental goals. Consumers of electricity benefit because the loan guarantee allows lower-cost financing, so the electricity sources deliver lower-cost electricity.

The beauty of the program is that it is designed to be self-financing; that is, there is no cost to the taxpayer. Project sponsors are responsible for underwriting the cost to the federal government of providing the credit support. In effect, Title XVII works much like an insurance product. Like insurance, the cost associated with the risk of the loan guarantee will be paid in advance by the recipient of the guarantee. That cost will be based, among other things, on each project’s individual risk of default.

Nuclear power plants are multibillion-dollar projects that will require an equity investment of about 20 percent – roughly $1 billion or so – in order to qualify for a loan guarantee. This large amount of capital investment ensures that companies will proceed cautiously and prudently make sure that projects are completed successfully. If the 50 percent default rate quoted by Friends (which is based largely on an outdated Congressional Budget Office forecast of a high failure rate on loans for nuclear projects) were realistic, companies would not proceed with nuclear projects. And since the default rate is baked into the fee a company will pay to receive a loan guarantee, taxpayers will not be required to “bailout” any projects, regardless of the risk of default.

In fact, the program actually has the potential to generate revenues to the federal Treasury. In addition to the cost paid by companies to cover default risk (which the federal government keeps if there is no default), project sponsors qualifying for a federal loan guarantee must also pay a fee to the Department of Energy for costs associated with the program. That fee will likely be in the hundreds of millions of dollars.

The federal loan guarantee program is an important tool for bringing new, low-carbon energy technologies to market. If well-managed, the program will cost taxpayers nothing, but will create significant value by increasing the country’s energy supply and reducing greenhouse gas emissions.

The inconsistency of the activists’ argument is only one amazing aspect of this campaign; its timing is the other. Friends of the Earth has launched this effort at the very moment that legislation extending more than $6 billion in tax credits for their preferred energy technologies – i.e., renewables – is pending on the floor of Congress; they actually were rolled into the massive economic bailout legislation approved yesterday by the U.S. Senate. For months now, advocates of these direct taxpayer subsidies have warned that renewable energy projects will grind to a halt without the tax credit extensions. One can’t help but note that Friends of the Earth hasn’t a word to say about such direct subsidies, even as it decries a “preemptive government bailout” for loan guarantees. Now that’s chutzpah.

Guest post by Elizabeth Majeau