A delay of 3-4 years in the completion and commissioning of Temelin 3&4 would bring CEZ to the verge of bankruptcy.*



No private investor is willing to commit its own resources to building two new reactors at Temelin without guaranteed financial returns from the Czech state.

Imagine a situation in which CEZ would be forced by its majority shareholder to move ahead with Temelin 3&4 without guaranteed returns in the form of a public subsidy. In this case, the project would destroy so much value in the state-owned company that it would likely go bankrupt.

Now let us return to reality, and assume that a public subsidy is made available, and that it takes the form of the Contracts for Difference scheme envisaged by the Czech government today. In this case, the guaranteed floor price for nuclear generated electricity under the scheme would be equal to a direct increase in consumption taxation. The subsidy would be collected through raising the utility bills of all electricity consumers, and so reducing the disposable income of households and businesses.

In other words, money which could have been spent in the economy, invested by businesses or saved, would instead be passed on to CEZ, which would use this money to cover its losses incurred from the unprofitable operation of Temelin 3&4.

We estimate that the total annual subsidy payment from Czech consumers to CEZ would approach €1 billion, paid every year for 35 years, or 16% of the state’s spending on education in 2012. This assumes that CEZ is awarded a nuclear floor price of €108/MWh.

So much for the impact on energy consumers. Let us now consider the financial impact that expanding Temelin would have on CEZ itself. In order to quantify this impact, we have built a financial model projecting CEZ’s financial statements from 2013 until the decommissioning of Temelin’s planned additional reactors in 2085. For full details of the assumptions behind the model, please consult the study itself on our website here.

Perhaps the most important and the least predictable assumption on which we base our model is an average wholesale price of electricity of ~€40/MWh over the new plants’ useful life. Some will argue that this baseload price is too low compared to pre-financial crisis prices of nearly ~€90/MWh. We would disagree. Market and technological developments are transforming wholesale power markets.

The most significant of these developments, all of which serve to push wholesale prices down, are as follows:

- the growth in renewable energy sources;
- the anticipated introduction of capacity payments;
- the large reserve of unused capacity which can be brought online if demand recovers;
- advances in energy efficiency;
- and the introduction of demand response technologies.

If we assume that CEZ is to benefit from similar conditions for Temelin 3&4 as EDF has negotiated with the British government for Hinkley Point, namely a nuclear price floor of €108/MWh for 35 years, our model shows that the project would destroy some €4.5 billion of value in CEZ in today’s money. This is the equivalent of almost 3% of the Czech Republic’s annual economic output in 2012.

This destruction of value would occur because the project’s all-in costs (operating costs, capital costs, decommissioning costs, fuel costs, etc) will be higher than the revenues CEZ will be able to receive in the open market.

And even such a high subsidy level might still leave CEZ with significant cash flow problems during the actual construction of the plant. This is because CEZ has a large amount of bonds maturing over the period 2014-2025, which, added to the company’s recurring capital expenditures and the capital expenditures for Temelin’s expansion, may increase the company’s debt to as much as 4x EBITDA.

Recall that just two years ago, CEZ’s chief financial officer declared that he “must smile at the suggestion that CEZ would not have the money”, and that “whatever the estimates of the cost, CEZ will be generating so much cash between the start of construction in 2015/2016 and its completion in 2020 that it will be enough.”

That was then. Two years later, reality has wiped the smile off Martin Novak's face. Today, the completion and commissioning of the two new reactors is currently planned for 2026. Delays are usual in such projects. And even with the vast public subsidy covered by Czech consumers now being considered by the government, an overrun of just 3-4 years in the commissioning of Temelin 3&4 could bring CEZ to the edge of bankruptcy,

*This is the third and last edited excerpt from our study examining the economics of Temelin expansion, TEMELINomics 2, published this week. The full study in English may be downloaded free of charge from our website.