The Senate’s near-unanimous 88-2 passage of the ADVANCE Act to speed the permitting of the new nuclear reactors is a bipartisan victory for energy policy. Yet, while the Federal government deploys massive resources to support new nuclear—including a generous tax credit and low-cost loans—and tries to streamline the surrounding administrative process through this new law, one of the officials most responsible for deploying new nuclear projects in the United States—Georgia Public Service Commissioner Tim Echols—argues forcefully that these actions are hardly enough.
The difficulty of predicting the final costs and construction timelines of a massive new capital project like a nuclear power plant puts the unlucky utility attempting to build one at risk of massive unanticipated delays and cost increases. These losses are especially vexing for a public utility commissioner like Echols: under the current system for how utilities undertake capital expenditure, cost increases might force public utility commissions to authorize increases in consumer utility rates to recover the rising capital costs of new investment. In the case of new nuclear plants, large cost overruns and years-long delays threaten the financial viability of both utilities and their nuclear projects, all while imposing substantially on ratepayers.
In response, Jigar Shah, the Director of the Department of Energy’s Loan Programs Office—the entity responsible for the low-cost capital that helped make Georgia’s new Vogtle reactors possible in the first place—argued that utilities are ultimately private companies and must take risks. In fact, one could argue that public utilities are privileged with a regulated monopoly in their service territory precisely so that they can undertake higher-risk capital investment projects with multi-decade horizons.
This debate between two powerful advocates of nuclear power is illustrative about how different technologies and regulatory contexts present distinct challenges for mitigating investment risk and uncertainty. As we have written before with respect to geothermal technology, there is an analytical distinction between risk and uncertainty. Risks are, by definition, something that are knowable and can, a priori, be assigned probabilities (even if through just educated guesses). That makes it possible to buy insurance against potential revenue shocks, or take other steps to hedge one’s liabilities.
Uncertainty is different: it can’t be assigned a reliable probability or weight in a statistical model; the future of something uncertain is not knowable. Nuclear technology falls victim. Despite being a well-known technology and piece of energy infrastructure, nuclear reactors are highly complex and, at least in their current designs, bespoke. Building one requires extensive construction expertise, permitting, complex safety procedures, and, most importantly, highly specialized supply chains and workforces. A hitch in any of these inputs, or the inputs to the inputs, will delay the project or induce suppliers to raise prices. If taken far enough, delays and supply-driven inflation could make the entire project unviable. And, really, it is hard for standard financial models to treat these deployment uncertainties as if they were probabilistic risks and returns.
Shah’s favored response is convincing commissions, businesses, state governments, and other vital actors to push ahead with a mixture of financial inducements specifically to build the same type of reactor as Vogtle—the AP1000—again and again. The more we build things, the more experience workers and firms gain, and the predictable and increasing demand for inputs strengthens downstream supply chains. In other words, the very act of building and solving problems teaches us how to build things better, and hence more cheaply in the longer-term. Scale means predictability and a learning of risk—by transforming or “certifying” uncertainty. Thanks to Vogtle, Shah argues, we now have a trained workforce that can deploy AP1000s. If you can “get to yes” using the substantial financial tools at the federal government’s disposal, there is a huge upside to trying to get these projects built.
However, after a certain point, the reduced weighted average cost of capital that concessional federal lending provides to nuclear power isn’t as relevant to commissions, which set electricity rates that serve as the future revenue stream validating present investment, so much as the possibility that costs could unexpectedly spike, leaving their ratepayers with zero recourse in the face of the utility’s long-term legal or financial commitments. That political risk, the risk that cost overruns blow up the standard rate-base model of utility finance, isn’t something available financing tools can guarantee on their own.
We need two types of policy interventions tailored to address the specific uncertainties that threaten unexpected cost increases. The first is, of course, addressing supply chain, workforce, and regulatory obstacles to nuclear development in the United States. These are what cause delays and cost overruns in the first place; we know generally what they are, and recent federal action suggests that policymakers are becoming more aware of their impacts, too. The second is to transfer the impact of uncertainties from actors like utility commissions, developers, and electricity consumers to an actor capable of bearing them—while concurrently mitigating or eliminating nonfinancial barriers to investment. The best actor for the job is, unsurprisingly, the federal government. CPE Fellow Mitch Green has argued for a contract-for-difference-style scheme for small modular reactors whereby the federal government agrees to cover the entire difference between the initial power purchase agreement between a utility and developer and price increases caused by an agreed-upon set of potential cost overruns.
It’s worth being clear as to why the federal government should pair such financial interventions with policies directly addressing specific investment barriers. A major problem of capital expenditure is coordinating actors such that investments are actually made and sequenced appropriately with respect to social needs, particularly when that investment process is riddled with sector, technology, demand, market, regulatory, political, and other uncertainties about the future. Better coordination allows for speedier installation and more robust operation of critical infrastructure, not just in the energy sector.
No matter whether the actor undertaking capital investment is private or public, the federal government’s role is to transform uncertainty into risk because, as the entity with the fewest budgetary constraints and the greatest loss-bearing capacity in the entire economy, it is best suited to shouldering the burdens of uncertainty, thereby allowing more budget-constrained private actors and state instrumentalities to coordinate investment and deploy their specific technological expertises as needed with respect to public mandates, with appropriate hedging for more predictable risks.
Utility commissions already grant their utilities a monopoly over the collection of ratepayer funds within set service territories; this arrangement, a stable source of revenues for regulated utilities, is something they can use to guarantee a certain rate of return to their shareholders. This regulated monopoly model is supposed to allow for greater, cheaper, and longer-duration financing of capital expenditure. However, this advantage comes with a vulnerability: specifically, cost overruns force the utility to engage in very expensive short-term debt refinancing that can only really be paid back via large, immediate, and unexpected increases to ratepayer bills. The same guarantees that give utilities their unique ability to finance investments over the long term make such cost overruns politically difficult—the commissions that set rates must protect ratepayers from overly burdensome bills; they look a lot worse if they don’t. In other words, public or quasi-public utility commissioners, like Tim Echols, have serious and legitimate hesitations about undertaking ambitious investments.
To say the least, implementing what is functionally a tax increase on ratepayers is hard—and any hesitation toward doing so is amplified by high levels of uncertainty about whether, and when, the cost of deploying already-expensive capital investments could spike. Unexpected overruns could put a utility commission in the position of either allowing a utility to go bankrupt or placing further burdens on customers. If it chooses to do the former, it guarantees that utilities will be wary of taking on ambitious types of investments in the first place. If it chooses the latter, ratepayers could oppose necessary investments in the name of controlling costs. Thus, we end up in a vicious cycle: elevated uncertainty prevents key state and private actors from undertaking the kind of regular, planned capital expenditures which would, over time, reduce that same uncertainty and therefore bring down costs along the way.
If we want nuclear power to aid grid decarbonization at scale, there is no substitute for finding politically viable arrangements that recognize and address these key barriers while ensuring that stakeholders are in a position to proceed with investment once those barriers are lifted. Otherwise, the standoff between advocates like Shah and Echols will continue, and other decarbonization options—perhaps worse ones—will fill the void.