Financial Center
Investment Stimulus in 2005 Energy Policy Act
The Energy Policy Act of 2005 provided investment stimulus for new nuclear plant construction, and a form of federal insurance to protect project developers against delays in commercial operation of a new nuclear plant due to factors beyond the project developer’s control. These factors include regulatory delays and litigation.The energy legislation provides two forms of investment stimulus for new nuclear plants:
- federal loan guarantees for up to 80 percent of total project cost
- a production tax credit of $18 per megawatt-hour for 6,000 megawatts of new nuclear capacity.
The loan guarantees and the production tax credits generally have the same effect: They reduce the cost of electricity from the first plants, ensuring that they are competitive with other sources of electricity, and they provide project developers with attractive returns.
The loan guarantees are particularly attractive for unregulated generating companies, which will use them to finance nuclear projects using higher leverage than is typical of regulated utilities. A highly leveraged project, which is only possible if the debt financing is secured by a federal guarantee, will produce lower-cost electricity than the same project without the loan guarantee.
Investment Protection
Although the new licensing process is designed to preclude delay, no one can guarantee zero risk of licensing delays during construction or, more damaging, delays in full-power operation of a completed plant. Such delays are highly unlikely but, if they occur, they have extremely high consequences.To manage this regulatory risk, the Energy Policy Act includes a form of insurance under which the federal government will cover debt service for the first few plants if commercial operation is delayed. This coverage is capped at $500 million for the first two reactors and $250 million for the next four reactors.
The delays covered include failure of the U.S. Nuclear Regulatory Commission to meet schedules and litigation.
Viewpoints on Nuclear Energy
Key Issue: New Nuclear Plants
The U.S. Department of Energy projects that U.S. electricity demand will rise 25 percent by 2030. That means our nation will need hundreds of new power plants to provide electricity for our homes and continued economic growth.