Brussels launches state aid probe into Hungary’s Paks nuclear project

Brussels launches state aid probe into Hungary’s Paks nuclear project
By bne IntelliNews November 23, 2015

The European Commission has launched a probe to establish whether Hungary’s plan to finance the construction of two nuclear units is compatible with state aid rules, the EU executive announced on November 23.

The move comes just days after the commission launched an infringement procedure against the expansion of the Paks power plant, saying Budapest breached EU procurement rules in awarding Russia the €12.5bn project without a tender. After waiting close to two years since Hungary sealed the deal with Moscow, the EU has now blasted it with both barrels within the space of a week.

The moves come as Brussels unveiled on September 18 a progress report on its efforts to build an Energy Union, with a bid to implement new regulations that would demand the EU is party to any intergovernmental agreements on energy. Russia's role in Central and Eastern Europe, and the obstacles to creating a unified market, is front and centre in the report.

Hungary has claimed that because the deal on Paks is intergovernmental, it is not subject to state aid rules. However, handing over such leverage on an EU nuclear facility has clearly rattled Brussels as it fights to alleviate European dependence on Russia for energy, which is often used to exert political pressure.

Budapest has been lambasted for its resistance to EU sanctions over Russia's role in the Ukraine crisis. In an interview with Politico Europe published on November 23, Hungarian Prime Minister Viktor Orban called for a new EU constitutional convention that strengthens the power of nation states and weakens Brussels, as well as normalised relations with Russia.

Budapest tore up an international tender in January 2014 to hand Russia the contract to expand Hungary's only nuclear power plant. In return, Moscow agreed to lend Hungary €10bn in funding. The pair signed contracts on the design, construction and maintenance of the two new 1,200 megawatt reactors late last year.

The European Commission said it was concerned the Hungarian investment may not be compatible with market pricing. “Given the size and importance of the Paks project, the commission has to carefully assess whether Hungary's investment is indeed on market terms or whether it involves state aid”, EU Competition Commissioner Margrethe Vestager said.

The same official made her mark earlier this year when she reinvigorated a probe into anti-competitive practices by Gazprom in CEE. The Russian state-controlled gas giant is now negotiating over a case that could land it with a fine of more than €10bn.

In the Paks deal, EU regulators will in particular assess whether a private investor would have financed the project on similar terms to Budapest. If the project is found to involve state aid, the commission will investigate whether it would lead to distortions of competition on the Hungarian energy market.

Hungarian Prime Minister Viktor Orban said on November 20 that the project would go ahead despite the commission's legal action on the procurement charges. "Without the Russians, it’s impossible to manage rightly the future of the Hungarians," he told Politico. "So we have to have a good balanced relationship with the Russians."