The Problem with Increasing Energy Loan Guarantees

Jack Spencer / February 03, 2009

There has been a lot of talk in recent months on expanding the loan guarantee for energy projects broadly and nuclear projects specifically.

The problem with the LG program is not the cost, per se. It is clearly set up so that the recipient has to pay for the administration costs. And as for the likelihood of default, the risk for nuclear seems almost nonexistent as compared with other renewable sources. New nuclear plants will be cranking out a valuable commodity for the better part of a century.

The problem is that loan guarantees distort normal market forces thus unfairly enhancing the competitiveness of the recipient’s project and removing dollars for projects that might otherwise get funding.

One of the basic problems with the larger economic debate that is going on in the nation is the misunderstanding (or at least a choice to ignore) the fact money does not grow on trees. It comes from real places and exists in finite amounts. So by subsidizing a portion of the actual cost of a project through a loan guarantee, you are actually removing money from the system that could have gone to a project that stood on its own.

This signals to industry (be it nuclear, wind, autos or anything else) that it does not have to be competitive. Because Washington bureaucrats deem a product politically correct, it gets to slide by even though it is not quite good enough.

While this may be good for the near term interests of the LG recipient, it is not good for consumers, tax payers, or the long-term competitiveness of the larger industry in question.

And here is why: (more…)