Senate Poised to Give Private Energy Projects a Blank Check, Putting Taxpayers at Risk

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 examines the economics of nuclear power, in particular.

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.