Gang of 10 on Nuclear Energy

With the increasing public debate this election year over energy policy, proposals to remove offshore and ANWR drilling restrictions have rightly caught the public's attention.  While this is a critical policy focus requiring re-examination and revision, other energy policy issues are also seeing the light of day that normally are buried in the trivia of governmental regulation.

A new faction within the US Senate, the "Gang of 10", have put forward a set of energy policy proposals that they see as a compromise between the "soft energy path" types like Speaker Pelosi and the "hard energy" hawks like Newt Gingrich. Again, oil drilling captures the most attention but there are significant impacts from the Gang's proposals in other areas.  Let me address their plans for civilian nuclear power.

According to Senator Conrad's website posting, the Gang has three proposals related to nuclear energy.  First, they want to subsidize "workforce training."  This is news?  The Department of Energy has seen this problem coming for several years and has helped existing programs to expand our support for US engineering schools and their nuclear engineering departments.  Already, nuclear engineering enrollments are way up, tripling in fact, over their nadir in 2001.  I'd venture that some high school students are way ahead of some of our senators in their reading of our energy needs.  Of course, this is a good proposal and even more help would be appreciated and wise if implemented competently.

Secondly, they propose to encourage research and development of nuclear fuel recycling.  Again, this is news?  Since 2005, there has been a global initiative, lead by the US, to back off our Carter-era policy of burying our spent, but valuable, nuclear fuel and instead, reprocess it to recover the burnable uranium and plutonium still contained there and reduce the long term hazard from the remaining wastes.  The fact that our burial site at Yucca Mountain is projected to cost 2 to 5 times what the infrastructure for recycling the fuel values and the destruction of the worst bad actors would has been understood for years.  Plus, why would we bury the fuel for a trillion dollars worth of electricity at wholesale?

The real red meat in the proposal is the tax change to the depreciation schedule for new nuclear power plants.  Today, the owner of a new nuke would apply a "Modified Accelerated Cost Recovery Schedule" (MACRS) with a "service life" of 20 years.  (The underlying land has its own schedule, like all real estate.)    For a critical piece of infrastructure with a planned service life of 60 years, that sounds like a generous treatment of capital.  It is --  but build a solar array or a windmill and you get to use the 3 year depreciation schedule.  Now that's generous -- let me illustrate with a hypothetical.

For an example of what this means to the prospective investor in a new nuke, let's assume that your plant cost $6 billion when it enters service in the middle of 2016.  That initial tax year, the active investors get a $2 billion tax write-off.  The second year is even better at $2.67 billion but drops off rapidly after that to a final write-off in year 4 of the last $300 million.  By comparison, with existing schedules, the investors would get only $225 million in write-offs the first year and $433 million the second.  Assuming a corporate income tax rate of 35%, that's almost $750 million in additional AFTER-TAX profit in the second year from the revised tax treatment. In structuring the finance for a major project, who gets the use of the write-offs (and when) can be a significant motivating factor for investors.  Beyond this level, I'll leave any discussion to tax specialists since my engineering training rebels at the conceptual complexities of our tax codes.

So I have no complaints against the Gang's proposals for nuclear energy and heartedly welcome the new tax treatment, which will make a positive difference to private investment in new nuclear capacity.  However, all three suggestions are nothing new and need not hold hostage offshore and ANWR drilling for oil and natural gas.  They can and should be implemented (or expanded) on their own.
With the increasing public debate this election year over energy policy, proposals to remove offshore and ANWR drilling restrictions have rightly caught the public's attention.  While this is a critical policy focus requiring re-examination and revision, other energy policy issues are also seeing the light of day that normally are buried in the trivia of governmental regulation.

A new faction within the US Senate, the "Gang of 10", have put forward a set of energy policy proposals that they see as a compromise between the "soft energy path" types like Speaker Pelosi and the "hard energy" hawks like Newt Gingrich. Again, oil drilling captures the most attention but there are significant impacts from the Gang's proposals in other areas.  Let me address their plans for civilian nuclear power.

According to Senator Conrad's website posting, the Gang has three proposals related to nuclear energy.  First, they want to subsidize "workforce training."  This is news?  The Department of Energy has seen this problem coming for several years and has helped existing programs to expand our support for US engineering schools and their nuclear engineering departments.  Already, nuclear engineering enrollments are way up, tripling in fact, over their nadir in 2001.  I'd venture that some high school students are way ahead of some of our senators in their reading of our energy needs.  Of course, this is a good proposal and even more help would be appreciated and wise if implemented competently.

Secondly, they propose to encourage research and development of nuclear fuel recycling.  Again, this is news?  Since 2005, there has been a global initiative, lead by the US, to back off our Carter-era policy of burying our spent, but valuable, nuclear fuel and instead, reprocess it to recover the burnable uranium and plutonium still contained there and reduce the long term hazard from the remaining wastes.  The fact that our burial site at Yucca Mountain is projected to cost 2 to 5 times what the infrastructure for recycling the fuel values and the destruction of the worst bad actors would has been understood for years.  Plus, why would we bury the fuel for a trillion dollars worth of electricity at wholesale?

The real red meat in the proposal is the tax change to the depreciation schedule for new nuclear power plants.  Today, the owner of a new nuke would apply a "Modified Accelerated Cost Recovery Schedule" (MACRS) with a "service life" of 20 years.  (The underlying land has its own schedule, like all real estate.)    For a critical piece of infrastructure with a planned service life of 60 years, that sounds like a generous treatment of capital.  It is --  but build a solar array or a windmill and you get to use the 3 year depreciation schedule.  Now that's generous -- let me illustrate with a hypothetical.

For an example of what this means to the prospective investor in a new nuke, let's assume that your plant cost $6 billion when it enters service in the middle of 2016.  That initial tax year, the active investors get a $2 billion tax write-off.  The second year is even better at $2.67 billion but drops off rapidly after that to a final write-off in year 4 of the last $300 million.  By comparison, with existing schedules, the investors would get only $225 million in write-offs the first year and $433 million the second.  Assuming a corporate income tax rate of 35%, that's almost $750 million in additional AFTER-TAX profit in the second year from the revised tax treatment. In structuring the finance for a major project, who gets the use of the write-offs (and when) can be a significant motivating factor for investors.  Beyond this level, I'll leave any discussion to tax specialists since my engineering training rebels at the conceptual complexities of our tax codes.

So I have no complaints against the Gang's proposals for nuclear energy and heartedly welcome the new tax treatment, which will make a positive difference to private investment in new nuclear capacity.  However, all three suggestions are nothing new and need not hold hostage offshore and ANWR drilling for oil and natural gas.  They can and should be implemented (or expanded) on their own.