Nuclear in CEE – too tender by half

By bne IntelliNews August 7, 2014

Nicholas Watson in Prague -


The Czech Republic's decision in April to scrap a tender to build nuclear reactors ended not merely that process, but has also perhaps sounded the death knell for the use of such open tenders in Central and Eastern Europe (CEE) for these hugely expensive and complex projects.

Five years before CEZ announced the cancelation of the €8bn-10bn expansion of the Temelin nuclear power plant on April 10, the state utility had announced to great fanfare the start of what it claimed would be the Czech Republic's "most transparent" tender ever. But on the back of worsening economics and decisions of questionable legality, the process had degenerated into a fiasco by the time it was put out of its misery.

That's not to say the Czech Republic has given up on expanding nuclear generation. In an interview with local media published on May 30, Industry and Trade Minister Jan Mladek said nuclear remained the best option for the country and together with Finance Minister Andrej Babis he would produce a draft plan by the end of the year under which nuclear would replace coal-fired power plants by around 2030.

But analysts say the Czech Republic will probably join others in the region – like Hungary, Poland and Turkey – in avoiding the use of traditional "engineering, procurement and construction" (EPC) contracts, whereby the state chooses in a tender a contractor who designs the installation, procures the necessary materials and builds the project in return for a fixed price.

Lack of finance

The Temelin tender's ignominious end was put down to many project-specific factors, such as CEZ's legally suicidal decision in 2012 to eject France's Areva from the tender. But more generally, observers say the problems afflicting the nuclear industry, namely those related to the cost of financing and new competition rules in EU energy markets, have forced governments into reconsidering the open EPC contract, whose predetermined nature foists most of the cost increases onto the contractor.

A similar story was seen in Bulgaria with the €5bn Belene nuclear project, where an EPC contract was signed with Russia's Atomstroyexport (a division of Rosatom), but not the financing package. Parliament under a previous centre-right government officially terminated the Belene project in March 2012.

"The main issue the nuclear industry is facing is the combination of the difficulty to finance these projects – due to the huge initial investment and the long development and construction period – and the liberalization model that the EU and third energy liberalization package has imposed on the industry. So avoiding open tenders is rather a reaction of the host governments and the nuclear industry in CEE to the range of difficulties that the industry is facing," says Kostadin Sirleshtov, who heads the electricity practice in CEE for CMS Cameron McKenna in Sofia.

An industry insider in the region, who wishes to remain anonymous, says Poland's "integrated procedure," which combines the key elements of the nuclear power plant construction project, is perhaps better suited to today's market. "Choosing the technology is too difficult without lots of experience, so it might be better to choose a strategic partner that would cover investment, the contract, a technology partner – this integrates the whole view," says the insider.

PGE EJ1, a unit of state utility PGE set up to build and operate Poland's first nuclear power plant, is currently looking for long-term technology and financial partners for the €10bn-14bn project, after the Polish government at the end of January adopted a national programme to build two 3,000-megawatt (MW) nuclear power plants in Poland, as well as put together a regulatory and organizational framework for the industry. The site of the first plant – two locations, Choczewo and Zarnowiec, both close to the Baltic coast have been shortlisted – will be decided by 2016, with construction beginning in 2019 and ending in 2024. The programme includes plans to build a second plant by 2035.

Two Polish energy firms, Enea Group and Tauron, and the country’s copper producer KGHM have been cited as possible partners, while two French energy companies, Areva and EDF, have inked initial deals with Polish construction firms over collaborating on the construction of any future nuclear plant.

CMS Cameron McKenna's Sirleshtov acknowledges that, "the Polish approach provides the best value-for-money alternative for the government, guarantees enough business for the ones involved in the model and builds on the fact that Poland enjoys a sufficient number of very experienced experts in energy contracts who could be of assistance in this project."

However, while the integrated approach has its advantages, he is less convinced that a country like Poland in desperate need of nuclear power but with no experience in the sector should take this option. "Such a country needs to make a strategic decision on the technology and move forward with a turnkey EPC contract, which in theory will make the project more expensive, but which skips many of the hurdles," he says.

Hungary has gone down the bilateral route, signing a state-to-state deal with Russia in January for Rosatom to build and finance two new 1,200MW reactors. In June, the Hungarian parliament, where the governing Fidesz party has a majority of two-thirds, approved a loan agreement worth up to €10bn with the Russian state nuclear holding Rosatom. With no open tender, the EU hasn't approved project. The European Commission has indicated it is examining it to see whether it abides by public procurement rules.

For the Czech Republic, Finance Minister Andrej Babis, who together with President Milos Zeman appears to be leading the charge for trying again to build two more nuclear reactors in the country, began fleshing out the details of how a new tender might be structured in an interview with business weekly Ekonom published on July 17. In it, he suggested a public-private partnership (PPP) could be the way to go.

Another option would be for the project to be a joint investment with a private investor. Of the bidders in the last tender, only Russian state nuclear agency Rosatom said it was ready to put up money for the project, while the two private contractors, the Japanese-US Westinghouse and France's Areva, would not be in a position to do so. South Korean state utility Kepco is strongly linked with joining any new tender; like Rosatom, it too could offer financing.

New model army

There are alternatives being explored elsewhere in Europe that could be emulated, most notably in the UK. There, the government intends to employ its "contracts for difference" (CfD) scheme, which provides a guaranteed "strike price" for each unit of electricity generated. In July, the Commission approved this model for general use in the electricity generation sector, though it is still investigating on a case-by-case basis to see whether the scheme conforms to rules over state aid when applied to the new £16bn nuclear power station that will be built by a consortium led by France's EDF Energy at Hinkley Point in Somerset. For that project, the British government and EDF agreed a "strike price" of £92.50 for every megawatt hour of energy Hinkley C generates, almost twice the current wholesale cost of electricity.

The Commission has yet to decide if CfD would count as illegal state aid for Hinckley, but in February issued a critical preliminary verdict on the plans. However, as the industry source, who has previously worked at the Commission, tells bne: "In this report the Commission is just doing its job, in 70 pages or so asking relevant questions and points that must be addressed. They are really looking for extra information."

Sirleshtov agrees, warning that it will take some time for Brussels to fully assess and come back with either an approval for the model or a revised draft of it. "The UK model is providing one alternative solution, which Brussels will find it hard to reject as a whole. The model is a complicated one and there might be elements in it… which might be subject to adjustment."

Ultimately, Sirleshtov says, there is a sense of relief in the nuclear industry that the EU appears to have arrived at a point where the seriousness over the lack of new electricity capacity in Europe is accepted, and that "a new market model is being developed that could easily be the ground for reshaping the EU approach to the electricity markets."

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