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Nuclear Loan Guarantees Aren’t Just Guarantees: They are Actual Taxpayer Loans

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bananas Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 04:54 PM
Original message
Nuclear Loan Guarantees Aren’t Just Guarantees: They are Actual Taxpayer Loans
http://www.nirs.org/press/02-17-2010/1

February 17, 2010
Nuclear Loan Guarantees Aren’t Just Guarantees: They are Actual Taxpayer Loans

President Obama’s announcement yesterday of a “conditional” $8.3 billion loan “guarantee” to the Southern Company for construction of two nuclear reactors in Georgia obscured an important fact about the loan guarantee program: taxpayers are not just providing a guarantee, they also will be providing the actual loans.

According to a press release from Southern Company yesterday, “Total guaranteed borrowings would not exceed 70 percent of the company's eligible projected costs, or approximately $3.4 billion, and are expected to be funded by the Federal Financing Bank.” (Note: the discrepancy in amounts--$3.4 billion vs $8.3 billion, is because Southern Company is only a partial owner of the two reactors, the rest of the funds will go to the other owners).

The Federal Financing Bank (FFB) is a little-known government entity that more typically makes loans to universities, colleges, rural electric co-ops and other small-scale projects. Interest rates from the FFB may be lower than offered by private financial institutions. Use of the FFB means that the loans themselves for new reactor construction will come from taxpayers, putting taxpayers in the risky business of both providing the loans and guaranteeing to themselves that the loans will be repaid.

Similarly, UniStar Nuclear, which is said to be on the Department of Energy’s “shortlist” of loan guarantee applicants, states in its license application to the Nuclear Regulatory Commission, “It is expected that, with respect to the portion of the debt guaranteed by the Department of Energy under the loan guarantee program, the source of financing will be the Federal Financing Bank, and with respect to the portion of the debt insured by export credit agencies, the source of financing will be commercial banks.”

“This is not like Dad co-signing a loan for a child’s first car,” said Michael Mariotte, executive director of Nuclear Information and Resource Service. “The idea that these are just loan “guarantees” is fictitious: these are actual loans. Giant nuclear utilities will be raiding the federal treasury for money to build reactors, and they are expecting the taxpayers to bail them out if the project goes bad.”

“Coupled with Secretary Chu’s astonishing admission yesterday that he was unaware of the Congressional Budget Office report estimating a 50% failure rate for new reactor projects, the administration has chosen a path of enormous risk to taxpayers and is obscuring the real nature of that risk,” said Mariotte.


Kristopher was right: he said that even with the loan guarantees, they wouldn't find any takers, and they didn't:
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=115&topic_id=228077&mesg_id=228106

These are loan guarantees, not direct money to build. Unless the underlying economics change, it won't matter if the total amount is $500B or the current $18B. As long as investors have a 50/50 chance of either 1) a successful project that starts generating low (6% or so) ROI in 15-29 years or 2) receiving your principle back when the loan defaults after 10 or so years of lost earnings; then there will be no takers.


I keep warning people: you can't trust the nuclear industry. They kept saying it was "loan guarantees", not federal loans. There's no need for a "loan guarantee" when the federal government is the one loaning the money - taxpayers pay for it whether or not it defaults.

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xchrom Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 04:58 PM
Response to Original message
1. Recommend
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fascisthunter Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 05:04 PM
Response to Original message
2. privatization is proving to be MORE expensive to Tax Payers
when the elite say less taxes, they are talking about themselves, not the rest of us.... oh, and right wingers and tea baggers are f'n idiots.
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kristopher Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 07:06 PM
Response to Original message
3. Now THAT I didn't see coming...
I was trying to see the pragmatic side, but now I'm steamed.
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joshcryer Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 07:45 PM
Response to Original message
4. I don't think it takes a genius to know that they'd need 3 times the guarantees...
...to start building.
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Massacure Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 08:57 PM
Response to Original message
5. This is preferable to a loan guarantee.
The federal government gets to keep any profits on loans that do not default. Even if half of the loans default and pay nothing, the government will still break even assuming the others are paying 5.5% interest over 30 years. Even companies which default will repay something though.
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kristopher Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 12:44 AM
Response to Reply #5
8. Are you crazy?
Edited on Fri Feb-19-10 01:15 AM by kristopher
That money you are "earning" is WAAAAAY below market rates for a high risk loan such as this. Banks won't touch them for a reason - THEY WOULD LOSE MONEY.

