bne -

Lost amid all the excitement and headlines about the Czech Republic's biggest ever tender is the simple question of whether the project to build two new nuclear reactors actually makes economic sense. Some would argue not - and have produced numbers to back that up.

The project is already at the stage where the Czech government is waiting for binding bids to be submitted by July 2 from France's Areva, a Russo-Czech consortium led by Atomstroyexport and the US' Westinghouse Electric. But according to a study entitled "Temelinomics" by the Prague-based advisory firm Candole Partners (which counts amongst its clients competitors of the country's utility CEZ), the estimated CZK200bn (around €8bn) project to build two new reactors at the Temelin nuclear power plant has only a 46% chance of breaking even over its lifetime, which is about 40 years.

What that means, says Jan Ondrich, one of the authors of the report, is that there's a 54% chance that the project won't be profitable. "If we were potential investors in the project, we would probably decline. Investors typically want a 95% ratio to be sure that they won't lose money," he says. "This is like taking €8bn and betting on the flip of a coin whether it's heads or tails."

Such numbers are of crucial importance to the financing of the nuclear expansion, the costs of which Candole assumes will be 30% financed from CEZ's own resources and the rest borrowed. "We are unable to find an economic justification for the project; we assume potential investors will reach a similar conclusion," says Candole.

And these odds could in reality be worse, as Candole says the model doesn't take into account the possibility (probability, if other civil nuclear projects are any guide) that there will be a delay in the projected completion date of the first new reactor in 2023 and the second one 18 months later, nor will there be any cost-overruns on that €8bn figure. "As of April 1, 2011, there were 64 reactors under construction in 14 countries... Of the 64 reactors, 27 have been delayed, of which 12 have been delayed for over 20 years... And certainly, every year of delay is a fixed cost that leads to budget overruns," the report says.

Of course, CEZ sees things very differently - or at least they did until a day before the official release of Candole's report on January 27.

Six months ago, CEZ's chief financial officer, Martin Novak, was telling the Czech press that by the time construction is underway, the utility would be making so much money that it won't need a loan for the two new Temelin reactors, arguing that he "had to smile at the suggestion that CEZ would not have the money." However, on January 26, Novak revealed in an interview with Bloomberg that CEZ is considering bringing in an investment partner to help finance the project. And on February 6, CEZ confirmed to Czech Position that it had picked French bank BNP Paribas to help it find a partner to finance the Temelin expansion. "It's one of the options we are actually assessing. We are definitely looking at models of how nuclear plants are built today in Europe. We are looking at forms of sharing the risk," Bloomberg quoted Novak as saying.

While insisting that CEZ is capable of financing the construction of Temelin units 3 and 4 on its own through a combination of cash flow and debt, inviting another investor remains an option because it would leave the Czech utility a freer hand to invest in other projects, according to Novak.

These other projects are a key reason why Candole believes the financing of the Temelin expansion will be so prohibitively expensive. "Bonds must be refinanced and [coal and gas-fired power plant] projects worth more than €10bn completed. To accomplish all this will involve committing to loans that would leverage the company above the industry average and make it less able to respond to future business risks - and for that matter, to future legal risks such as conviction for alleged abuse of dominant market power by the European Commission, whose ruling on the matter is expected shortly," says Candole.

"CEZ is trying to handle too many things simultaneously," says Ivan Kotev, another of the report's authors, who adds that the cost of many ongoing and nearly completed projects would continue long after they had come online.

CEZ also talks about mitigating some of the risk by, for example, offering loan guarantees or setting an attractive fixed price at which the electricity produced must be bought by consumers. "In the calculations, we can be more accurate after we get the offers from the tender participants [on July 2], including also the part of financing and after it is clear whether the state will participate in the risk elimination, as it does in all countries - Britain, Finland, France," CEZ spokesperson Eva Novakova tells bne.

Money to burn

However, this being public procurement in the Czech Republic, there could be other motives behind the desire of the powers-that-be to press on with the tender: namely rent seeking, for example in the form of public subsidy-hunting. "Not unlike with the Czech photovoltaic bubble created and exploited by politicians," says Candole, referring to the situation where too-generous incentives resulted in the Czech Republic having triple the solar capacity per person than California, landing taxpayers with a massive hike in their electricity bills.

Ultimately, Czech politicians don't tend to bother themselves with the economics of the nuclear industry, if the latest Czech energy policy draft is anything to go by. This recommends that, in addition to the planned two new nuclear reactors at Temelin, a further eight 1,000-MW reactors should be added to the existing generation fleet by 2060 - an investment programme that is estimated would cost between 40-60% of Czech GDP in 2010. "Matters such as an appropriate fuel mix and the size of the future generation fleet are judged to be issues of Czech sovereignty and beyond the reach of cost-benefit analysis. The question of how much actual demand there might be for the planned electricity production is not even asked," says Ondrich.

Like the government, CEZ airily dismisses doubters about its strategy with appeals to history. "Throughout the 1990s, we read a series of expert studies that the completion of the first two units of Temelin will completely ruin CEZ and its shares will become worthless. It did not happen," CEZ spokesperson Novakova tells bne.