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September 24, 2009 

Senate Poised to Give Blank Check to Energy Projects

This fall the Senate is expected take up a climate and energy bill that would establish a new agency within the Department of Energy to administer federal loan guarantees for private "clean" energy projects. The bill, the American Clean Energy Leadership Act of 2009 (S.1462), was passed by the Senate Energy and Natural Resources Committee in June.

The proposed new agency, the Clean Energy Deployment Administration (CEDA), would offer a range of financing options, including direct loans, letters of credit, loan guarantees and insurance for energy production, transmission and storage projects that emphasize so-called "breakthrough" technologies to reduce global warming emissions and energy consumption. Renewable energy, advanced nuclear, and coal carbon capture and storage projects all would qualify for assistance.

On the face of it, a federal "clean energy bank" sounds like a good idea. In fact, the House included a provision for CEDA in the Waxman-Markey climate and energy bill it passed in June. But experts at the Union of Concerned Scientists (UCS) took a close look at the Senate's proposal and found a number of serious pitfalls that the House's version avoided. For example, the Senate's proposal would permit potentially unlimited loan guarantees to a wide range of costly energy technologies without the benefit of congressional oversight through the appropriations process. As drafted, it also would not restrict the amount of financial support that could go to the most costly, most risky, and least sustainable energy technologies. Finally, it would do nothing to prioritize the most cost-effective, environmentally sound technologies to address global warming. These deficiencies would put U.S. taxpayers at risk for loan defaults.

The most alarming problem? The fact that the Senate bill's CEDA provision could offer virtually unlimited loan guarantees without restrictions on the amount of assistance to any one technology. The provision does this by exempting CEDA from the Federal Credit Reporting Act (FCRA), which would allow the new agency to issue loan guarantees without going through the normal appropriations process. This loophole would eliminate critical government oversight and could increase taxpayer liability for billions of dollars in risky loans. Given the capital-intensive nature of many of the technologies that would be eligible for CEDA loan guarantees, as well as their limited or poor credit history, it would be fiscally irresponsible for Congress to exempt CEDA from FCRA requirements.

Although the Senate bill would require an energy company to pay the so-called subsidy cost—the estimated default risk—of the loan up front to get a loan guarantee, there is no certainty that the risk to taxpayers would be accurately reflected in the subsidy cost because the process for calculating it is murky and poorly understood. Both the Government Accountability Office (pdf) (GAO) and the Congressional Budget Office (pdf) (CBO) have concluded that it is extremely difficult to calculate these costs, potentially increasing taxpayer liability. Further jeopardizing taxpayers, the Senate bill would allow a combination of borrower and federal dollars cover subsidy costs. Thus, taxpayers could have even more to lose if and when projects default.

The CEDA proposal also would do nothing to ensure that a healthy diversity of projects would actually receive taxpayer-backed loan guarantees. Eligible projects would include non-renewable technologies, such as coal-to-liquid, coal with carbon capture and storage, and nuclear power. These technologies are highly capital intensive, which could enable them to capture the majority of the program's available credit support even if there were overall limits on the amount of loans that could be guaranteed under the program. With no limit on the amount of financial assistance for any one technology, CEDA's project portfolio could disproportionately favor capital intensive, non-renewable energy technologies at the expense of less costly, cleaner technologies. A recent UCS report sheds light on the economics of nuclear power.

Finally, the proposal does not ensure that the fund will achieve the greatest global warming emissions reductions per dollar invested. With access to potentially unlimited loan guarantees and no requirement to cost-effectively reduce global warming emissions, increased electricity demand could be met with a high percentage of non-renewable energy sources, further eroding the ability of renewable energy resources to compete with coal, nuclear and other conventional resources.

UCS experts say the Senate should include taxpayer protections that are at least as strong as those in the House CEDA proposal. The clean energy bank must comply with FCRA, subjecting it to congressional oversight to shield taxpayers from extreme financial risk and establish limits on the size of the fund. Likewise, CEDA must limit the amount of financial assistance for any one technology to prevent a small number of large, capital-intensive projects, such as nuclear power and carbon capture and storage technology, from crowding out assistance for renewable and energy efficiency technologies. Finally, CEDA funding priorities must be based on the amount of carbon emissions reduced per dollar invested in the shortest amount of time. These critical requirements would ensure that the most cost-effective energy technologies with the greatest potential for reducing global warming emissions would be first in line for financial assistance from a new clean energy bank.

 

 

The Union of Concerned Scientists puts rigorous, independent science to work to solve our planet's most pressing problems. Joining with citizens across the country, we combine technical analysis and effective advocacy to create innovative, practical solutions for a healthy, safe, and sustainable future.

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