Wednesday, October 13, 2010

Czech utility postpones new build at Temelin

The $25 billion deal will be delayed due to lower demand for electricity

slowdown One of the largest pending deals in the global nuclear industry took a major step backwards Oct 12 with the postponement of construction at the Temelin power station of up to five new reactors in the Czech Republic. The Czech news service reported power producer CEZ is delaying construction of the first two units by at least several years.

Reuters reported Oct 13 that CEZ has pushed back plans to build two new reactors at its Temelin plant 60 miles from the Austrian border as well as up to three more units in Slovakia and at its Dukovany power station in the Czech Republic. The initial phase of the project is estimated to be worth $8 billion.

According to the Czech wire services, the utility’s board of directors was spooked by new estimates of demand for electricity which came out far lower than the numbers that went into the decision to offer the $25 billion tender for bid.

A source close to the board told the news service, “We were too optimistic when we were planning the tender.”

The fact that Germany is keeping its 17 reactors past 2020 may have played a role in these calculations. CEZ may have been counting on supplying electricity across the border from the first two new units at Temelin coming on line in that timeframe.

Martin KocourekCzech Industry & Trade Minister Martin Kocourek (right) confirmed to the wire service that lower electricity demand due to the impact of the global recession was the reason for the delay in moving ahead with the project.

“Estimates of electricity consumption made before the [financial] crisis broke out have changed.”

He didn’t mention German demand in his comments to the wire service. However, he noted that the rates the utility can charge customers have dropped by 15% in the past year. The firm’s share price has tumbled since July from 880 to 800 czk ($50 to $45; a 10% decrease) possibly impacting its ability to raise capital for the new reactors.

Bloomberg wires service reported Oct 13 the decision to delay the new reactors could accelerate the stock slide.

“Nuclear power plants are the cheapest source of energy for CEZ,” Milan Vanicek at Prague-based brokerage Atlantik FT wrote in a note to clients.

“The report of a possible delay is not a good one for investors and we expect a negative market reaction.”

Intense competition continues

The bidding for Temelin remains an intense three-way contest between Areva, Westinghouse, and Rosatom, the Russian state-owned nuclear agency. The bid by Rosatom is the first effort by that group to propose to build a reactor within the European Union.

The Russians are claiming their VVER design has new safety features and the agency reminds potential customers of the country’s uranium processing capabilities including a commitment to take back spent nuclear fuel. Areva can make a similar claim.

Tender manger has conditions

Vaclav BartuskaThe Czech utility is very aware of how deep a deal the new reactors will be. The New York Times reported Oct 11 that Vaclav Bartuska (left) , the official driving the bid process, told the newspaper, “You are choosing a friend, a collaborator, a supplier for the next 100 years.”

In September Bartuska told the New York Times that the Temelin project “is the biggest tender in Europe … and it’s unique as it is open for both east and west.”

The competitive edge, in apparent defiance of European Union rules, will hinge on local content and technology transfer. Bartuska told the Times “high local content” would make a difference in the winning bid. He told Dow Jones News Wires September 18 “the project is going to tie local industry with the winning bidder.”

He added that “the biggest fight in the tender will be over technology and transfer of know-how.”

In response, Westinghouse is reported to have made a claim of being willing to source up to three-quarters of components from Czech firms. Kerry Hanahan, the Westinghouse proposal manager for the Temelin project, told the NYT in September, “we buy where we build.”

Challenges ahead

However, Bartuska did not comment on how the reactor project would be financed or whether suppliers would be expected to take equity stakes in the project. Recently, the UAE updated its $20 billion deal with South Korea to build four new reactors gaining $10 billion in bonds, export credits, and other investment mechanisms to fund the project.

project_managementAdditionally, at the time Bartuska made his statements about technology transfer, he did not mention that the utility planning to build the reactors was also having second thoughts about whether it could sell electricity from them.

The new numbers driving the announcement this week are likely the results of months of number crunching by CEZ.

In a September 2010 presentation to investors, CEZ reminded them the firm plans to sell its electricity to neighboring countries including Germany and Poland.

It isn’t clear how CEZ factored in total regional demand for electricity in its sudden change of heart for the Temelin tender. It is plausible Germany’s recent decision to keep its 17 reactors operating past 2020 played a major role in revising the outlook for electricity demand from new reactors. The first two new units at Temelin would have come online in that timeframe.

The Temelin project has been a point of political contention between the Czech government and Austria, which has strident anti-nuclear politics. NGOs in Austria get significant official government backing and funding for protests. The Prague Monitor reported one provincial government agency gave NGOs (euro) 200,000 ($280,000) to fund activities that began this past August.

Energy security is green

green economic growthThe postponement of the Temelin tender may also impact the country’s ability to meet its commitments to decrease greenhouse gas emissions. About two-thirds of the country’s electricity comes from coal-fired power plants. Russian supplies three-fourths of the country’s natural gas and oil.

If the Czech government wants to meet green goals, and achieve energy security, it will have to think hard about when and how to build up its nuclear infrastructure.

Bartuska apparently understands this point. The country’s energy future drives the nation’s fate. He told the NYT, “we will either be high tech or dirt poor.”

If work were to have started on the first two new reactors by the end of this year, they would have been expected to enter revenue service by 2021. The two units at the current site were completed in 2002.

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1 comment:

crf said...

Having the builder put together government backed financing seems key to securing a deal.

It makes sense in the car industry: GM sold a lot more cars, and made a lot of money, from leasing.

Differences: the risks in the auto leasing industry were defaults, which were individually small, predictable and taken into account, and large-scale collapse in demand (which we saw), which leaves no industry unscathed. In Nuclear, the risks for a financing company are huge, because a plant is so expensive and therefore a loan to the plant would be a large proportion of its assets, and default in the plant would put the finances of the financing company at risk. The risks of collapse of demand for electricity are also present, and have to be taken into account over the long life of the plant.

Effectively, the market is clearly saying that a state needs to back these risks, which would be spread out if the state could finance many plants.

The market is saying that loan guarantees seem insufficient to cover the individual risk of each plant.

Korea understands this aspect of the market for electricity. That is why it is winning, and the US (and Canada, and Japan) are losing.