Batting away a double-barrelled blast from the EU, Hungary insists it will plough on with the Russian-funded expansion of the Paks nuclear plant. However, that hardly looks a realistic solution. Budapest potentially faces huge fines and long project delays should it try to simply ignore Brussels, and will likely launch a hunt for loopholes to smuggle the project through, suggest analysts.
Close to two years after Hungary tore up an international tender in January 2014 to hand Russia the contract to expand Hungary's only nuclear power plant, the EU pounced in mid-November to hit the deal with a sharp one-two. The European Commission has launched an infringement procedure on public procurement grounds, while a probe over alleged state aid will look at Hungary's €2.5bn share of the project's funding. Moscow will provide the other €10bn it will cost to plug in two new 1,200 megawatt reactors.
In typically confrontational fashion, Hungarian Prime Minister Viktor Orban reacted with scorn, and pledged the project will go ahead. A bevy of other officials in Budapest have made similar statements.
However, that uncompromising stance looks little more than the sort of display for the domestic political audience so common in Budapest these days. The government has had plenty of time to study its options. Perhaps the only surprise was that Brussels took so long to make its objections official, and that it then threw both challenges on the table within a week.
At some point the EU had to address these issues, Andras Deak, senior research fellow at the Institute of World Economics of the Hungarian Academy of Sciences points out to bne IntelliNews; EU procedures are simply time consuming, he says, adding that the issues raised “constitute the biggest risks to the project's implementation".
While he insists the EU's actions and timing are free of politicisation, he also admits that the shifting geopolitical ground beneath the deal can't be ignored. The EU's relations with Russia have nosedived since January last year, elevating the strategic connotations.
Orban’s cabinet is wearing its usual poker face as it fields the EU obstacles. “The Paks II project does not involve state aid, and a rational investor would also implement the investment, as its expected return is higher than the costs of the capital invested,” a government statement released on November 24 intoned.
Cabinet chief Antal Rogan pointed out Hungary has already successfully dealt with one EU order to suspend the project. Budapest quickly shook off a challenge to a contract on fuel for the plant in the summer. However, that now looks to have been a shot across the bows.
The European Commission has called on Hungary to halt the project while the state aid investigation is carried out. However, Orban's chief of staff, Janos Lazar, pledged that while the government will send a detailed response to Brussels, it will continue with the project, which Hungary recently declared will start preparations for construction next year (the construction itself is scheduled for 2018).
“The expansion of the Paks nuclear power plant remains on track, there is no question about it in the government’s mind," he stated, adding Hungary is ready to defend its position in court if need be.
Member states are free to make the decision to go forwards before a legal assessment from Brussels, sources at the European Commission tell bne IntelliNews, but could face serious problems down the line. “If the investigation comes to the conclusion that there is a state aid violation, the commission would ask Hungary to recover all monies paid out," the source emphasizes.
On top of that, Hungary could face a hefty fine, points out Deak. “If the commission were to set a fine of say just 10% of the project value, that would come to more than €1bn. I don’t think Orban would take that risk." Hungary is likely to use the next couple of months, during which it will discuss the objections with the EU, hunting for loopholes in the bloc's regulations, he suggests.
Time is money
Meanwhile time is also money. Edgar Van der Meer from think tank NRGExpert says Hungary is at a disadvantage regarding the schedule. "Hungary wants everything done quickly," he claims, "while the EU wants everything done properly".
That makes the state aid probe in particular a catch 22 for Hungary, he tells bne IntelliNews. “If the commission finds breaches, and then issues explanations, and then only after that sends the case to the court of justice, Hungary will lose a lot of time”.
However, long delays now look unavoidable. “If the commission succeeds in making the Hungarians change the project, they will have to go to Moscow and say: 'Sorry guys, we were stupid from the very beginning and have to start again',” Deak says. “On the other hand, Budapest could question the decision of the court, and that might take another two years. Either way, it will create a huge delay."
Hungarian opponents of the Paks expansion would welcome that. They insist that more time is needed to reverse errors already made. The project has never been clearly explained and justified to the public and expert community, they claim. Indeed, the deal with the Russians and project plans have been largely kept under wraps using legislation on strategic state investments.
Andras Perger from Greenpeace Hungary says the government’s key claim, that the upgrade of Paks will help cap power prices, is not backed up by calculations. “The loan given by the Russians for that construction will not make the price cheaper” he tells bne IntelliNews. “[The current price] €55 per megawatt-hour will be too much in 2025 [the projected launch of new Paks facilities], no one would expect such high prices on the market”.
"Eventually Hungary is likely to end up with an oversupply of expensive energy that no one will be willing to buy," he forecasts, "and we'll still be paying back the Russian loan."