VISEGRAD: Central Europe’s nuclear gamble

VISEGRAD: Central Europe’s nuclear gamble
The European Commission gave the final nod to Hungary’s deal with Russia to expand the Paks nuclear plant in early March.
By Tim Gosling in Prague March 22, 2017

The European Commission gave the final nod to Hungary’s deal with Russia to expand the Paks nuclear plant in early March. The approval may give other Visegrad states struggling to come up with funding plans for their own projects food for thought.

Budapest scrapped an international tender on Paks 2 in early 2014, instead handing the project to Russian nuclear agency Rosatom in return for €10bn in financing towards the €12.5bn project’s costs. Accepting Hungary’s claim that as Paks 1 features Russian VVER reactors so too must the expansion, Brussels closed its probes on both competition and state aid grounds in recent months.

Critics point out that Hungary already relies on Russia for 60% of its energy, and claim the deal will only hand Moscow more leverage. The financial risks are also huge, given the weakness of power markets and EU stipulations that Paks 2 production must be sold on the open market.

Rather than face yet another fight with Budapest, the wearied response in Brussels behind closed doors is said to have been: “It’s your funeral”.

Still, with no one willing to pick up the tab for a CZK300bn (€11bn) expansion of the Czech nuclear fleet – the leading element in the country’s long-term strategy – Prague will have noted events in Hungary. Under the Czech plan, nuclear energy would provide 50% of the country’s power by 2040, a rise of 15pp.

With elections due in October, the expansion of the Dukovany and Temelin NPPs had already returned to Czech headlines ahead of the Paks 2 approval. Pressured by minority shareholders, state-controlled energy group CEZ says it cannot build the new units without government support. Prague has recently reiterated its stance that the state will offer no guarantees.

It was just such a standoff that saw CEZ pull a 2014 tender, worth around €8bn, to build two new units at Temelin. Despite the disappointment, the two finalists in that scrapped competition – Russian state nuclear agency Rosatom and Japanese-owned Westinghouse – both met with the Ministry of Industry and Trade (MIT) in February to discuss the first project in the strategy: a new reactor at Dukovany.

Suitors from China, France and South Korea also held talks. The Czech government is yet to comment on whether the meetings trimmed the field.

However, the Russians and Chinese likely hold the advantage. Moscow and Beijing are keen to push their nuclear industries overseas. The segment represents a rare high-tech export opportunity, and both states are ready to offer financing in return for a contract.

The cost of funding is key to the success of any nuclear project these days, points out Petr Bartek, an analyst that covers CEZ for Erste Group.

Russia is ready to offer a full spectrum of investment and funding models, Rosatom says. Aside from the Hungarian deal, the company is also currently building a plant in Finland in which it will take on a minority shareholding, and runs other models across the globe featuring a variety of ownership and financing arrangements.

Harsh terms

China’s biggest coup thus far in proving itself in the nuclear race is the deal to buy into the UK’s Hinckley Point C, although that massive project continues to face hurdles. Beijing has also been looking at Belene, a former Rosatom project in Bulgaria that is currently mothballed.

On top of the funding options, Russian and Chinese technology is far cheaper than that offered by their competitors, says Geoffrey Rothwell, principal economist at the OECD Nuclear Energy Agency.

Czech media has reported that Beijing – which has received much encouragement for investment from President Milos Zeman and various oligarch groups over the past couple of years – is pushing Prague for a contract without a tender. Whilst that has not been confirmed, CEZ officials have suggested a direct inter-governmental deal a la Paks 2 would make life easier. The MIT has suggested it hopes to seek exemptions from EU public procurement rules.

However, Rothwell hints that Moscow has the upper hand. “Those that already have VVER technology will probably replace it with Russian financing,” he says.

The cost of such funding could prove a stumbling block, however. Hungary swiftly put all details of the Paks 2 financing deal with Russia out of sight, designating it a state secret. However, Jan Havercamp at Greenpeace CEE provided what he says is a Russian version of the contract that was briefly available online.

The deal stipulates an interest rate on the €10bn loan at 3.95% until Paks 2 is operational, or by 2026 at the latest. The cost then rises incrementally to 4.95% over the next 21 years.

Since regaining investment status at the three major US ratings agencies last year, Hungary has hinted it could consider seeking market funding instead. However, it is speculated that Moscow has responded with a firm nyet to that idea.

Hungary’s improved ratings has reduced the yield on 15-year sovereign bonds to just under 4%. The Czech Republic’s 20-year benchmark sits below 1.5%.

On top of that, the terms on the Hungarian loan are harsh. A 15-day delay in repayments would incur a 150% penalty clause. A six-month delay would allow Russia to call in the full amount immediately. No international arbitration clauses are included.

The sharp dive in the rates at which Hungary can borrow in the three years since Budapest sealed the deal with Russia illustrates the risks on a project whose life will likely to stretch close to the end of the century.

The rise of renewables, push for energy efficiency, and growing interconnection of power markets has quashed electricity prices. Wholesale European power prices fell to a 10-year low of €30 per MWh last year. The disagreement within the power industry now is over whether the long decline of recent years is due to reverse, or if low pricing is the new normal.

The other key debate is the cost-efficiency of nuclear against other forms of energy generation such as renewables. Embarking on a 70-year project to build a new nuclear plant is a big bet – likely with geopolitical strings attached – that the rapid pace of technological development of renewables will slow through the century.

Moreover, increased safety demands since the accident at Fukushima, and the difficulties of dealing with radioactive waste, have hiked the costs of building new nuclear capacity. While there is no little debate over the exact figure, new nuclear projects currently need to sell output at a level of at least €70 or so to make financial sense. The plight of Westinghouse is testament to the struggle that nuclear – or the standard model of large capacity plants at least – now faces.