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DOE's First Nuclear Loan Guarantee: Harbinger of Things to Come?

February 18, 2010

On February 16, 2010, President Obama announced that the U.S. Department of Energy (DOE) had offered $8.3 billion in conditional commitments for loan guarantees for two new nuclear reactors to be built at the Vogtle Electric Generating Plant in Burke, Georgia, owned by Georgia Power Company and its partners in the existing Vogtle units. This announcement came on the heels of the release of President Obama's FY 2011 budget which proposed tripling the current loan guarantee authority for nuclear projects. These two actions signal a renewed willingness on the part of the Obama Administration to support nuclear power as an essential ingredient in the nation's future energy supply. They also serve as a reminder of the unique legal challenges inherent in nuclear energy project development.


The DOE Loan Guarantee Program was established under the Energy Policy Act of 2005 and was designed to support eligible projects that avoid, reduce or sequester air pollutants, including anthropogenic emissions of greenhouse gases using new and innovative technology. On June 30, 2008, DOE issued solicitations for $18.5 billion in loan guarantee authority for nuclear power facility projects and $2 billion in loan guarantee authority for front-end nuclear facility projects. In response to these solicitations, DOE received applications seeking a total of $122 billion in loan guarantees. In May 2009, DOE selected four nuclear projects for final due diligence and negotiations for conditional commitments. 

The announcement, coupled with the Obama budget request, is an important signal for developers and the market that the White House is willing to commit resources to nuclear power as a core part of its energy policy. Importantly, in issuing its announcement, DOE also indicated that advanced work continues on the other three projects and that analysis has begun on four other nuclear projects.

The Vogtle Project, Legal Risks and Future Loan Guarantees

The Vogtle Project involves the construction of two new 1,100 megawatt Westinghouse AP1000 nuclear reactors. Nancy Wodka, Managing Partner of Bracewell's Washington, D.C. office, represented Westinghouse Electric Company in its successful negotiation of EPC (Engineering, Procurement and Construction) contracts for these facilities. These reactors will provide base-load electricity for an estimated 1.4 million people. Additionally, the industry has estimated that the project will create up to 3,500 onsite construction jobs and 800 permanent jobs at the facility. Now that DOE has offered a conditional commitment for the project, the licensing process for the reactors will proceed before the Nuclear Regulatory Commission and, ultimately, DOE must sign a final loan guarantee agreement.

While the announcement of the DOE loan guarantees opens the door to the continued development of nuclear plants that are necessary to meet baseload generation requirements over the coming years in the U.S., EPC contracts for new nuclear power plants present unique challenges. To begin with, they must contain the terms necessary to convince project lenders and utility regulators that risks of completion and price certainty are properly allocated among the parties. In addition, legal pitfalls should be properly addressed so as to avoid any concerns that the massive cost overruns and defaults of the past nuclear build-out will be avoided.

Another key aspect of Tuesday's agreement that has yet to be made public is the projected credit subsidy cost—or risk of loss to the Federal government of the Vogtle loan guarantee. This figure has been a topic of contention between environmental groups who claim this figure should be 50% or higher and DOE and the nuclear industry who have stated it should be far lower. Under DOE regulations and the Federal Credit Reform Act, loan guarantee applicants have to pay the credit subsidy cost and, therefore, how DOE resolved this issue will have a great impact on future federally-supported nuclear projects.   

Finally, in addition to DOE's work on nuclear loan guarantees, energy project developers, investors and lenders also should be anticipating DOE's announcement of loan guarantees funded by the American Recovery and Reinvestment Act of 2009 (ARRA). In passing ARRA, Congress appropriated $6 billion to DOE to support loan guarantees of up to $60 billion for renewable energy and electric power transmission projects.  Applicants for these loan guarantees included companies involved in alternative energy production (such as solar, wind and hydropower projects), leading-edge biofuel projects, and projects designed to upgrade electric power transmission. Applications for these funds are still being received by DOE and companies interested in applying for the program are welcome to contact Bracewell & Giuliani for assistance in exploring these opportunities.