Subsidyscope

Energy

Loans, Loan Guarantees and Other Risk Transfers in the Energy Sector

The federal government subsidizes certain energy related activities by assuming financial risk that would otherwise be borne by individuals, businesses or other organizations. Subsidyscope’s review of federal data shows that in fiscal year 2008 about $6.6 billion was directly loaned to companies and other organizations in the energy sector. Also, the government committed to guarantee nearly $785 million in additional loans in the sector. In fiscal year 2009, those numbers significantly increased, with direct loans adding up to $16.7 billion and commitments to guarantee third party loans totaling $14.5 billion. Subsidy estimates produced by the government for these loans and loan guarantees are presented below where available. While subsidy rates are often presented for specific programs, actual subsidy dollar amounts were not provided by the federal agencies administering the energy loan and loan guarantees shown below. Therefore, Subsidyscope does not present an aggregate total for the subsidy provided. Further, due to omissions and other potential errors in federal data, these numbers should be used with caution.1

Subsidyscope refers to these methods of providing subsidies (e.g., loans) as "risk transfers." By transferring risk from others to itself, the federal government encourages people to undertake activities they may not otherwise carry out. Such risk transfers are typically accomplished through government credit and insurance programs, such as the student loan program and federal deposit insurance. The extent of a subsidy received under a credit or insurance program generally is the difference between the terms the recipient would get in a competitive market and those offered by the government. (See Subsidyscope's discussion here for more detail on federal credit and insurance programs.)

Under the Federal Credit Reform Act of 1990 the government is required to estimate the expected cost to the government of loan and loan guarantee programs. While these estimates have limitations,2 the government essentially attempts to predict the net cost of a loan or loan guarantee by totaling up all the expected future cash flows to and from the government. A positive net flow from the government indicates there is a net cost to the government and that a subsidy is being provided to the borrower. The "subsidy rate" is the net cost (in current dollars) to the government divided by the total loan volume of the program; this rate approximates the percentage of the loan disbursements that the government is expected to lose after the expected return on the investment is taken into account.3

In the energy sector, there are several main programs through which the government takes on risk. The largest programs are carried out by the U.S. Department of Energy (DOE) through the innovative technology and renewable energy loan guarantee programs, which were significantly ramped up as part of the American Recovery and Reinvestment Act of 2009 (ARRA). Another large program is the U.S. Department of Agriculture's (USDA) Rural Utility Service, which makes loans and loan guarantees for generating and distributing electricity. In addition, the DOE provides lending and loan guarantees for nuclear power facilities. Prior to 2009, the majority of the direct loans in the energy sector were administered through the USDA for the purpose of improving electricity transmission in rural areas. Loan guarantees were also primarily administered through the USDA, with programs focusing on both electricity transmission and renewable energy production. These and other programs are described in more detail below.

Table 1: Loans in the Energy Sector Fiscal Years 2008 and 2009
Program Agency 2008 Subsidy Rate % 2008 Obligations ($ millions) 2009 Subsidy Rate % 2009 Obligations ($ millions)
Advanced Technology Vehicle Manufacturing DOE 21.74 10,100
Rural Electrification and Telephone Program:
FFB Electric Loans 		USDA -0.70 6,500 -2.28 6,500
Rural Electrification and Telephone Program:
Electric Hardship Loans 		USDA 0.12 99 -2.38 100
Energy Retrofit Loans HUD 89.92 92
Total 6,599 16,792

Source: Subsidyscope analysis of data from the Federal Credit Supplement (FCS). 2008 numbers are from the FCS FY2009, Table 1.; 2009 numbers are from the FCS FY2010, Table 1.

Note:

Credit programs may report "negative" subsidies under the accounting and valuation rules specified in the Federal Credit Reform Act of 1990. A negative subsidy occurs when the estimated cost to the government of providing credit is less than the estimated income from repayments, interest and fees. The cost to the government is in part determined by the estimated risk of default. Most frequently, negative subsidies result from the use of a risk free discount rate to value risky future cash flows. This has the effect of overvaluing expected income to the government from loans and guarantees and undervaluing the government’s expected costs from defaults. See this CBO report for additional information.

