The Three Mile Island Readout

LPO is off to the races

This week, the Loan Programs Office closed its first new loan under the Trump administration – a $1 billion loan to Constellation Energy Group to assist with the restart of the once-infamous Three Mile Island Nuclear Generating Station’s Unit 1.

This loan is historic for several reasons, including some LPO-specific novelties that energy wonks in particular may appreciate.

First, while Three Mile Island isn’t the first nuclear reactor to restart in the US – the Palisades plant in Michigan gets that distinction* – bringing back Three Mile Island is hugely symbolic. The Three Mile Island partial nuclear meltdown in 1979 was the worst commercial nuclear accident in US history (though we should note that it had no broadly-verified public health effects), and hastened the decline of the US nuclear industry. Today, many local residents are celebrating the reactor restart. It’s a new era in the political economy of nuclear power.

Second, it’s really the first LPO loan to tackle the issue of AI-driven load growth. Microsoft has signed a PPA with Constellation for 800+ megawatts as part of this deal; such a construct between a Big Tech firm and an energy developer would have been unthinkable just a few years ago, and represents the tech sector’s continued move into the infrastructure space. (Note: A technical but important point of clarification here – Microsoft has a PPA, but this is not a behind-the-meter deal. The electrons from Three Mile Island will flow directly into PJM, benefitting ratepayers and adding extra reserve margin to the grid.)

Third, this is the first ever LPO loan to reach conditional commitment and financial close on the same day. This is a big deal for the office – but more on this later.

Finally, this is the first LPO loan to close under the Trump administration’s revamped Energy Dominance Financing program. Looking back to just a few months ago – to the spring, when DOGE looked to cut LPO’s staff by upwards of 80%, or the summer, when the House reconciliation text tried to rescind nearly the entirety of LPO’s usable (at least for nuclear) credit subsidy – it’s worth reflecting on the fact that there were many moments where this moment seemed unlikely. This administration made a conscious choice to reverse course, and it’s paying dividends.

With all of this out of the way – let’s get to the details.

Three Mile Island in 2019, prior to shutdown

LPO’s Same-Day Financial Close

How is it that LPO was able to reach conditional commitment and financial close on the same day?

Simply put, LPO is able to move to financial close when all of the “conditions precedent” (CPs) have been met. CPs are, broadly, the legal, technical, due diligence, and other requirements that DOE requires to address outstanding risks – these include requirements like completing permitting or attaining certain manufacturing performance standards, for example.

Constellation already fulfilled all of these CPs – which makes some sense given that this loan was “investment grade” corporate loan (more on that below), which typically carries fewer CPs. That allowed the LPO to execute on the conditional commitment and financial close in quick succession.

Why Hasn’t This Happened Before?

Largely because no one thought to try.

Also, because this sort of construct is not the right fit for every project. One of the reasons that LPO usually takes the conditional commitment → wait a few months → financial close structure is the conditional commitment announcement helps recipients raise more equity for the project. In this case, though, Constellation, Microsoft et al. were not in need of equity, so the concurrent commitment/close structure made sense.

Will This Happen Again?

It seems likely. Obviously, many recipients want to move quickly. What’s more, as we’ve learned over the last year, unclosed conditional commitments sometimes face headwinds when an administration switches over, so quick turnarounds can be helpful.

Given the characteristics of a loan recipient who would want to pursue such a structure – well-capitalized, capable of meeting rigorous CPs in advance, etc – LPO’s utility deals seem like a logical use case. These are the big-billions deals where LPO issues a loan to a major, often vertically-integrated utility to pursue a host of different projects spanning gas, nuclear, batteries, etc. Importantly, these sorts of utility deals are different from the sorts of “project loans” that most people associate with LPO – they’re corporate loans, which go on the recipient’s balance sheet rather than through a special purpose vehicle.

And this is a good segue, because the Three Mile Island loan was unique – because it too was a corporate loan, not a project loan.

“Investment-Grade”

The corporate loan structure with Constellation means that it has the full strength and credit support of Constellation’s balance sheet. This, in turn, has resulted in LPO rating the loan as “investment grade” (shorthand: LPO gets paid back no matter what), which means that the loan is also zero credit subsidy.

I think this is a point worth underlining. A lot of companies don’t like corporate loans, because if the project underperforms, it can affect their credit ratings. Nobody wants to run the risk of getting downgraded, from, say, BBB+ to BBB-. So instead, most companies opt to accept their loans through special purpose vehicles.

But as we can see with the Three Mile Island deal, this is by no means a hard and fast rule. And given that the corporate loan structure drastically reduces the level of required credit subsidy, you can imagine a situation where LPO could shift towards corporate loans in scenarios where their available credit subsidy is low.

What’s Next?

Nuclear is obviously a priority for this administration, and LPO deals are closing. There are lots of rumors flying around about the LPO and its large modular reactor goals, but they are still just rumors, and we won’t speculate on those here.

What I will say is that with loans to help restart Palisades and Three Mile Island both announced, there is a very obvious third reactor to restart in Duane Arnold in Iowa. For my part, I’ll be staying tuned for future announcements.

That’s all we’ve got for now – thanks for reading.

*One of my nuclear friends would come after me if I did not mention that technically, Three Mile Island is the first reactor to start up after “shutdown.” Palisades will be the first reactor to restart after “entering decommissioning status.” So TMI really does have a unique claim here!