The taxpayers are going to do worse than investors would at market rates. Venture capital for projects with far far lower risk profiles expect a minimum of 18%. I'll bet the nuclear developers get the government money for 2-4%.

The taxpayers are getting screwed half a dozen different ways on this one.
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joshcryer Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 05:15 AM
Response to Reply #8
12. Yes, it's probably much lower than 5.5%
It's probably closer to 2%. 3.5% would be break even assuming it's annual interest.
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 02:21 AM
Response to Reply #5
10. You might want to check your math.
"Even if half of the loans default and pay nothing, the government will still break even assuming the others are paying 5.5% interest over 30 years."

:rofl:
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joshcryer Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 05:12 AM
Response to Reply #10
11. 5.5% annually over 30 years would more than break even. I assume it's not annual?
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kristopher Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 10:03 AM
Response to Reply #11
13. You have no concept of "opportunity cost" do you?
It is real. It means the money you lose has value beyond its face value. If I lose $1000 dollars today I not only lose that $1000 I lose the benefits that flow from it going into the future.


How to calculate opportunity cost?

Investors define opportunity cost as the difference in return between a chosen investment and one that is necessarily passed up. In other words, it is the amount of money you could have earned if you invested in the optimal investment.

For example, between investing and paying off debt, if we decide to pay off or pay down credit card debt, we give up an opportunity to invest the same amount.

In this case, the interest that we could have earned on the investment is the opportunity cost of paying off debt.

Opportunity cost is an important economic principle that affects the value of our financial decisions. For example, if we make a $1,000 payment on a 12% credit card, we can lower our interest expense. For one month alone, we save $10 in interest ($1,000*0.12/12). However, in order to pay down this debt, we may have passed up an opportunity to earn a 5% annual interest rate in a CD or other money market account. The opportunity cost, in this case, is $4.17 ($1,000*.05/12) in interest income.

Subtracting the opportunity cost of $4.17 from the debt savings of $10, we obtain a net savings of $5.83.

Opportunity cost is an important concept in financial decision-making and also any other aspect of business while it can also be applied to our daily lives as well.

Here's a useful rule of thumb for incorporating opportunity cost into your financial decision-making: If you face a spend-or-invest trade-off and decide to pay off debt, subtract the income you could have earned on the investment to calculate a net savings. If you decide to invest, subtract the interest you could have paid off on the debt to calculate net savings.

If it’s your daily life, here is an example. Many people enjoy stopping at their favorite coffee shop for a caffeine boost before going into work. What is the true cost of that coffee? Well, the cost that we feel in our wallet is the amount we pay at the register plus the opportunity cost of the interest we could have made had we invested it instead. This is fairly straightforward to calculate and countless articles have shown just how much money we are spending for our coffee. What isn't as obvious is the opportunity cost of the time we have spent getting our java fix.
http://www.bizymoms.com/homebusinessopportunity/calculate-opportunity-cost.html

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Massacure Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 05:21 PM
Response to Reply #13
15. If we were talking about corporations making these loans, I would agree with you.
But these loans are not made by corporations, they are made by the federal government. The federal government doesn't invest money and therefore doesn't have opportunity cost; it doesn't put money in the stock market, take out certificates of deposit, or have a money market account.

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kristopher Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 05:54 PM
Response to Reply #15
16. That isn't true. It may not matter to you but it matters to the budget and the policy.
Examples:
What is the cost of the money being lent? Do you think it is free? We finance our debt by selling bonds, so the money has a cost.

What ELSE could the government spend the funds allocated to this special bank?
I'd argue that there is a long queue of renewable developers that could
1) pay higher interest rates
2) dollar for dollar deliver more electricity for the money loaned
3) deliver said electricity much quicker than the nuclear plants will
4) do all of that with virtually no risk of default.

Credit is tight and there are a logjam of renewable projects waiting on financing.
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Statistical Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 10:57 PM
Response to Reply #15
17. Sorry I am 100% pro-nuke but that is wrong. Opertunity cost exist for everything always.
The govt borrows money so there is a cost.

Even if govt doesn't borrow money those funds could be "invested" in other activities which pay future dividends (school lunch programs, upgrade infrastructure, etc).

Even if the govt had NOTHING it could possibly spend it could reduce taxes by the amount of the loan and thus return money to taxpayers who could use that money in a variety of ways.


