COMMENT: How much will Czechs end up paying for Temelin II?

By bne IntelliNews October 10, 2012

Jan Ondřich of Candole Partners -

In June 2011, the chief financial officer of CEZ, Martin Novak, dismissed the suggestion that the Czech utlity would not have the resources to pay for the construction of two new nuclear reactors at its Temelin plant. He stated that by the time construction is underway, CEZ will be making so much money that it will be able to pay for the project in cash. Either the CFO was thinking that the 2016 start date for construction is unrealistic and that construction would begin much later, or his colleagues were working from faulty assumptions.

Our analysis published in 2012 shows that it will be impossible to finance Temelin without either a state guaranteed loan or a photovoltaic-like subsidy scheme. The country's industry minister has now arrived at the same conclusion. The recent energy policy concept assumes a subsidy scheme known as "contracts for difference". The Ministry of Industry and Trade assumes that the subsidy would be equal to the difference between a regulated tariff, which the ministry intends to set at a level of €60 per megawatt hour (MWh), and wholesale electricity price, with this difference being covered by consumers.

Our argument, that CEZ would need this consumer financed scheme in order to build Temelin, is now accepted even by the company's CEO, Daniel Benes. In October, he went so far as to estimate the expected size of the subsidy, stating that it would amount to CZK5bn (€200m) a year, and would increase consumer electricity prices by 1%.

We believe that both the industry ministry and CEZ underestimate the real size of the subsidy, perhaps as a way to prepare the public for the inevitable increase in the level of the tariffs at a later date. Our calculations show that the breakeven tariff for Temelin would have to be set at a level of €90/MWh. In comparison, French utility EDF is asking the British government to set the tariff at a level of between £100-140/MWh, or almost four-times the wholesale price of electricity.

We are being conservative in our calculation of €90/MWh only because we make the assumption that the published investment cost of CZK200bn will be adhered to. Experience of large investment projects in this country show that original estimates should be increased at least three-times to arrive at the true, final price.

And even if we stick to our conservative estimate of €90/MWh and average wholesale price of €51/MWh, we calculate that the subsidy scheme would cost Czech consumers almost CZK17bn a year, or over three-times more that Daniel Benes stated in the Czech media.

This would mean that a household with an average annual consumption of 4,500 KWh would pay CZK1,430 more than it pays today. This assumes that the burden of the subsidy is shared equally between industry and households. More likely, the burden will be unequally loaded upon the backs of households.

And so the nuclear subsidy scheme as presented by the Ministry of Industry and Trade and CEZ would increase household electricity bills by 10%, not the 1% that Daniel Benes claims.

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