FFB=Federal Financing Bank

Loans

In fiscal year 2009, the energy sector loan program with the largest estimated loan obligations was the Advanced Technology Vehicle Manufacturing Loan Program (ATVMLP), authorized in the Energy Independence and Security Act of 2007. This program includes both grants and loans (only the loan obligations are presented here), and supports the development of advanced technology vehicles in the United States. Estimated obligations of over $10 billion in fiscal year 2009 are intended to promote technology that will increase fuel efficiency and reduce emissions.4 For a vehicle to fit the definition of an advanced technology vehicle, "it must have at least 125 percent of the average base year combined fuel economy for vehicles with 'substantially similar attributes.'"5 A list of conditional commitments made through the program can be found on the DOE's ATVMLP Web page. As of September 2010, the ATVMLP has made a total of $8.6 billion in conditional commitments to companies.

The second and third largest loan programs in the energy sector in fiscal year 2009 are through the USDA's Rural Electrification and Telephone Program (yet these are the smallest in terms of the subsidy rate). The Federal Financing Bank (FFB) Electric Loans Program made loan obligations of $6.5 billion in fiscal year 2009, and the Electric Hardship Loans Program made loan obligations of $100 million in fiscal year 2009. According to USDA, eligible loan recipients for both programs include "corporations, states, territories, and subdivisions and agencies thereof, municipalities, people's utility districts, and cooperative, nonprofit, limited-dividend or mutual associations that provide retail or power supply service needs in rural areas." 7

Another relatively large energy-related loan program authorized in the ARRA provides grants and loans for sustainable or "green" retrofitting for multifamily housing units.8 The Energy Retrofit Loans Program is implemented by the U.S. Department of Housing and Urban Development (HUD) which notes that this funding will be invested in energy efficient modernization and renovation of HUD-sponsored housing for low-income, elderly and disabled persons.9 In fiscal year 2009, $92 million in loans were obligated through this program.

Table 2: Loan Guarantees in the Energy Sector Fiscal Years 2008 and 2009
Program Agency 2008 Subsidy
Rate % 		2008 Commitments
($ millions) 		2009 Subsidy
Rate % 		2009 Commitments
($ millions)
Title 17 Innovative Program:
Section 1705 FFB Loans 		DOE 11.81 8,000
Title 17 Innovative Program:
Section 1703 FFB Loans 		DOE 0.00 6,000
Renewable Energy Loan Guarantees USDA 9.69 184 9.69 312
Section 9003 Loan Guarantees
(Biorefinery Assistance) 		USDA 33.34 225
Title 17 Innovative Technology
Loan Guarantees 		DOE 600
Total 784 14,537

Source: Subsidyscope analysis of data from the Federal Credit Supplement (FCS). 2008 numbers are from the FCS FY2009, Tables 1 and 2.; 2009 numbers are from the FCS FY2010, Tables 1 and 2.

Note:

The two programs entitled 'Title 17 Innovative Program: Section 1705 FFB Loans' and 'Title 17 Innovative Program: Section 1703 FFB Loans' were categorized as direct loans in the FY2010 Federal Credit Supplement. However, materials from the DOE describe both as loan guarantee programs. Thus, Subsidyscope categorizes them as loan guarantees in its analysis of the energy sector.

Loan Guarantees

The two largest loan guarantee initiatives in the energy sector are the DOE's Section 1703 and 1705 loan guarantee programs, which together covered almost $14 billion in loan commitments in fiscal year 2009. The Energy Policy Act of 2005 created the Section 1703 program to support projects whose high technology risks make it difficult to obtain private financing.10 Eligible projects include renewable energy systems, electric power transmission systems and biofuel projects with a technology pilot project component.11

The ARRA authorized a temporary provision under Section 1705 of the Energy Policy Act of 2005 (EPACT) in order to support projects similar to those in Section 1703. According to the DOE, Section 1703 loan guarantees require the borrower to pay for the subsidy costs, while the new authorization under 1705 holds that the subsidy costs are provided by the government.12 The projected commitments for these programs presented in the President's Budget for fiscal year 2010 and fiscal year 2011 show continuing increases in loan guarantees.