Everything has opportunity costs. Most people make bad decisions because they don't think about that. I have a friend who is trying to pay off his mortgage early. He has credit card debt but doesn't have the willpower to pay that off and keep it paid off so he is paying his mortgage instead. His opportunity cost is the difference in the two interest rates however he also loses the tax deduction (due to less mortgage interest) so that too is added to opportunity cost.

Everything has opportunity costs. Everything you, a company, a country, or a world does or doesn't do has a cost.
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 02:20 PM
Response to Reply #11
14. Assuming 0% inflation?
No bank would survive a 50% default rate on 5% lending.
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amborin Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 09:42 PM
Response to Original message
6. k&R very risky for taxpayers! more here: mother jones:
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FBaggins Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-18-10 10:18 PM
Response to Original message
7. I think this is to be expected
The earlier assessment that similar loans for the first such plants in decades would be likely to default makes this clear. The first few can't possibly come in on budget or make a profit. If they were five million dollar items then some large company would just take it as the cost of doing business because they would build 100 more at lower prices... when you're only talking about a few dozen of whatever product and each one costs billions, then no company is going to want to pay for the prototype/pilot model(s) just for some other company to get the cheaper ones later.

Make smaller ones with the potential for hundreds to be deployed? Someone might be willing... but if the federal government wants to build a number of these over the next couple decades, they're essentially going to end up paying for the first few.
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kristopher Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 12:49 AM
Response to Reply #7
9. Of course you think it is to be expected.
Edited on Fri Feb-19-10 12:49 AM by kristopher
You don't care about efficient solutions to climate change and energy security; you just want funding for the nuclear industry.

Have you read this?

Posted with permission:

1
Nuclear Nonsense

I have known Stewart Brand as a friend for many years. I have admired his original and
iconoclastic work, which has had significant impact. In his new book, Whole Earth Discipline:
an Ecopragmatist Manifesto (Viking), he argues that environmentalists should change their
thinking about four issues—population, nuclear power, genetically modified organisms (GMOs),
and urbanization. Many people have asked me to assess his 41-page chapter on nuclear power, so
I’ll do that here, because I believe its conclusions are greatly mistaken.

Stewart recently predicted I wouldn’t accept his nuclear reassessment. He is quite right. His
nuclear chapter’s facts and logic do not hold up to scrutiny. Over the past few years I’ve sent him
five technical papers focused mainly on nuclear power’s comparative economics and
performance; he says he’s read them, and on p. 98 he even summarizes part of their economic
thesis. Yet on p. 104 he says, “We Greens are not economists” and disclaims knowledge of
economics, saying environmentalists use it only as a weapon to stop projects. Today most
dispassionate analysts think new nuclear power plants’ deepest flaw is their economics. They
cost too much to build and incur too much financial risk. My writings show why nuclear
expansion therefore can’t deliver on its claims: it would reduce and retard climate protection,
because it saves between two and 20 times less carbon per dollar, 20 to 40 times slower, than
investing in efficiency and micropower.

That conclusion rests on empirical data about how much new nuclear electricity actually costs
relative to decentralized and efficiency competitors, how these alternatives compare in capacity
and output added per year, and which can most effectively save carbon. Stewart’s chapter says
nothing about any of these questions, but I believe they’re at the heart of the matter. If nuclear
power is unneeded, uncompetitive, or ineffective in climate protection, let alone all three, then
we need hardly debate whether its safety and waste issues are resolved, as he claims.

In its first half-century, nuclear power fell short of its forecast capacity by about 12-fold in the
U.S. and 30-fold worldwide, mainly because building it cost severalfold more than expected,
straining or bankrupting its owners. The many causes weren’t dominated by U.S. citizen
interventions and lawsuits, since nuclear expectations collapsed similarly in countries without
such events; even France suffered a 3.5-fold rise in real capital costs during 1970–2000. Nor did
the Three Mile Island accident halt U.S. orders: they’d stopped the previous year. Rather,
nuclear’s key challenge was soaring capital cost, and for some units, poor performance.
Operational improvements in the ’90s made the better old reactors relatively cheap to run, but
Stewart’s case is for building new ones. Have their economics improved enough to prevent a
rerun?

