Tim Gosling in Prague -
Czech power utility CEZ announced on April 10 that it has cancelled the tender to expand the Temelin nuclear plant. The move comes a day after the government made its strongest statement yet that it would not offer the €8bn-10bn project any state support.
State-controlled CEZ said it has informed bidders - US/Japanese Westinghouse and a consortium led by Russian state nuclear agency Rosatom - that the tender for two additional 1,200 megawatt (MW) reactors at the plant in the south of the country has now been halted.
Explaining the reasons behind the decision, CEZ's CEO, Daniel Benes, said in a statement that: "Since 2009, when the public tender was launched, until today, electricity sector in Europe has evolved turbulently. While originally the project was fully economically feasible given the market price of electricity and other factors, today all investments into power plants, which revenues depend on sales of electricity in the free market, are threatened."
However, to many the project has been unviable from the start - a view that has only been lent more weight as time has passed. "CEZ should have made the decision to cancel the project a long time ago - it would have saved tens of millions of euros of shareholders' money as well as time and energy the bidders had to put in," says Jan Ondrich of Candole Partners, a Prague-based advisory firm that has been a long, trenchant critic of the project. "There is overcapacity in Europe and there is no need for large baseload generators. Power prices will likely stay low given expansion of wind and solar in Germany (albeit at slower pace), low hard coal and low carbon prices which we do not expect to reach relevant levels of €20-plus before 2021."
Given the worsening economics surrounding the project, CEZ has been long trying to secure state support for it, but Prime Minister Bohuslav Sobotka sternly ruled that out on April 9. The move to pull the plug also comes as the power giant attempts to fight off growing pressure from the coalition government to pay out more in dividends.
On April 9, Czech President Milos Zeman called for the tender to be scrapped and a new competition set up. The ejection of France's Areva from the competition in 2012 left the field to the two remaining bidders, but given the Ukraine crisis a decision in favour of the Russian bid would clearly be tricky.
Zeman, who has long been seen as having close Russian ties, has no formal power over the tender process, but dangled the carrot of revived government support for the project should a new tender be called. The president said he wants to see Areva - which has long challenged its ejection - back in the running, as well as the introduction of an unnamed bidder from South Korea, reports Reuters.
A representative of Korea Electric Power Corp (KEPCO) was part of a South Korean delegation to the Czech capital recently. The president said a new tender with four rather than two entrants offered "a chance to lower the price".
The offer of potential government support - albeit Zeman is in no position to officially offer it - could help revive a project many argue (and hope) is now dead in the water. CEZ CEO Daniel Benes had been busy lobbying in the press again recently, and reiterated on April 9 that without state support, CEZ would drop the expansion of the nuclear plant outright.
Benes also told a meeting of the Chamber of Deputies' economic committee that despite the current poor power market in Central Europe, the Czech Republic is likely to face a significant deficit in power production after 2030, even though it currently has a surplus largely owing to planned closures of power plants and a decline in coal mining.
Yet the government has stood its ground, making its strongest statement yet the same day. "We have clearly declared that we currently refuse any type of state guarantee," Sobotka said, according to CTK. "Nobody should be surprised at this considering the experience we have had with support to renewable sources, above all to solar power plants. Moreover, the development on energy markets is unpredictable to a maximum extent, and the government can hardly pledge to guarantee electricity prices."
While the coalition has suggested several times since coming to office in January that it's not ready to support the project, the latest statements were the clearest yet. Deputy Prime Minister Pavel Belobradek said the government had not decided to halt the extension of Temelin. However, he added: "This decision is to be made by CEZ."
On top of that, Finance Minister Andrej Babis is pushing state companies - CEZ first and foremost - to help fund the planned increases in government spending. The leader of the Ano party has called for the utility - 67% state owned - to pay out 100% of 2013 profit as dividends.
Amid the widespread claims that the Temelin project is economically unviable, CEZ had until recently insisted it could fund the expansion out of its own resources, as long as it could divert every crown to the cause. Pointing out that such a payout would make Temelin impossible, Benes said dividend policy is in the hands of its shareholders, and that the company will submit a proposal to them by the end of April, with a decision due in June.
Analysts at VTB Capital agree that a 100% payout would hurt the company, considering the capital expenditure and pricing outlook for power in the region. "Last year, management specified that [the dividend policy of 50-60%] was set considering i) capex ahead, ii) deteriorating power prices, and iii) the credit rating. The outlook on capex has not changed much, while the price outlook has only become worse. That said, we will either see a sharp turnaround in the company's thinking, lobbied by the finance ministry, or last year's considerations prevailing."
Zeman's intrusion into the government's territory - a regular feature of his presidency - is likely partly motivated by backroom politics both within his former party, the coalition leading Social Democrats (CSSD), and between the CSSD and major partner in government ANO 2011. At the same time, the president is a long-term supporter of both nuclear power and major state-connected deals.
Put to bed
Analysts are hoping to see the project cancelled rather than see it return in a different form. Petr Bartek at Erste Bank suggests "the cancellation of the tender ... [is] ... positive in our view in the current environment of depressed wholesale power prices." The analyst notes Erste included a CZK30 per share risk provision for the Temelin expansion in its CEZ valuation.
Says Candole's Ondrich, "Given healthy and abundant power supply in Europe, the Czech government should focus on making the Czech grid smarter, better interconnected and more robust. Then consumers will be able to profit from cheap German wind and solar power rather than to try to subsidize inflexible baseload generators."
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