Nuclear realpolitik14 June 2017
With cheap finance and advanced technology, could Russia solve Britain’s nuclear energy crisis? By Ian Jackson
Britain needs new nuclear power stations. And lots of them. The UK government aims to have 16GWe
of new nuclear baseload generating capacity operating by around 2030, with no restriction on foreign equity investment. At least another 14GWe of low carbon nuclear power would also be needed to enable Britain’s transport sector to successfully transition away from petrol and diesel fossil fuels towards the widespread adoption of electric vehicles.
Today Britain is potentially the most important market for new nuclear reactor build in the Western World. But a major hurdle remains. Britain’s nuclear energy problems are not political, technological nor safety. They are financial. The collapse of Westinghouse Electric Company LLC, which entered US bankruptcy protection in March 2017, starkly illustrates the fragility of commercial nuclear reactor vendors. Westinghouse was and remains a highly regarded and historically successful American company that has supplied half of the world’s civil nuclear power technology. And yet Westinghouse was brought down by financial cost over-runs at its two flagship AP1000 construction projects, Vogtle and Summer in the USA. The French reactor vendor Areva has also experienced similar cost problems with EPR builds at Olkiluoto in Finland and Flamanville in France, but has so far managed to avoid collapse through its majority public sector ownership by the French state. Areva’s reactor business Areva NP will be merged with EDF in 2017, and its fuel business Areva NewCo will be sold off separately. The de facto collapse of both Westinghouse and Areva is deeply troubling, because they are key suppliers of nuclear reactor technology for Britain’s nuclear build programme. Avoiding similar cost over-run difficulties in the UK is essential, if Britain’s plans are to proceed smoothly on schedule. Russia might be able to help.
Why buy Russian?
At face value, buying a Russian nuclear power plant makes commercial sense. Russia is a full fuel-cycle nuclear superpower, supplying friendly countries with both advanced VVER-1200 nuclear reactor technology and a financial package to cover the purchase cost. The vast territory of the Russian Federation has major oil, gas, petrochemical, metal and mineral resources that will continue to provide fundamental economic strength and stability for a long time to come. In short, Russia is a stable and relatively wealthy country with home-grown nuclear technology that can finance overseas nuclear projects at low interest rates.
Little wonder that Russia has been highly successful in the international nuclear build marketplace, competing strongly against Korean, Chinese, Japanese, French and US reactor vendors. Russia’s nuclear deal with Hungary in Europe illustrates why. An intergovernmental agreement between the Russian Federation and Hungary signed on 28 March 2014 provides a fixed-price turnkey contract to supply two 1200MWe VVER reactors, along with €10 billion of Russian state credit for financing up to 80% of Hungary’s Paks 2 project.
Loans are reported to be at an interest rate of 4.0-4.9%. In September 2015 Rothschild estimated the cost of debt for Paks 2 to be 4.5%, and since debt interest is fully corporation-tax-deductible at 19%, after taking account of Hungary’s corporation tax shield the post-tax cost of Russian debt is just 3.6% covering 80% of the reactor financing. This is an astonishingly good deal and was easily approved by the European Commission, which granted State Aid clearance to Hungary in March 2017.
Russia is planning to build similar VVER- 1200 units at Akkuyu in Turkey, Ostrovets in Belarus, Hanhikivi in Finland, Ruppur in Bangladesh and El-Dabaa in Egypt. There has also been strong interest from the governments of Jordan, Vietnam and most recently South Africa.
Russia’s nuclear export sector perhaps risks spreading itself too thinly, especially if a buyer country defaults on its loan repayments in the future. But there is little chance of this in Western Europe. The British government has not defaulted on a debt since the 17th century and is therefore regarded as extremely creditworthy. Breakthrough success for Rosatom in a Western nuclear market is likely to follow at some point soon.
Could Russia build nuclear plants in the UK?
If Communist China can build a Hualong One HPR1000 nuclear power plant at Bradwell in the UK, then there is no reason in principle why Russia could not build a VVER-1200 elsewhere in Britain.
