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Subsidies for Nuclear Power: Is It Really A Tax?

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My first reaction was “Wow! Did I just read that correctly?!”

It was one of those “ah-ha moments” when a seemingly mundane statement leapt out of the page and whacked me on the forehead.  This time the catalyst was a twitter reply from Chris Pragman (@ChrisPragman) who describes himself as an “Avid Podcast listener, Engineer, Nuclear Power, Fire Protection, and beer geek with a long commute!”

You see, I had posted a tweet earlier in the day about the cost to taxpayers of some “green energy” jobs.  There’s a new wind farm in Oregon called Shepherds Flat that received federal cash grants totaling $490 million under the guise of job creation.  For that grand sum the Shepherds Flat project will create 35 new jobs.  The math is easy; $14 million per “green energy” job.

This tidbit about Shepherds Flat was part of a larger report by the Energy Tribune that among other things compared the relative size of US government subsidies to various energy industries.  The report by Robert Bryce calculated subsidy dollars per unit energy produced and concluded the renewable energy industry receives 6.5 times more federal government subsidies than the nuclear industry, and 12 times more than the oil and gas industry.  That fact really didn’t surprise me considering the billions of dollars in grants, production tax credits, and favorable depreciation rules the government lavishes upon anything branded with the “renewable” label.  Then Chris asked a great question, “What do they consider nuclear subsidies?”

When I dug into that question I learned the Congressional Budget Office is tasked with tracking the amount the government spends subsidizing various industries, and they publish their findings periodically.  There it was on page 3: $900 million in “subsidies” for the “favorable tax treatment of nuclear decommissioning funds.”  Hmmm. What could that be?

You see, every nuclear plant owner is required by federal law to set aside funds to ensure there’ll be enough money to pay for decommissioning the plant when the time comes.  Typically plant operators add to the fund each year and over time the fund grows until it’s used. The NRC monitors each fund and will require plant owners to make additional payments if they think they’re behind.  These funds are essentially forced savings accounts that add to each nuclear plants annual operating expenses.

So what’s the “favorable tax treatment?”  It turns out Title 26 of the United States Internal Revenue Code requires interest or other investment earnings of nuclear plant decommissioning funds to be taxed at “only” 20%.  Maybe I’m alone in this, but being required by law to set up a fund, then being taxed on that fund’s growth hardly fits the definition of a “subsidy!”  Other sources of energy are not required to set up such funds – they carry the potential future costs of dismantling equipment as liabilities on their balance sheets.  In the case of nuclear plants they’re forced to set aside capitol in government mandated and monitored funds, then the government takes 20% of the fund’s earnings.

Anyway, in 2009 the CBO calculated this “favorable tax treatment” to be worth $900 million, and they called that a “subsidy.”  That’s quite a different kind of subsidy from the cash grants, tax credits, and accelerated depreciation enjoyed by the renewable energy industry.  Personally, I have a tough time viewing this as a subsidy at all.

Chris, thanks for asking the question! I learned something new today, and maybe some of you out there did too.

Happy Birthday to This Week in Nuclear!

On Dec 27 This Week in Nuclear will turn seven years old.  I would like to express my heartfelt “thanks” to all of you who have supported and continue to support the blog and podcast!

Happy Holidays!

John Wheeler

Discussions

Bill Hannahan's picture
Bill Hannahan on Dec 28, 2012

 

Fascinating. Thanks for the information John. It makes me curious for more facts. Do you know;

1... What  would the tax rate be without the subsidy?

2... What is the total amount in the various funds.

3... Are the earnings minus taxes staying ahead of inflation? With the government creating huge amounts of new money, inflation is going to be raging at some point. I hate paying taxes on accounts that are shrinking in real value.

Creating new money is just a way of steeling from people and companies that have money.

 

 

Alan Rominger's picture
Alan Rominger on Jan 3, 2013

It is said that decommissioning costs on the order of $300 million.  I don't see information readily available on how much utilities have in these funds, but going by anecdotal information, utilities believe that it will cost significantly less than what they've saved.  The fund is thus a means for return of shareholder value.  The incentive for the utility is to decommission for as low cost as possible, and whatever is left goes to their bottom line.  The fund inherently has to be an overshoot, because the point is to prove existence of sufficient funds.  Because they plan to get the money back, the operators don't mind packing away too much anyway.  I've also heard it said that there are many plants out there that don't look very profitable, but they actually are because the earnings are being delayed by stashing it in the fund.

I don't understand the 20% myself.  Our corporate tax rate is 35% for the highest bracket (above $13 M per year, which is tiny) and 15% for the lowest.  As we often hear, however, the effective tax rate is much lower, at around 13.4%.  I would imagine that the quoted tax rate on the decommissioning fund would act in place of the corporate tax rate, but I can't say for sure.  Even assuming I've interpreted that right, whether the utility could have obtained a lower tax rate by absorbing the money into their general fund would be an open question.

Even so, that would be small potatoes compared to the fact that the fund has requirements placed on it.  Since the goal is to satisfy the NRC that they have sufficient funds, it's sure to be in relatively safe and low-yield investments.  That's not good for shareholders, and is really the opposite of a subsidy, although it may be a reality of decommissioning needs.  In fact, the loss of return due to the requirements on the fund may form the argument for setting a special tax rate in the first place.

The main lesson I learned from industrial economics is that corporations basically bleed money.  Deferring gains until later almost always incurs an economic penalty, since the rate of return you need to justify investments internally to a corporation is much higher than what we normally think of from personal finance.  I think a part of the reason is that tax it has to incur to get from the corporate balance sheet to the investor's account.  Worse still, we don't even bother correcting depreciation for inflation.  That means the return from an investment must be vastly higher than a single calculation with single rate would suggest.  Nuclear plants, as very long term investments, have extremely unfavorable depreciation schemes, and faster depreciation is sometimes noted as a subsidy to various renewables.  In the big picture, there are many ways taxes disincentive nuclear investment, although the decommissioning fund may or may not be among these.

John Wheeler's picture

Thank John for the Post!

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