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Feb 23, 2016

The Paks Nuclear Power Plant in Hungary

In order to decrease its dependence on imported energy, Hungary aims to diversify its energy imports and increase the share of energy generated domestically. Nuclear energy presents an indispensable option to generate cheap energy, and the project to sustain capacity at the Paks Nuclear Power Plant will ensure that Hungary’s dependence on imported natural gas will not increase in the future.

During the term of the previous, Socialist-led government, the Hungarian Parliament gave its consent to authorize the capacity sustainment of the currently operating Paks Nuclear Power Plant, a decision supported at the time by every party in parliament. Following this decision, the Orbán Government signed an agreement with the government of the Russian Federation on the peaceful use of nuclear energy, which was officially approved as law by the Hungarian Parliament.

Within the framework of this investment, two Russian-made reactors will be constructed, each with a capacity of 1200 MWe. The Hungarian project company has contracted the Russian enterprise JSC NIAEP to carry out the construction of the blocks. The estimated cost of the investment is up to 12.5 billion euros, with a Russian intergovernmental loan providing up to 10 billion euros. Eighty percent of the financing will be covered by this 30-year loan provided by Russia, at an interest rate between 4 and 5 percent, and Hungary will provide the remaining 20 percent of the financing.

The capacity sustainment of the Paks Nuclear Power Plant will ensure that Hungary’s dependence on imported natural gas – 80 percent of which comes from Russia - does not increase in the future. Hungary, in order to decrease its dependence on imported energy from Russia, aims to diversify its energy imports and increase the share of energy generated domestically. Hungary lacks natural energy resources, and nuclear energy presents an indispensable option to generate cheap energy. Forty percent of Hungary’s electricity supply currently comes from nuclear sources, and with the Paks capacity sustainment in the coming decade this share could be maintained over the long term.

Sustaining the capacity of the nuclear power plant will enhance the competitiveness of Hungary as well as the region. With this investment, competitive electricity prices could be ensured for consumers and businesses, and the project, thanks to the low CO2 emissions of nuclear power, also contributes to achieving climate policy objectives.

Today, the European Union has no consensus on nuclear energy. Each state may decide for itself on its energy mix. Currently, nearly half of the world’s nuclear reactors are located in Europe. Several European states generate part of their electricity from nuclear power. The highest ratio is in France, but it also makes up a significant share in Belgium, the Czech Republic, Slovakia, Spain, Sweden, and the United Kingdom.

The Hungarian government has been in an intensive dialogue with the European Commission for almost two years to keep it informed about the investment project. By 2016, the discussions were focusing on two, specific aspects: competition and procurement. At the end of November 2015, due to the size and importance of the Paks project, the European Commission opened a formal investigation “to carefully assess whether Hungary's investment is indeed on market terms or whether it involves state aid,” said Margrethe Vestager, European Commissioner for Competition. The Hungarian government’s position is that the expected rate of return of the project is higher than the cost of capital; therefore, a rational private investor would also pursue the project, and it does not benefit from state subsidy. The government is also convinced that it has concluded a commercially highly beneficial, fixed-price turnkey EPC contract with fixed deadlines.

One of the world’s largest, independent financial advisory groups reviewed the Paks II project and issued a similarly positive assessment in early 2016. According to the Rothschild Group, the Paks II nuclear power expansion project is being carried out with “the aim of liberalized and interconnected European common energy markets.” It would generate sufficient revenues, Rothschild reported, “to cover the operational costs of running the nuclear plant, as well as contributions towards returning the invested capital,” and those returns are “in line with market benchmarks” for projects in other EU countries.

The Commission’s decision to open a formal investigation comes after one and a half years of a pre-consultation period and a further six-month assessment of Hungary’s official “no state aid” submission. Additionally, the investigation of procurement comes almost two years after the signing in January 2014 of the intergovernmental agreement on the peaceful use of nuclear energy. Taking into consideration that the Commission did not object to the signing of the intergovernmental agreement and provided no feedback during the consultation to signal outstanding issues from the Commission’s side, launching an infringement procedure against Hungary for procurement reasons is surprising and raises questions about motive.