Hungary does not need new nuclear blocks

Hungary plans to build two new nuclear blocks in Paks. Russian Rosatom just got the deal without a tender. It will cost around 12.5 billion euros. The first block could be operational already by 2023. At least according to the intergovernmental agreement. Will it be built or not? Will it be a failure or a success? A brief analysis.

By Péter Simon Vargha and István Zsoldos

As long as the debate focuses on whether or not a tender is necessary (or rather would have been necessary…), and how the financing will look like, we’re avoiding noticing the elephant in the room: Does Hungary even need a nuclear power station for the moment? That is the real question.

Our answer is that no, we do not currently need a nuclear power station. With or without a tender process.

Source: index.hu

It is simply not worth it

Considering its estimated cost of EUR 12.5 bn, the electricity generated by the two new blocks will be extremely expensive. Based on a back-of-the-envelope calculation, this would be around EUR 95/MWh (the equivalent of HUF 29/kWh), which is more than double the current wholesale price. But we can’t be completely sure about this; we don’t actually know all the conditions of the deal, nor the calculations used. So basically we are committing over 10% of our GDP without making any figures public.

“There are several reasons against a rushed nuke expansion: nuclear energy is expensive, and it seems that not only money, but electricity demand and project management skills are also lacking in Hungary.”

We wrote this more than a year ago in our post ‘New nuke in Hungary or joining euro – Which will come first?’. Nuke costs have increased; otherwise the analysis is still valid.

The only publicly available number is the expected total cost of the investment (and it’s more of a ballpark figure). But even this is enough to see that the only way the generated electricity could be substantially cheaper than the EUR 95/MWh cited above is if the project were to be financed below market levels – say at 3%. That would make the cost of generated electricity roughly correspond to the current baseload price.

Sources: own calculations, MIT model, HUPX.

 The deal would only make sense if Hungary got exceptionally cheap financing. But why would Rosatom (essentially the Russian state) be willing to agree to this? To base their decisions on sheer goodwill instead of business interest? Our gut feeling as well as our experience both tells us that fairy godmothers only exist in fairy tales, and not in the business world. Especially not the Russian business world.

If they could finance the Paks nuclear blocks much cheaper than EDF would finance the nuclear power station at Hinkley Point (and the construction costs would also be lower), then why aren’t they the ones building the station in the UK? If everything is so rosy, why is the Czech atomic power station project on the verge of collapse?

It’s more likely that the costs are hidden. Where exactly they are hidden is anybody’s guess until the exact conditions are revealed, but we are skeptical of Russia suddenly acting so selflessly and charitably towards Hungary. Furthermore, one of the major issues is who will bear the project’s inherent risks: the typical construction delays and cost overruns (which we also wrote about previously).

It is precisely because of these enormous risks that atomic station construction projects imply such high capital costs (with much greater yields than in the case of government bonds). (See for example MIT’s study, which we used as the basis for our own calculations.)

Some ‘minor technicalities’

The current blocks could remain fully operational until the mid/late 2030s; in fact, their lifespan may eventually be extended further. The first new block could be up and running already by 2023. This would result in an even greater oversupply of electricity, especially at night, which is already a problem. This is also the case in other parts of Europe; indeed, the cost of electricity is sometimes negative. So this raises the question: what could Paks do with this vast amount of excess electricity during the transition period? Are we simply going to spend another EUR 3 bn on constructing an inefficient pump storage unit to absorb electricity at night and return it during the day? (For those not familiar with Hungary’s geography, the country is basically flat, so finding a suitable location for that is nearly impossible within the country).

Are we going to commit all our money until 2100 on a technology that is both inflexible and extremely expensive? Especially at a time of accelerated development in renewables and energy storage technology, which could potentially make both commercially viable within a decade?

There are 3 possible scenarios

 A)     It turns out the deal’s conditions aren’t favorable after all, and so the project is not realized.

B)      The new nuclear blocks are built, but they never recover their costs, and taxpayers must carry the burden (though they might not be aware of this).

C)      The new blocks are constructed, and their costs are recovered – due to, say, the global gas glut turning out to be a hoax, the gas price multiplying, while all technological development in solar panels (and in other areas) is completely halted.

Based on the information currently available, we think this last scenario is the LEAST LIKELY one.

More to read on the issue:

Extensive coverage on the English site of Hungary’s biggest online financial journal (Portfolio)

Russia builds clout in eastern Europe with €10bn loan to Hungary (Financial Times)

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Tags: electricity, Hungary, nuclear, Rosatom, Russia