Loan Guarantees
How It Works
Loan guarantees are used by the government to decrease the risk of loans used for specific energy technology investments. Through loan guarantees, banks no longer need to hedge their risk by charging high interest rates, and can pass the savings on to the borrower.
Innovation due to these guarantees has been historically sparse and by 1989 no guarantees for energy technologies were granted by the government (Herrick, 2002)
However, there has been a recent rebirth in loan guarantees as the government tries to promote nuclear power (DEA, 2008). In 2008 the DEA is allowed to give up to 38.5 billion in loan guarantees, about half of which is designated for nuclear power. Currently an extensive regulatory process involves public hearings which mean construction may be stalled and investment returns delayed for years. A loan guarantee makes these types of investments more attractive.
Cost of Implementation 2
The only cost to the government comes when a loan is defaulted upon.
Environmental Impact 6
Loan guarantees can be used for renewable resources, but are mostly geared toward nuclear energy.
Foreign Energy Useage 3
Both renewable resources and nuclear energy would greatly reduce our foreign energy imports.
Implementation 1
Guarantees are probably the easiest to implement and administor and have a long history in the US.
Political Toxicity 1
Once a forgotten step-child, loan guarantees are making a comeback and are generally accepted by all parties involved.
Barriers to Future Use
- The general public will not be too concerned with how guaranteed loans can affect financial markets. Politicians thus do not need to be worried about their electability being affected by supporting these guarantees. But industries that do not receive loan guarantees will be concerned. Banks will choose to loan more funds to the industries protected by government guarantees and less to the other industries. Those left out may use political lobbies to prevent the use of loan guarantees.
Pros of Use
- Loan guarantees need not be used specifically for nuclear power. The DEA provides them for "renewable and/or energy efficient systems" that may need such risk protection.
- There is only an expense to the government if the loan is defaulted upon and even then the government can seek reimbursement.
- Guarantees can be used to target specific technologies.
- Experience with geothermal power loan guarantees are viewed as highly successful (Schochet, 1994).
Cons of Use
- Government interference in the financial markets has many unintended consequences (Fried, 1998).
- As banks make more loans they will sell the government bonds they hold in their investment portfolio and thus increase the supply of the bonds making them less valuable to investors.
- In order to sell the government bonds that finance the deficit, the government must pay a higher interest rate.
Most Important Fact
Loan guarantees can be used to selectively encourage new investments into desirable energy sources. Historically nuclear power is especially suited to benefit from guaranteed loans.