On the contrary, a 2003 MIT study found new U.S. nuclear plants couldn’t compete with new
coal- or gas-fired plants. Over the next five years, nuclear construction costs about tripled. Was
this due to pricey commodities like steel and concrete? No; those totaled less than one percent of
total capital cost. Were citizen activists again to blame? No; they’d been neutralized by
streamlined licensing, adverse courts, and Federal “delay insurance.” The key causes seem to be
bottlenecked supply chains, atrophied skills, and a weak U.S. dollar—all widening the cost gap
between new nuclear power and its potent new competitors.
2

Today’s main alternatives aren’t limited to giant power plants burning coal or natural gas.
Decentralized sources provide from one-sixth to more than half of all electricity in a dozen
industrial countries and, together with more efficient use, deliver the majority of the world’s new
electrical services. Booming orders did lately raise wind-turbine and photovoltaic prices too, but
they’re headed back down as capacity catches up; PVs got one-fourth cheaper just in the past
year, and reactor-scale PV farms compete successfully in California power auctions. New U.S.
windfarms—“firmed” to provide reliable power even if becalmed—sell electricity at less than
typical wholesale prices, or at a third to a half the cost utilities project for new nuclear plants.

Rather than viewing nuclear power within this real-world competitive landscape, Stewart simply
waves away its competitors. He praises efficient use of electricity, but rejects it because he says
it can’t by itself replace all coal and power all global development. He also dismisses wind and
solar power, and omits small hydro, geothermal, waste/biomass combustion, all other
renewables, and cogeneration. Yet worldwide these sources make more electricity than nuclear
power does, and for the past three years, have won about 10–25 times its market share and added
about 20–40 times more capacity each year.

The world in 2008 invested more in renewable power than in fossil-fueled power. Why? Because
renewables are cheaper, faster, vaster, equally or more carbon-free, and more attractive to inves-
tors. Worldwide, distributed renewables in 2008 added 40 billion watts and got $100 billion of
private investment; nuclear added and got zero, despite its far larger subsidies and generally
stronger government support. From August 2005 to August 2008, with new subsidies equivalent
to 100+% of construction cost and with the most robust nuclear politics and capital markets in
history, the 33 proposed U.S. nuclear projects got not a cent of private equity investment.

Nonetheless, Stewart rejects all non-nuclear options, for four fallacious reasons:

• Baseload: Wind and photovoltaics can’t keep the lights on because they can’t run 24/7.
• Footprint: Photovoltaics need about 150–175 times, and windfarms from 600+ to nearly
900 times, more land than nuclear power to produce the same electricity.
• Portfolio: We need every tool for combating climate change, including nuclear power.
• Government role: The climate imperative trumps economics, so governments everywhere
must and will do what France did—ensure that nuclear power gets built, regardless of
economics or dissent.

I believe each claim is unsupportable:

• Baseload. The electricity system doesn’t rely on any plant’s ability to run continuously;
rather, all plants together supply the grid, and the grid serves all loads. That’s necessary
because no kind of power plant can run all the time, as Stewart says they must do to meet
steady loads. I repeat: there is not and has never been a need for any particular plant or
kind of plant to run all the time, and none can. All power plants fail, varying only in their
failures’ size, duration, frequency, predictability, and cause. Solar cells’ and windpower’s
variation with night and weather is no different from the intermittence of coal and nuclear
plants, except that it affects less capacity at once, more briefly, far more predictably, and
is no harder and probably easier and cheaper to manage. In short, the ability to serve
steady loads is a statistical attribute of all plants on the grid, not an operational
requirement for one plant. Variability (predictable failure) and intermittence (unpredic-
table failure) must be managed by diversifying type and location, forecasting, and
integrating with other resources. Utilities do this every day, balancing diverse resources
to meet fluctuating demand and offset outages. Even with a largely (or probably a
wholly) renewable grid, this is not a significant problem or cost, either in theory or in
practice—as illustrated by areas that are already 30–40% windpowered.

• Footprint. Stewart understates nuclear power’s land-use by about 43-fold by omitting all
land used by exclusion zones and the nuclear fuel chain. Conversely, he includes the
space between wind or solar equipment—unused land commonly used for farming,
grazing, wildlife, and recreation. That’s like claiming that the area of the lampposts in a
parking lot is the area of the parking lot, even though 99% of it is used for parking,
driving, and walking. Properly measured, per kilowatt-hour produced, the land made
unavailable for other uses is about the same for ground-mounted photovoltaics as for
nuclear power, sometimes less—or zero for building-mounted PVs sufficient to power
the world many times over. Land actually used per kWh is up to thousands of times
smaller for windpower than for nuclear power. If land-use were an important criterion for
picking energy systems, which it’s generally not, it would thus reverse Stewart’s footprint
conclusion.

