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Feb 05, 2016 - Zoltán Kovács

What the Rothschild Group Had to Say about Hungary’s Paks Nuclear Project May Surprise Some People in Brussels

What the Rothschild Group Had to Say about Hungary’s Paks Nuclear Project May Surprise Some People in Brussels

The Paks II nuclear power expansion project is being carried out with “the aim of liberalized and interconnected European common energy markets,” according to one of the world’s largest independent financial advisory groups. Paks II will generate sufficient revenues “to cover the operational costs of running the nuclear plant, as well as contributions towards returning the invested capital.”

Those returns, said the Rothschild Group, which recently published an analysis of the project, are “in line with market benchmarks” for projects in other EU countries.

The expansion of the Paks Nuclear Power Plant in Hungary has been back in the news since European Commissioner for Competition Margrethe Vestager announced last November that the Commission would launch an in-depth investigation into Hungarian investment support for the project. Over the course of two years of close consultations, the Hungarian Government has provided extensive information for evaluating the project and, during the back and forth with Brussels, even had to point out a number of methodological errors related to the calculation of the project’s capital cost and rate of return. Unfortunately, the commissioner’s November announcement of the investigation contains a number of inaccuracies and misunderstandings as well as unfounded and misleading claims. That’s unfortunate, but we’ve grown accustomed to a certain amount of this from Brussels.

The Hungarian government recognizes that the investigation will now have to run it’s course, but we’re quite clear on the facts: the expansion, also known as the Paks II project, is competitive and offers an acceptable rate of return under free-market conditions and requires no state aid. Even after all the time we’ve spent in consultations, the European Commission has not been able to present a set of well-reasoned arguments that would refute our assertion that the project is fundamentally competitive. Oddly enough, the Commission did not question the profitability and use of state aid in several nuclear power plant projects in other EU countries, such as Finland (the Hanhikivi nuclear project), France (Flamanville), Slovakia (Mochovce), and the United Kingdom (Hinkley C), just to mention a few. The Finnish case is especially interesting as Rosatom is a 34 percent shareholder in theHanhikivi 1 project, which has technical terms very similar to Paks II. Furthermore, when an infringement procedure was launched against Hungary for not pursuing a public procurement process to sign the deal, no one seemed to recall that in Europe, no nuclear energy development projects are carried out through open public tendering.

Nevertheless, the Commission’s decision to open an investigation has brought about a constructive, even if inadvertent, result. Because an official investigation has begun, third parties can now give their opinion on the competition law aspects of the project.

That’s brings us to the Rothschild Group and the independent analysis they produced on the Paks II project. Rothschild has quite a reputation in this area, so it’s worth taking a look at what they had to say.

The report begins by highlighting why the investment carries strategic importance. In order to enhance the security of future energy supply, additional reactors must be installed. By 2030, some of the reactors currently in operation will be retired. Putting that in perspective, the Paks nuclear power plant generates around 51 percent of Hungary’s current electricity requirement. Without the expansion, the price of electricity would rise dramatically, causing serious problems for consumers.

“[T]he Paks II project is being implemented in accordance with the aim of liberalized and interconnected European common energy markets,” the Rothschild Group concluded based on international comparative data, challenging the concerns of Commissioner Vestager. The analysis found that, due to expectations that electricity prices will rise considerably in the coming years, Paks II will be capable of generating sufficient revenues “to cover the operational costs of running the nuclear plant, as well as contributions towards returning the invested capital”. Cash flows will likely also be able to cover the costs of waste management and the future decommissioning of the plant. Paks II, according to Rothschild, will return the investment cost of the project along with an additional economic return “in line with market benchmarks for return expectations from non-regulated generation projects in other EU countries.” 
 
The Rothschild analysis could not be clearer. Hungary remains determined to defend this investment project, which is crucial to our energy security, and if the infringement procedure or the investigation compels us to do so,we are willing to take the case to the European Court of Justice. When independent experts like the Rothschild Group support our own calculations, we remain confident in our determination to go forward.