CEZ Republic no more as Czech utility faces major shake-up

CEZ Republic no more as Czech utility faces major shake-up
CEZ's existing nuclear power plant at Dukovany.
By Nicholas Watson in Prague February 28, 2018

It promises to be a crucial six months for the Czech Republic’s nuclear industry as a model for building and financing a new nuclear reactor at the Dukovany power plant takes shape.

According to Jan Stuller, special envoy for nuclear energy at the Czech Ministry of Industry and Trade, his nuclear energy committee is working towards putting together an agreement over the investment model for building the reactor by the end of March, beginning of April.

There are three options on the table: the reactor’s construction is done through subsidiaries of the 70% state-owned CEZ with some form of state guarantee; by the state buying those subsidiaries; or by CEZ once the state has squeezed out minority shareholders.

A key part of this is whether or how CEZ will be restructured. Ladislav Kříž, spokesman for CEZ, has confirmed to bne IntelliNews that a transformation study was prepared last year by a team of internal strategists, external lawyers, consulting companies and investment bankers. From this, the preferred option of CEZ’s management in any company shakeup would be to spin off the utility’s distribution, renewable energy, small-customer sales and energy services into a new company (CEZ ESCO) and to sell 49% of that entity to investors, while the state would take control of 100% of the remaining nuclear, coal, natural gas and hydroelectric assets, as well as coal mining and energy trading.

Splitting up CEZ, Central and Eastern Europe’s largest utility with a market capitalisation of around €11bn, would be a major shakeup of the business and political scene of a country that has sometimes been referred to over the years as CEZ Republic.

On February 7, Babis said the Czech government would appoint an expert team to assess a proposal to split the majority state-owned CEZ, though he does not appear to support the idea – in public at least – and is still insisting that CEZ should finance the building of any new reactors on its own without any state guarantees, hard or soft.

Few believe this is feasible, however, given CEZ’s stretched balance sheet and the difference between CEZ’s borrowing rates and the government’s being about 9% versus 3%. CEZ’s minority shareholders, who hold 30% of the shares, are also against new nuclear projects and could file a lawsuit arguing that Dukovany would destroy shareholder value.

“There is a vast consensus on building new nuclear resources… but financing is one topic where we do not have a consensus,” Stuller tells bne IntelliNews. “In November I would love to see the answer to three questions: the investment model, the financing model and how we should select the supplier.”

At the same time, the Czech government is currently working on providing further answers for the European Commission over its request to get around certain EU requirements governing public tenders.

Kristýna Křižanová, adviser to the vice-minister, Section of Energy, at the Ministry of Industry and Trade, tells bne IntelliNews that the Czech government has been holding talks with the European Commission about seeking an exemption to tender rules for the electricity market, though the issue “is getting really complicated and we are not sure we will be granted the exemption… Right now, we are in the process of responding to additional questions from the commission and we have a deadline of the end of March before another round of talks with the commission”.

Fear of fiasco

This latest project is actually the Czech Republic’s second attempt to complete a nuclear tender, after the previous one to build two more reactors at the Temelin nuclear plant was finally put out of its misery in 2014, the victim of a series of over-optimistic financial forecasts and incompetent official decisions.

Fearful of a repeat of that fiasco, a key part of this new project is getting Brussels to agree to exemptions to the strict rules that govern public tenders in the bloc, downgrading the issue of price in favour of other criteria such as technology, to make the process less complicated and drawn-out.

If this effort doesn’t succeed, other options will be considered, including a direct government-to-government deal like the €12.5bn one that Hungary agreed with Russia to expand its Soviet-era nuclear power plant at Paks after receiving approval from the European Commission in March 2017. Brussels received commitments from Budapest over limiting distortions of competition and accepted its arguments that only Rosatom could meet the technical requirements.

“We are now assessing other possible options and that is a legitimate example of how to proceed, but we have no preferred option right now,” says Křižanová.

Just as in Hungary, a direct government-to-government deal would undoubtedly favour Russia and its nuclear holding Rosatom over Korea Hydro & Nuclear Power Co, China’s General Nuclear Power, the US’ Westinghouse Electric Corporation, France’s EDF, and a joint venture of Japan’s Mitsubishi Heavy Industries and France’s Areva called ATMEA.

As well as the nuclear technology at CEZ’s plants already being Soviet, Russia has the option of offering financing for the new reactor at Dukovany, as well as for a possible three more reactors to be built at an expected total cost of around $30bn.

The Russian bid also has strong political backing, following the re-election of the openly pro-Russian President Milos Zeman in January and the victory of the Ano party of billionaire Andrej Babis in October 2017’s parliamentary election.

Babis, who is currently acting prime minister as he tries to form a coalition government, has been dogged by allegations about his links to the communist-era security services and the murky circumstances that enabled him to take over in the early 1990s Agrofert, a subsidiary of Slovak group Petrimex, the monopoly importer of oil and chemical products to Slovakia, that has since become the source of his vast fortune.

Zeman, meanwhile, has said he would not be opposed to a nuclear deal similar to that which Hungary struck for Paks, while local weekly Respekt detailed several visits last year that Zeman’s top aide Martin Nejedly made to Moscow, where he held a series of meetings with influential officials close to the Kremlin, including Rosatom head Alexei Likhachev. Nejedly, who used to run the local branch of Russian oil major Lukoil, has refused to discuss any meetings he might have held in Russia, insisting they were private affairs.

Industry sources in Prague also point to several deals in the nuclear supply chain that suggest Russia is positioning itself to win the tender.

In particular, in November CEZ confirmed reports it is considering selling all or part of its engineering/procurement/construction (EPC) arm Skoda Praha and is in talks with several interested parties, which reportedly include Rosatom. Analysts say buying this division would put the acquirer in a strong position to win any nuclear supply deal in the Czech Republic.


“We’ve always known that the preference is for Russia,” says one diplomatic source in Prague. “The decision in the end will be political.”

While Rosatom is odds-on favourite to win any nuclear supply deal should the Czechs succeed in getting exemptions to the tender rules or if they opt for a direct government-to-government deal, diplomatic sources in Prague warn that the European commission is unlikely to be as relaxed over the issue as it was with the Hungarians. 

Two of the Czech Republic’s neighbours – Germany and Austria –happen to be two of the most powerful EU members that strongly oppose any expansion of nuclear power in Europe. Austria has already launched a lawsuit following the commission’s climbdown over Paks, and, unlike Hungary, the Czech Republic is already one of Europe’s biggest power exporters, so the new reactors will be much more high profile.

There are also security fears in Brussels about the growing influence of Russia in the Czech Republic, which under its State Energy Policy (SEP) for the development of nuclear energy, approved in 2015, will see nuclear power become the main source of electricity production as ageing coal-fired power plants are phased out over the coming decades, with its share rising above 50% by 2040. Rosatom is already the exclusive supplier of fuel for the Temelin nuclear plant until 2020.

“Projects such as Nord Stream 2, or Russian energy activities in Serbia, the Czech Republic and Hungary keep the Euroatlantic counter-intelligence community awake at night,” says Jakub Janda, deputy director of the Prague-based European Values think-tank.

However, overshadowing all these different moving parts is the lack of government in the Czech Republic. “Everything is complicated by the negotiations going on about forming a government between the political parties, which will have to be approved by parliament,” says Stuller.

This means there is every possibility of further delays to this process, but an eventual Russian win is looking likelier by the day.