New Czech govt likely to bring further delays for CEZ nuclear tender

By bne IntelliNews November 19, 2013

Nicholas Watson in Prague -

A new Czech government is in the final stages of being formed, but its make-up will probably mean further delays at the very least for the state utility CEZ's costly nuclear tender.

Czech President Milos Zeman is expected on November 21 to give a mandate to Bohuslav Sobotka, head of the Czech Social Democratic Party (CSSD), which won the inconclusive parliamentary election in October, to form the next government. Sobotka has already started talks with the big winner of the election, the new ANO 2011 party founded by Slovak-born billionaire Andrej Babis, and the centrist Christian Democrats (KDU-CSL).

Jan Mladek, a CSSD heavyweight and possible member of the new cabinet that should be in place by New Year's Eve, tells bne that out of the nine working groups put together by the possible coalition partners, eight have reached "a lot agreement", though the crucial one on taxes and the budget is still far from a deal.

On the biggest energy issue, CEZ's controversial project to double the capacity at the Temelin nuclear power plant at an estimated cost of €8bn-12bn, the new government is likely to stick to the line that it should be completed, but that further delays to choosing a winner are inevitable. Currently, the Russian-Czech consortium of Atomstroyexport, Skoda JS and Gidropress is fighting it out with the Japanese-US firm Westinghouse for the contract, after France's Areva was turfed out of the tender under controversial circumstances in October 2012.

"Written in our programme is that we favour finishing Temelin, but it should make economic sense. Mr Babis is also in favour of finishing Temelin, but it should make economic sense and be without subsidies, including those like the British government agreed for the Hinkley nuclear power station," says Mladek, referring to the commitment from the UK government that the nuclear power produced at the EDF plant will be bought at the price of £92.50 per megawatt hour (€110.20), more than double today's wholesale spot price in Europe of around €40/MWh.

That spells trouble for the Temelin expansion, because no one, not even CEZ itself, believes the project is economically viable without some form of state guarantee. Candole Partners, a Prague-based consultancy (whose clients include CEZ's competitors) that has been a persistent critic of the project, claims the breakeven price of the Temelin expansion is close to €115/MWh. "This selling price will have to be sustained in real terms... for the full operational life of the plant to ensure capital costs are covered. Neither we nor potential equity investors consider this realistic," Candole says in a recent report on the economics of the project.

An industry insider who declined to be named admits the project is "weak", having relied on "over-optimistic predictions" from the outset. "It could've done with another strategic investor in there from the start," he says.

Another insider close to CEZ says a combination of Czech politicians' unwillingness to put more financial burdens on Czech households already reeling from recession and austerity, the fraught international politics of the project, and the worsening financial plight of CEZ mean the project won't be completed.

Mladek admits that while the current situation is not favourable for the nuclear tender and further delays or even restarting it are possibilities, it does not mean the project is dead.

However, others argue that even within CEZ itself there is a growing acceptance the project in its present form is dead in all but name. CEZ did not answer questions put to it by bne, though sources say support for the project within the utility's management, never that unanimous, has fallen as the economics behind it deteriorated and the tender's legal problems stemming from Areva's ejection mounted.

The latest setback came on November 11 when the European Commission announced it has begun a preliminary investigation into CEZ's decision to exclude Areva from the tender for alleged "serious shortcomings" in its preliminary bid. "No infringement procedure has been launched," a spokesperson for the Commission was quoted as telling reporters. "It is still very much at the stage of preliminary investigation."

That investigation is a victory for Areva, which has been busy since its ejection from the tender filing lawsuits against the decision and trying to get Brussels to look into the issue. Areva's record in the Czech courts has been mixed, but its suits are proving a fly in the ointment for the tender. The latest legal hiccup came on October 22 when the Czech Regional Court in Brno issued an injunction preventing CEZ from signing a final contract with a winner in the tender, though a court spokeswoman Miroslava Sedlackova said CEZ could still choose it's preferred candidate.

The series of legal challenges have already forced CEZ to delay selecting that candidate. CEZ was to have picked a preferred bidder by the autumn, but the director of CEZ's strategy division, Pavel Cyrani, revealed in July that a final contract might not be signed until the autumn of 2014.

That is now looking increasingly optimistic.

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