European Commission seeks clarity on Paks II state aid issue

13 January 2016

Hungary has so far failed to explain how the Paks nuclear power plant expansion project does not conflict with state aid rules, the European Commission said yesterday. In response, the Hungarian government said the EC's investigation of the matter contains "a number of inaccuracies and misunderstandings" as well as "unfounded and misleading assertions".

An inter-governmental agreement signed in early 2014 would see Russian enterprises and their international sub-contractors supply two VVER-1200 reactors at Paks, as well as a loan of up to €10 billion ($10.5 billion) to finance 80% of the project. Paks currently comprises four Russian-supplied VVER-440 pressurized water reactors, which started up between 1982 and 1987.

Since the EC first formally expressed its concerns in November last year, Hungary has argued that the project complies with the market economic investor principle (MEIP) - an EC criterion for assessing state aid.

But in a report summarised in the Official Journal of the European Union yesterday, the EC said Hungary had not provided sufficient information on whether the investment is profitable on economic terms. It has come to the preliminary conclusion that "there are doubts" as to whether the measure entails state aid within the meaning of Article 107(1) TFEU - Treaty on the Functioning of the European Union. The EC "in particular questions whether the measure could be implemented by any economic investor in the market under similar conditions."

The publication of this document also means that the "opportunity has emerged", the EC said, for third parties to make comments in the coming month as to whether the Paks capacity maintenance project involves any state aid.

Economic analysis

The EC said that information Hungary submitted included an economic analysis for the project that shows a post-tax internal rate of return during operations higher than the weighted average cost of capital and hence the state investment would be profitable - that is, in compliance with the MEIP test. But Hungary has not provided sufficient information whether the investment is profitable on economic terms, taking into account the allocation of risks under the contract, and expectations on future revenues - based on future electricity prices, the EC said.

In addition, the EC said it "does not have sufficient elements to conclude whether, should the measure constitute state aid, the conditions for the compatibility with the internal market in accordance with Article 107(3)(c) TFEU are met, in particular whether the aid is necessary and, in particular, if there are market failures that affect new investments into nuclear projects in Hungary and what these market failures are."

The EC requires information regarding the "possibilities of new nuclear investments - without state support - and their timing given the specificities of the Hungarian electricity market and its expected evolution and market modelling in this respect".

The EC "has doubts" that the notified measure is proportionate, "as, at this stage, it is not clear how and to which extent Paks II will remunerate the state's investment". In addition, the EC is concerned about the project's "possible distortive effects" on competition and trade.

"The Hungarian electricity generation market is characterised by a relatively high market concentration with the current Paks nuclear power plant providing some 50% of domestic generation. At this stage not much new capacity is known to join the market, despite the projected generation gap. Therefore Paks II is expected to represent at least one-third of the forecasted domestic demand in 2030 and could thus lead together with the still running/not yet retiring Paks reactors to enhancing the market concentration," the EC said.

It also considers that aid to such "baseload capacities characterized by a high load factor and a lower level of levelised cost of energy may serve as a barrier to entry for new market players and displace further down the merit curve a certain amount of existing higher cost generation capacity".

The Hungarian Prime Minister's Office yesterday responded to the EC report with a written statement that said: "The Hungarian government takes the view that the decision of the European Commissioner for Competition of 23 November 2015 and the summary published in today's edition of the Official Journal of the European Union contain a number of inaccuracies, misunderstandings, and unfounded and misleading claims. The Hungarian government firmly believes that the Paks II project is competitive and offers an acceptable rate of return also amidst free-market circumstances, and there is therefore no need for resorting to state aid. It also transpires from the decision dated 23 November that even in the wake of preliminary consultations under competition law over a period of almost two years, the European Commission was unable to present a set of well-founded arguments which would refute the position of the Hungarian party which claims that the project involves no state aid."

The government noted that Commissioner Margrethe Vestager had "herself stressed" that the EC needs time to conduct a comprehensive investigation and to provide the opportunity for other Member States, market players and third parties to state their comments on the basis of the relevant Brussels procedure.

"The government takes the view that the revenues of Paks II will be sufficient to cover all costs, including the capital and capital costs, fuel costs, and the costs of operation, maintenance, waste disposal and disassembly, and the project's anticipated rate of return is in harmony with the level expected by market investors," the statement reads. This was also confirmed by the detailed economic analysis prepared by the Rothschild Group on the basis of international comparative data, it said. This analysis is available in full on the project company's and Hungarian government's websites, it added.

Finnish 'twin-project'

The EC has overlooked the similarities, the government said, between the Paks expansion project and Finland's plan to build the Hanhikivi 1 nuclear power plant, which also draws on Russia-backed financing.

"Regrettably, the European Commission's decision of 23 November neglected the circumstance - which is relevant to the issue of state aid - that in the Hanhikivi 1 atomic power plant project in Finland, which is greatly comparable with the Paks II project in technical terms, private investors, too, undertook to play a role within the boundaries of a consortium who expect an adequate level of profitability from the Finnish atomic power plant project," the government said.

Russia's Cabinet of Ministers in January last year approved up to RUB150 billion ($2.3 billion) in funding from the country's sovereign wealth fund for the Hanhikivi 1 project. To be built in Pyhäjoki, in northern Finland, Hanhikivi 1 is scheduled to start generating electricity by 2024. The project is owned by Finland's Fennovoima, of which another Finnish company, Voimaosakeyhtiö, has a 66% share. The remaining 34% of Fennovoima is held by RAOS Voima Oy, a Finnish subsidiary set up in 2014 by Russia's Rosatom specifically to hold a stake in the company.

The Hungarian government statement added: "Despite the fact that the consortium also features municipalities and Russian state-owned actors, the Commission does not call into question whether the 'Finnish twin-project' is implemented on a market basis, without state aid."

In its summary published yesterday, the EC "misleadingly" invited third parties to submit their comments regarding the possible involvement of state aid, "despite the fact that they did not at all prove the existence thereof", the government said.

Hungary pointed out a "number of methodological errors" related to the EC's calculation of the project's capital cost and rate of return, "which call the well-founded nature of the Commission's conclusion into question", it said.

The government said it will respond to the misunderstandings "item by item" in its next submission to the EC.

"The Hungarian government is ready to face a formal investigation, as part of which we shall maintain that the project does not involve state aid," it said.

Russia has appointed JSC Nizhny Novgorod Engineering Company Atomenergoproekt (JSC NIAEP), a subsidiary of Rosatom, to construct the new Paks units, while Hungary has appointed MVM Paks II Nuclear Power Plant Development Private Company Limited by Shares (Paks II) to own and operate them.

Hungary wants to grant investment support to Paks II in the form of equity for the construction of the reactors, arguing that keeping nuclear generation in the national fuel mix is necessary to replace phased out capacity, address the need for new generation capacity and meet European climate objectives.

Attila Aszódi, the government commissioner responsible for Paks II, said in November that he still expected construction work to start in 2018, with Paks 5 and 6 starting commercial operation in 2025 and 2026.

European Atomic Energy Community (Euratom) approved a contract between Hungary and Russia on nuclear fuel supply for the project last April. Then in September Hungary received confirmation from the EC that the project meets the objectives of the Euratom Treaty. That approval relates to Article 41 of the treaty - the requirement that persons and undertakings engaged in certain industrial activities communicate to the European Commission investment projects relating to new installations and also to replacements or conversions.

Researched and written
by World Nuclear News