Nicholas Watson in Prague -

A fairly confused picture surrounds the apparent delay in the huge and much-heralded expansion of CEZ's Temelin nuclear power plant by several years. Some reports and comments from government and company officials refer to uncertainty over electricity demand after 2020, others talk about the Russian Atomstroyexport pushing for more time to prepare its bid, while CEO Martin Roman is telling anyone who will listen that's there's actually no delay at all. A more likely explanation is that the Czech utility simply can't afford the billions needed for the project.

In September 2009, CEZ launched a tender to build two new nuclear reactors at its 2-gigawatt Temelin nuclear power plant, the largest source of electricity in the country, with an option for up to three more reactors at other sites around Europe, in what could've amounted to an investment of about €20bn. It subsequently announced three international firms - the US' Westinghouse, France's Areva and Russia's Atomstroyexport - had qualified to participate in the tender to build two reactors at its Temelin nuclear power plant, and so the mass lobbying-effort began.

But things began to look a bit shaky in September when it emerged that CEZ was considering partnership deals with European utilities to help finance the estimated €20bn expansion of its nuclear fleet. Now the daily Hospodarske Noviny, citing an unnamed CEZ employee, reported that construction could be delayed by as much as several years, while the firm also plans to reduce investments in Bulgaria, Romania and Poland. "The entire strategy according to which Temelin was built has changed somewhat because power consumption is developing differently [than expected] and so are power prices," Industry and Trade Minister Martin Kocourek was quoted as telling reporters.

A small price to pay

Indeed they are. When CEZ began this whole process, electricity prices were at around €80 per megawatt hour (MWh). Prices have since fallen dramatically as the global economic crisis took its toll on electricity demand. CEZ had managed to lock in forward prices of €61/MWh for 2010, but spot prices are now around the mid-€50/MWh range and the prospects of a return to pre-crisis prices are unlikely anytime soon.

When electricity prices were high, CEZ was making money hand over fist. But with the fall in prices, CEZ's inefficiencies and financial weaknesses have been brutally exposed. In the first half of this year, CEZ's net income fell 18.5% on year to CZK28.7bn, while its cash flow (ebitda) fell 9.0%, putting upward pressure on its net debt/ebitda position, which grew to 1.3x in the first-half from 0.8x a year earlier (though this is still below its medium-term goal for net debt/ebitda not to exceed 2.0-2.5x).

On October 14, Hospodarske Noviny quoted Eduard Janota, a member of CEZ's supervisory board, as saying that CEZ has now introduced a new cash-flow management policy designed to prevent its debt levels from rising as fast as they have in the past.

Actually, CEZ's financial position is probably worse than the profit-and-loss statement implies; its foreign forays into other Central and Eastern European countries have proved less-than satisfactory - hence its decision to concentrate more on it home market - and it's having difficulty getting customers in places like Bulgaria, Romania and Albania to pay up.

CEZ is also very inefficient; according to research by Candole Partners, it needs 401 employees to generate 1 MWh of power compared with between 180-290 needed by its European peers such as E.On, EDF, RWE and Fortum.