Admittedly, electricity generation plants are ‘critical national infrastructure’ and are of course security sensitive. Effective practical engineering and cyber safeguards must be in place to prevent the possibility of any external or foreign interference. Quite properly the UK government would want to retain oversight of security arrangements and exercise corporate governance controls through a golden share in a nuclear development joint venture company registered in the UK.
In contrast with the difficulties experienced in France and the USA, China and Russia have been very good at managing the construction costs of nuclear power plants. Chinese construction of two 1600MWe EPRs at Taishan for €8 billion (agreed in 2007) is understood to be half the cost of similar EPRs being built in Europe. Likewise Russian VVER-1200 reactor technology is estimated to be 30% cheaper than its Western counterparts.
Russia had begun to make important progress in the UK, recognising its potential as a key Western nuclear build market. In 2012 Rosatom announced that it intended to apply for design certification for its VVER- TOI Generation III+ reactor technology, with a view to Rusatom Overseas building them in the UK (although it has not done so to date). In June 2013 an intergovernmental agreement set up a working group to explore possible Rosatom involvement in UK nuclear power projects. This led to a nuclear cooperation agreement in September 2013, which was followed immediately by an agreement that Rosatom, Rolls-Royce and Fortum would prepare to submit an application for Generic Design Assessment. Rolls-Royce would undertake engineering and safety assessment work on the VVER technology, while Fortum operates two early but westernised versions of VVER units in Finland.
Russian political intervention in Crimea during 2014 has stalled further nuclear progress by Rosatom in the UK. Nevertheless the idea of introducing Russian VVER technology into the UK assisted by Rolls Royce – an excellent British company, always ahead of the game – was bold and visionary.
What to expect when working with Russia
Modern Russia is not the Soviet Union. Indeed young Russian professionals are arguably the world’s newest capitalists. Back in 2011 I lectured at Skolkovo, the Moscow School of Management established by Russian President Dmitry Medvedev in 2010. Russian nuclear firms were looking at expanding internationally and interested in learning how Western nuclear businesses operate. Interestingly their main focus of attention was better understanding French and American nuclear business models, who they saw as the most successful key market players, not the British.
What particularly impressed me was the strong entrepreneurial spirit of the Russian MBA students and their enthusiasm and ambition to compete in the global export market, displacing established nuclear players. Today Russia is successfully competing based on its lower capital cost base, excellent export finance packages and high technical quality VVER reactor technology.
Over the past six years I have not been surprised by Russia’s accelerating nuclear export success, and am glad to have perhaps played a small part in it. Back in England I subsequently learned to speak and read some basic Russian and have visited legacy Russian nuclear power plants in Central and Eastern Europe.
Russian nuclear technology remains widely used and understood in Former Soviet Union (FSU) states, where Russian is the lingua franca of nuclear sector professionals. And since Russia also has historically longstanding cultural relationships with many Asian countries – now the fastest growing nuclear energy markets in the world – Russian is often the nuclear language of choice in Asia too. Here are some tips on what to expect when negotiating with Russian nuclear organisations:
- Political access is simpler than in the West. Western companies can get good access to senior political decision-makers in Russia much more easily than in Western countries. Russian civil servants positively enable access, rather than block it, and push decision-making up the chain of command.
- Russians are straightforward but can appear blunt. Russians speak bluntly about what they want although this is a function of the Russian language structure, which is more direct and shorter than the English equivalent. However this transparency also helps business negotiations.
- Russians will not move on a business deal until they get what they want. Russians can appear to be inflexible. This can make business negotiations more difficult than in the West, with fewer compromises possible.
