Nicholas Watson in Prague -

RWE's decision to pull out of the project to build a nuclear power plant in Bulgaria leaves the door open for the Russian state-owned Rosatom to finally get a toehold in Europe's nuclear power sector.

RWE's announcement on October 28 ended months of speculation that the German utility was having second thoughts about its involvement in the project to build a 2,000-megawatt nuclear power plant in Belene in northern Bulgaria. RWE had been picked in 2008 as the strategic partner to build and operate the plant in conjunction with the state-owned national electricity company NEK, which is now part of the country's energy holding company, BEH, which retained 51% in the project. RWE held the other 49%.

The terms of the deal required RWE to pay €500m for the project's structuring and to invest another €1.2bn during the initial stages of development. However, the global economic crisis was making financing for the project difficult, which in turn was inflating the cost of the project. In January, NEK signed a €4bn contract with Russia's state-owned nuclear engineering exporter Atomstroyexport to build the two 1,000-MW reactors. However, it was later disclosed by Atomstroyexport that delays in the project from the government's failure to provide financial guarantees had pushed up the estimated cost of construction to €6bn. Then after a new Bulgarian government was elected in July, its review of the country's various energy projects found that the cost of the whole project would actually probably be nearer €10bn.

At the same time, RWE's sums were showing that future revenues from the plant would be less than initially thought. According to Datamonitor, projections made in 2007 for power demand are now reckoned to be overly optimistic. "Without sufficient demand for power, baseload prices will remain below the minimum threshold necessary to render nuclear generation viable," Datamonitor says. "Belene would thus face excessive price risk in that one cannot easily turn off a nuclear power station, should baseload prices fall too low."

Furthermore, the economic crisis hit emerging Europe's economies hard, causing industrial output there to collapse. This in turn cut greenhouse gas emissions to such an extent that many utilities and corporations in the region are now long on carbon credits, eliminating the cost advantage that nuclear power enjoys over coal- or gas-fired generation.

Given that RWE hadn't yet put any money into the project because the government had dragged its feet over finalizing deals for project financing, engineering, delivery and construction, this was probably a good time to get out. This was also the third project in Central and Eastern Europe that RWE had pulled out of in as many weeks - it ended talks to buy a stake in the Polish utility Enea and withdrew from an LNG project in Croatia - suggesting the crisis has forced the German utility to focus on its core activities and market.

Harder work

RWE's withdrawal probably won't spell the end for the Belene project, but, as Bulgaria's Economy Minister Traicho Traikov admitted a day later, it certainly "makes things even harder." The next step, he said, would be to hold a transparent tender to hire a consultant for the project. After a consultant is selected, Bulgaria will see what investment interest there is and decide - with the consultant's help - what share package to offer a new strategic investor.

That new strategic investor will most likely be Russian. Earlier this year, as the economic crisis punched a hole in the country's finances, the government had put out feelers to sell down its 51% stake in the project, perhaps by 20-30%. Several foreign companies reportedly approached the government, but the only real interest came from Russia. On October 30, Sergei Novikov, an advisor to the chief of the Russian state nuclear corporation Rosatom, was quoted by newswires as saying that his company is still interested in holding a stake in the power plant regardless of WE's decision and expects to receive a proposal soon from the Bulgarian government regarding the terms and conditions of its participation in the plant's capital structure.

The presence of the Russians is no surprise to analysts. Ivan Koutsarov of IHS Global Insight notes that the Bulgarian state has already invested more than €1.2bn in the project, with construction work begun and equipment already ordered from Atomstroyexport. "It's highly unlikely that any credible western investor will be willing to commit to a majority stake in Belene, given that the framework of the project has already been laid down... This leaves Russia as the only viable foreign partner," Koutsarov says. "The financial difficulties of Belene may turn out to be an excellent opportunity for Russia to realise its objective of entering the EU nuclear power sector."

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