No private investor will join the Temelín project without clear, enforceable commitments of support from the Czech state, for which read the Czech taxpayer.

ČEZ revealed last week that it had hired a French bank, BNP Paribas, to find an equity partner to help finance its expansion plans at NPP Temelín. What a turnaround! In just six months, ČEZ has moved from an outright dismissal of the suggestion that it might not be able to finance the project alone, to a position of wanting to share the financial risks of the project with an outside investor.

It will not be so easy to find such an investor. The business case for investing in nuclear plants is not compelling. A report by Citigroup called “New Nuclear – The Economics Say No”, published in 2009, set out the many risks facing private investors in nuclear plants, and investment conditions have not got any better since then.

Four risks in particular stand out, those linked to the construction, operation and decommissioning of the plant, and to the volatility of electricity prices. Construction risk is the danger that with such capital intensive projects any delay or budget overrun can cause serious financial damage to the private investor. Historical performance is not encouraging. Of the 64 reactors currently under construction, 27 have been delayed, of which 12 have been delayed for over 20 years. As The Economist pointed out recently, the record for building nuclear plants on time and within budget is “somewhere between horrendous and terrible” (“Nukes of hazard - The fallout from nuclear power”, 15 October 2011).

Price risk acknowledges the alarming volatility of electricity prices. Between August 2007 and January 2012, the electricity price on PEX increased by 70% and then fell by 45%. For a project with a 60 year operational life, no rational investor would be willing to bear such price volatility without the comfort of knowing it would achieve substantial returns on the investment.

Under operational risk, Citigroup points out that a six-month breakdown can translate into £100mn in direct costs and lost output. And then there is the decommissioning and waste risk, both of which will grow in the case of the Czech Republic as it prepares to locate and to build a new deep geological repository in 2050-2065.

A recent study by the US-based Texas Institute on the financing of nuclear power projects identifies another risk, which is the high incidence of credit rating downgrades among utility companies investing in nuclear projects. Ratings downgrades might harm a company's share price while increasing its cost of borrowing.

In short, it is safe to assume that no private investor will consider joining the Temelín project without clear, enforceable commitments of support from the Czech state. In addition to the subsidies it already provides ČEZ’s nuclear business, such as the cap on nuclear liability and transmission grid expansion (the cost of which is passed onto consumers), an outside investor will be looking for stable financial incentives from the state, or rather the Czech taxpayer who underwrites any support the state might provide.

The signals being sent by the Czech government are typically inconsistent. Trade & industry minister Martin Kuba declared today that there “should be neither a minimum buying price for electricity nor bank guarantees –for now”. In contrast, Special Envoy for Temelín, Václav Bartuška, has indicated that the government is leaning towards a form of support being proposed in the UK, in which the state guarantees the price paid for nuclear generated electricity.

We can dismiss Martin Kuba’s statement as either willfully ambiguous or fanciful. Our own analysis of ČEZ’s financial strength (see Temelinomics) demonstrates that ČEZ cannot afford to pay for Temelín itself. So let us assume that Václav Bartuška offers the more truthful insight into the government’s thinking, and that state support is being considered. One notable difficulty with the UK’s version of nuclear feed-in tariffs is the legal uncertainty that still surrounds it. KPMG recently pointed out that the guaranteed purchase price might be considered illegal state aid under European Union competition rules.

The European Commission has not yet ruled on the British proposal. And until it does so, potential investors in Temelín will have to add this risk to the many other risks associated with investing in the construction of nuclear power plants. It is worth reminding ourselves that ČEZ is a private company, a fact that politicians tend to overlook in their enthusiasm to promote what might be considered legitimate public policy objectives but which destroy shareholder value nevertheless.

Thanks to Ivan Kotev for his help with this text.