- Russia is comfortable with its own nuclear technology and is not here to steal Western intellectual property. Russian nuclear energy development in the UK is not a Trojan Horse for espionage. The prime motivation is developing Russia’s international trade, commerce and ultimately Russian jobs. VVER nuclear technology is state-of-the-art and has evolved progressively and smoothly with significant inward investment. Russia is not interested in acquiring Britain’s ageing technology, not least because it already has its own, and in any case there is no viable commercial market. (Neither is China interested in copying Britain’s historic legacy technology. In 2015 I negotiated a £50 million five-year deal with China to establish a nuclear Joint Research and Innovation Centre (JRIC) between the British and Chinese Governments. China is primarily interested in developing leading edge advanced nuclear technology to export internationally as part of its “One Belt, One Road” economic trade strategy).
- Russian organisations pay well but are demanding and expect consistent excellence. Expect late night emails, evening meetings in unorthodox locations and a strong delivery culture.
New opportunity for Russia in the UK
Russia could still potentially join the first wave of new nuclear power plant projects in the UK after the UK’s referendum decision to leave the European Union and exit the Euratom Treaty. Political circumstances in the UK are changing very rapidly.
In the coming months Britain’s previous civil nuclear energy policy relationships are likely to be reviewed and probably renegotiated.
The economic realpolitik of Brexit is already resulting in new trade alliances. Despite significant opposition from the USA, the UK has allowed Chinese investment in new nuclear power plant construction at Hinkley Point C. Further Chinese nuclear development at Bradwell is likely to follow. Russia now has a window of opportunity to influence civil nuclear energy policy in the UK, leading towards the successful build of a Russian VVER-1200 at a British site. The UK government’s Department for Business, Energy and Industrial Strategy (BEIS) and the Department for International Trade
(DIT) – whose predecessor organisations had once discouraged Russian entry into the UK nuclear sector – are now taking a fresh look at trade options as new economic and industrial strategies must be developed to prepare for Brexit.
Britain’s political exit from Europe will also naturally result in greatly improved relations with Russia for several reasons:
- US interest and influence in the UK will decline as the UK is no longer a natural commercial gateway for the USA into the European marketplace. The USA was always acutely aware of the geopolitical risks from a new powerful ‘United States of Europe’ emerging under the guise of the EU. Brexit suits US foreign policy interests because it helps to maintain US dominance.
- Britain may no longer play a strong security role supporting the unnecessary, and sometimes seemingly aggressive, expansion of the EU and NATO towards Russia’s borders. Russia gets nervous when the West approaches too closely. Separation of Russian and Western territory by a neutral buffer zone reduces potential conflicts.
- Britain may be less likely to become involved in the political complexities of Former Soviet Union States such as Ukraine and Crimea. Working with Russian nuclear energy development separately, Britain would be less vulnerable to the political fallout from potential conflicts developing in Asia between China, Japan, Vietnam, North Korea and the USA, where for example oil exploration and military territorial disputes are becoming a particularly sensitive issue in the South China Sea.
- President Trump’s Administration may yet result in improved relations with Russia and a de-escalation of past tensions accumulated under the former administration. A better relationship between Britain and Russia might also be politically supported by the USA. However, France may apply pressure not to work with Russia, mainly because Areva and Rosatom are direct competitors.
Russia is well positioned to successfully exploit these changing circumstances and gain access into the UK nuclear market. Success depends on developing an effective engagement strategy, a roadmap of achievable goals and a real-world action plan, that understands the needs of the new UK government and better sells the capabilities of Russia.
Britain needs to play its part too and build much stronger relationships with Russia, based on mutual trust and respect. When lecturing in Moscow for the first time, I experienced something unexpected; ordinary Russian people were wary of me as a Westerner. It was an uncomfortable realisation and disturbed me long after I had returned from Moscow. Diplomacy and dialogue are the solution to rebuilding trust. Britain and Russia are two great nuclear energy nations. We should be working more closely together.
About the author: Ian Jackson is a nuclear consultant and author of “Nukenomics: The Commercialisation of Britain’s Nuclear Industry”. He is a Fellow of the Society for Radiological Protection and was previously an Associate Fellow at the Royal Institute of International Affairs, Chatham House, London. www.JacksonAssociatesInternational.com