The DOE also uses authority granted in EPACT to guarantee loans for nuclear facilities in an effort to expand the use of nuclear electric power in the United States. The Federal Credit Supplement does not identify which guarantees are for nuclear power plants; however, the President's Budget for fiscal year 2011 proposes an additional $36 billion in loan guarantee authority be made available for nuclear power facility projects.13

The Price-Anderson Nuclear Industries Indemnity Act

The Price-Anderson Nuclear Industries Indemnity Act (Price-Anderson Act) limits the financial liability of companies licensed to operate nuclear power plants. Specifically, nuclear power plant licensees are required to pay an insurance premium every year for $300 million of coverage per nuclear reactor unit. In the event a nuclear accident results in offsite damages of more than $300 million per reactor, each licensee is responsible for additional coverage of up to, but no more than, approximately $96 million per reactor unit. Licensees are not responsible for damages over this amount. The cap includes not only accidents that may happen during the operation of a reactor but also any mishap (including theft or sabotage) that may happen during the transport or storage of nuclear fuel or waste to or from the reactor. The purpose of the Price-Anderson Act is to establish a process for compensating the public for damages in the event of a nuclear accident and encourage private investment in nuclear power.

While the liability limit has never been exceeded,14 in 2007 the Energy Information Administration concluded that the Price-Anderson Act "reduces the cost of insurance to the owners of nuclear power plants . . . and, hence, reduces the cost of nuclear power and other nuclear activities."15 While estimates of this subsidy vary widely, in 2008 the Congressional Budget Office concluded that the subsidy is probably less than one percent of the cost for new nuclear generating capacity or about $600,000 per reactor.16 As of the date of this estimate there were 104 commercial nuclear power reactors in the United States, resulting in an implied total subsidy of approximately $62 million.17

The Oil Spill Liability Trust Fund

The Oil Pollution Act (OPA) of 1990 established that the owner or operator of a facility responsible for an oil spill is also responsible for the associated damages, up to the limit of their liability.18 The limit on damages is determined by the circumstances of the spill. For example, onshore facilities are liable for up to $350 million per spill, while holders of leases or permits for offshore facilities (such as the Deepwater Horizon drilling rig leased by BP) are liable for damages of up to $75 million per spill (not including removal costs).19 If an oil spill is found to be the result of gross negligence, the responsible party is no longer entitled to a liability limit.20

The Oil Spill Liability Trust Fund (OSLTF) was created by the OPA to help the federal government rapidly and effectively manage the response to oil spills.21 The primary purpose of the Fund is to provide the initial payment for the cleanup costs and damages resulting from oil spills, in the event that the party responsible for the spill is unknown or is unable to effectively respond to the spill.22 Importantly, the OSLTF also pays for economic damages when the liability limit on a specific incident is reached (subject to the caps described below). In instances where the responsible party is known, the National Pollution Funds Center (under the Coast Guard) which administers the program, will later bill the costs of the cleanup and damages (up to the liability limit) to the responsible party.23 The total amount of OSLTF funds available for a single incident is generally capped at $1 billion, with a cap of $500 million applying specifically to the payment of claims for damages to natural resources.24

The OSLTF is financed primarily through a tax on oil produced in or imported to the U.S., as well as through fines, penalties and cleanup costs recovered from liable parties.25 To the extent that the OSLTF is financed by revenue from the energy sector, the cleanup costs, damages and other costs paid out of the OLTSF do not constitute a subsidy to the energy sector. It is not clear how an oil spill response would be funded in the event that the costs reach the OSLTF's $1 billion maximum for a single incident.26

