American or Russian? This is the 8 billion euro question. And Miroslav Šlouf is working on the answer.




Geopolitical entertainment provided by Miroslav Štěpán and Miroslav Šlouf

The figure refers to the price tag put on the construction of new nuclear reactors at Temelin; the nationalities, to the bidders; and Šlouf’s answer, to Atomstroyexport.

But of course this is the wrong question. And the fact that it is the only question being asked in Prague these days is a measure of how shallow is the debate. It should not matter to anyone besides the two bidders (and the two Miroslavs pictured above) who wins. This is because the impact on the country and its electricity market of an American or a Russian solution is impossible to measure in any meaningful way.

The fact that the world and his wife are so enthralled by this geopolitical entertainment, and that they avoid relevant and difficult questions, is not a victory for common sense.

Czech taxpayers are being asked to accept a priori the need to build more nuclear plants. This is like being asked to accept that drug addiction is a priori part of the human condition, and limiting the debate to the question of which is less harmful, a dependence upon opiates or stimulants.

The question of whether the Czech Republic needs more nuclear power plants is not a silly question. And yet it is missing from the domestic debate. All stakeholders, from taxpayers to shareholders, should have a keen interest in the merit of the decision to embark upon such a project.

The issue of who gets to build the plant is a secondary detail.

Here are questions we might like to answer before the government selects either Atomstroyexport or Westinghouse. What is the likely demand for electricity in the Czech Republic and CEE in 20 years from now? Can this demand be met by modernizing the country’s existing generation fleet? What is the best generation fleet given different fuel, CO2 and electricity price assumptions 20 years from now?

And the really impolite question: Is the management of CEZ actually capable of implementing such a vast CAPEX?

It may well be that the answers lead to the conclusion that new nuclear plants are required. But we shall never know without serious and public examination of the questions.

Perhaps the management of CEZ knows best what to do. After all, it has a financial interest in the success of the firm and would never support a project that has the potential to wipe out shareholder value. Or would it? Albania springs to mind.

Czech tax payers will be asked to write a blank cheque to CEZ to underwrite the building of Temelin 3&4. Why would they agree to do so, given the management’s less than compelling performance in its other investment programs?

The credibility of CEZ’s management has been dented in the last twelve months. A year ago, the firm’s senior executives ridiculed those few who dared suggest that it might not have the financial fire power to build the two new reactors, and that lenders might not be so keen to finance such a project.

In the course of 2012, the very same executives have abandoned all such bravado, and today lobby the Czech government to create a system of contracts-for-difference in which consumers would be asked to pay for a difference between wholesale electricity price and estimated levelised cost of electricity (LCOE) produced by Temelin 3&4.

CEZ’s management and the local industry ministry would like us all to believe that the LCOE for Temelin 3&4 will be EUR 60/MWh and that electricity prices will be much higher than that, so Czech consumers will actually profit from this arrangement. In the worst case, they say, the bill will be CZK 5 billion per year.

If this is the case, and if the future is so bright, why on earth would CEZ need a public subsidy scheme? If CEZ’s predictions are as robust as it claims, it would surely find investors and creditors without the need for subsidy. And even if CEZ is wrong, and electricity prices are lower than it predicts, its publicly presented business plan suggests that the firm could afford to write off CZK 5 billion per year from its P&L.

But CEZ knows very well that the downside risk is much greater than CZK 5 billion (we estimate the figure at CZK 17 billion) and even this may be difficult for it to absorb. Setting aside the question of how the management arrived at these figures, why would we trust them if a few months ago they were insistent that CEZ could pay for the two new reactors in cash? What can we expect next? An LCOE of EUR 120/MWh?!

Let us hope that 2013 will be the year in which the Czech nuclear debate develops into a serious attempt to answer the important questions, rather than the geopolitical entertainment it is today. Expect however the entertainment to continue well into the year.

In our opinion, the final outcome will be a very large and expensive hole in the ground filled with steel rods and concrete, at which point CEZ will abandon the project, citing external pressures beyond its control -Miroslav Šlouf notwithstanding.

This text was first published in the January 2013 edition of Platts Energy in East Europe. It was written by Jan Ondrich, and amended by me to mark the return of Miroslav Šlouf to politics –or rather to geopolitics.