• Portfolio. The one paper he cites as proof that we need all energy options actually says
the opposite. There is no analytic basis for his conclusion, and there’s strong science to
the contrary. We can’t afford to stuff our energy portfolio indiscriminately with some of
everything, and we shouldn’t: some options are less worthy and effective than others. The
more you fear climate change, the more judiciously you should invest to get the most
solution per dollar and per year. Nuclear flunks both these tests.

• Government. If nuclear power isn’t needed, worsens climate change (vs. more effective
solutions) and energy security, and can’t compete in the marketplace despite uniquely big
subsidies—all evidence-based findings unexamined in Stewart’s chapter—then his
nuclear imperative evaporates. Of course, a few countries with centrally planned energy
systems, mostly with socialized costs, are building reactors: over two-thirds of all nuclear
plants under construction are in China, Russia, India, or South Korea. But that’s more
because their nuclear bureaucracies dominate national energy policy and face little or no
competition in technologies, business models, and ideas. Nuclear power requires such a
system. The competitors beating nuclear power thrive in democracies and free markets.

Stewart’s reputation and his valuable prior contributions to clear thinking for a better world may
win his nuclear views some attention. Yet judged on its merits, not his history, this nuclear chap-
ter’s assertions can only worsen climate and security risks.
—Amory B. Lovins
Chairman and Chief Scientist, Rocky Mountain Institute (www.rmi.org)
13 October 2009
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Statistical Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 11:01 PM
Response to Reply #7
18. No reason why the can't be on budget and on cost.
Japan built 2 new GenIII+ reactors and they were on-time and on-budget.

China is building 2x AP1000 (Westinghouse GenIII+ reactors) and so far they are on-time and on-budget.

So it CAN be done. However the risk remains. The US is well known for being a regulatory nightmare for nuclear power. No company wants to take the risk. It doesn't mean the first reactors will fail, or not be profitable it simply means there isn't sufficient risk-reward for companies to justify the RISK.

In most scenarios to make risk-reward work out you simply raise the reward which is interest rates. However reactors are very capital intensive. The construction + Interest is about 90%-90% of the LIFETIME cost of the reactor. Doubling interest would simply make it impossible to ever produce enough power to break even.
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bhikkhu Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-19-10 11:44 PM
Response to Reply #18
19. Here's what we may get, again, for those billions:
http://www.roadsideamerica.com/tip/16488

I think that one cost about 4 billion. Here's a good shopping list of ongoing stuff we might want to get in on, 4 trillion or so that we really don't need for anyhting else I guess:

http://www.grist.org/article/how-much-will-nuclear-cost-us-citizens/

I'm not actually anti-nuke, I just think that conservation and limits to growth are realistic, and in a best-case nukes just offer the false illusion of abundance for another short few years anyway.
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joshcryer Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Feb-20-10 07:39 AM
Response to Reply #19
20. It is becoming increasingly apparent to me that the USA is the problem.
There's something with regards to building nuclear plants in the USA that causes them to undergo major delays and cost overruns. Haven't tracked it all down quite yet, but certainly the generalization is untrue as it relates to nuclear power elsewhere in the world.
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kristopher Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Feb-20-10 04:34 PM
Response to Reply #20
21. You need to do more research.
http://www.nytimes.com/2009/05/29/business/energy-environment/29nuke.html

In Finland, Nuclear Renaissance Runs Into Trouble

By JAMES KANTER
Published: May 28, 2009

OLKILUOTO, Finland — As the Obama administration tries to steer America toward cleaner sources of energy, it would do well to consider the cautionary tale of this new-generation nuclear reactor site. After four years of construction and thousands of recorded defects and deficiencies, the price tag on the reactor in Olkiluoto, Finland, has climbed at least 50 percent.

The massive power plant under construction on muddy terrain on this Finnish island was supposed to be the showpiece of a nuclear renaissance. The most powerful reactor ever built, its modular design was supposed to make it faster and cheaper to build. And it was supposed to be safer, too.

But things have not gone as planned.

After four years of construction and thousands of defects and deficiencies, the reactor’s 3 billion euro price tag, about $4.2 billion, has climbed at least 50 percent. And while the reactor was originally meant to be completed this summer, Areva, the French company building it, and the utility that ordered it, are no longer willing to make certain predictions on when it will go online.

While the American nuclear industry has predicted clear sailing after its first plants are built, the problems in Europe suggest these obstacles may be hard to avoid...
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