  1. See our page on data quality for a description of some of the errors Subsidyscope has found in federal data.
  2. Congressional Budget Office (CBO). "Estimating the Value of Subsidies for Federal Loans and Loan Guarantees." August 2004. pp. 1-2.
  3. For more on the calculation of subsidy rates see: CBO. "Subsidy Estimates for Direct and Guaranteed Student Loans." November 2005, Box 2, p. 10.
  4. Office of Management of Budget (OMB). "Federal Credit Supplement FY2010." Table 1. U.S. Government Printing Office.
  5. U.S. Department of Energy (DOE). "Advanced Technology Vehicles Manufacturing Incentive Program Technical Support Document."
  6. U.S. Department of Agriculture. "Loans Administered by the Electric Program Rural Utilities Service." November 18, 2004.
  7. U.S Department of Housing and Urban Development (HUD). "Webinar: The Recovery Act's Green Retrofit Program for Multifamily Housing." June 10, 2009.
  8. HUD. "HUD Implementation of the Recovery Act."
  9. DOE. "Webinar: Loan Guarantee Program, Suggestions for a Strong Application." September 8, 2009.
  10. "American Recovery and Reinvestment Act of 2009." P.L. 111-5, United States Statutes at Large. Sec 1705 (a)(1).
  11. DOE. "Webinar: Loan Guarantee Program, Suggestions for a Strong Application." September 8, 2009.
  12. OMB. "The Appendix, Budget of the United States Government, Fiscal Year 2011." U.S. Government Printing Office. 2010. p. 441.
  13. The most serious accident at a U.S. nuclear power plant, the 1979 accident at Three Mile Island Nuclear Station, resulted in $70 million in liability claims. See: Government Accountability Office (GAO). "NRC's Liability Insurance Requirements for Nuclear Power Plants Owned by Limited Liability Companies." May 2004. p. 5.
  14. Energy Information Administration (EIA). "Federal Financial Interventions and Subsidies in Energy Markets 2007." April 2008. p. 197.
  15. CBO. "Nuclear Power's Role in Generating Electricity." May 2008, Box 3-1, pp. 28-29.
  16. This is an extrapolation based on CBO's estimate of the cost of the subsidy under Price-Anderson for one nuclear plant, and is therefore a crude measure and only as good as that estimate.
  17. U.S. Environmental Protection Agency (EPA). "Oil Pollution Act Overview." Last Updated: March 17, 2009; and U.S. Department of Homeland Security (DHS) and United States Coast Guard (USCG). "Oil Spill Liability Trust Fund (OSLTF) Funding for Oil Spills." January 2006. p. 3.
  18. EPA. "Oil Pollution Act Overview." Last Updated: March 17, 2009.
  19. DHS and USCG. "Oil Spill Liability Trust Fund (OSLTF) Funding for Oil Spills." January 2006. p. 4.
  20. EPA. "Oil Pollution Act Overview." Last Updated: March 17, 2009.
  21. EPA. "Oil Spill Liability Trust Fund." Last Updated: March 17, 2009; and DHS and USCG. "Oil Spill Liability Trust Fund (OSLTF) Funding for Oil Spills." January 2006. pp. 1, 3.
  22. DHS and USCG. "Oil Spill Liability Trust Fund (OSLTF) Funding for Oil Spills. January 2006. p. 3; and U.S. House of Representatives Committee on Transportation and Infrastructure. "Hearing on Liability ad Financial Responsibility for Oil Spills under the Oil Pollution Act of 1990 and Related Statutes." June 8, 2010. p. 9.
  23. DHS and USCG "Oil Spill Liability Trust Fund (OSLTF) Funding for Oil Spills. January 2006. p. 2.
  24. USCG National Pollution Funds Center. "The Oil Spill Liability Trust Fund (OSLTF). Structure of the Fund." Last Updated: May 6, 2010.
  25. "Oil Spill Liability Trust Fund." U.S. Code 26, Section 9509. 2007 ed.

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