Answering Arguments Against Obama's Nuclear Energy Plan

Yesterday, the Obama administration announced its plans to guarantee an $8.3 billion loan to build the first nuclear reactors in three decades. The new initiative is not without its opponents. I think the move is a smart one and defended the effort on a few tv/radio shows since the announcement. Opponents have three common arguments that I think are worth examining, because I don't think they hold up.

50% Probability Of Default

Possibly the strongest-sounding argument against the government guaranteeing nuclear reactor loans comes from a Congressional Budget Office report (.pdf) from back in 2003. It found a 50% probability of default from such loans. Nuclear energy opponents love this finding. After all, a bipartisan Congressional budget authority says it's a bad bet! But it helps to actually read the report and not consider the statistic in a vacuum.

If you do, then you find out there are two reasons why that probability is so high. The first is the regulatory barriers that exist for building nuclear reactors. But in this case, that obstacle should be much easier to overcome: if the government is really serious about more reactors, it can work with regulators and the utility companies to succeed. And by the way, if the regulators never sign off, there won't be any guarantees anyway, so taxpayers won't lose anything.

Second, there's a very high initial cost in building these reactors, and current energy prices show the break-even a long ways off. But as fossil fuels become scarcer, energy will only get more expensive. And considering that the U.S. will eventually adopt a carbon pricing scheme, the economics change significantly, since nuclear emits no carbon. When nuclear reactor production begins again, costs will also decline over time, just like with all technology.

Finally, even if these loans do "default," it won't be as bad as it sounds. According to that same CBO report, the subsidy (loss) rate on the loans would probably be about 30%, since the reactors will get built and eventually provide some revenue. While less-than-ideal, if a $2.5 billion investment jumpstarts the nuclear energy industry again in the U.S., then I'd argue this money was well-spent.

Wall Street Hates It

Another argument is that Wall Street won't fund it, so why should the U.S. government? It's usually those very far to the left ideologically who rally against nuclear energy, so it's always amusing to hear them use Wall Street bankers -- who they generally decry as greedy criminals -- as their foundation for an argument. But the reality is that this is precisely the sort of investment that Wall Street hates and the government should be involved in.

One of the central reasons why bankers hate nuclear investment is because of the regulatory struggles I mentioned earlier. They create great uncertainty. But again, if the government assists with this, then this barrier becomes much more manageable.

But the bigger problem with nuclear for bankers is the style of investment it requires. It's very capital intensive at the front-end, and it takes many years to break even. As a result, it doesn't generally satisfy Wall Street's get-rich-quick philosophy. Private equity firms, for example, don't hope to be involved in a firm 30 years down the road. They want to get in, make a profit, and get out, as quickly as possible. The government, on the other hand, has the time and patience for a long-term investment to pay off -- especially if it significantly benefits the energy prospects of the nation.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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