Eastern Europe

New Candu for EU

10 May 2005

The year 2007 will be a significant one for Romania. It is the year that the country is scheduled to join the European Union; it is also the year that Romania’s second nuclear power unit is expected to come on line. By Mark Rowe

Joining the European Union (EU) has required Romania to endure something of a scramble to update its energy sector to comply with EU standards on energy liberalisation. Accession has also required it to face up to just where it will get its energy from and has prompted some long-term thinking on the direction of the nuclear power industry. Although nuclear power plays a key role, Romania also has many other natural resources. Ensuring security of energy supply for an economy whose rate of GDP growth has exceeded 5% in each of the past four years (the forecast for the next 10 years is about 5-6%) is one of the priorities of the Romanian government.

“Romania is a large country with significant geographical differences between some areas, so it can rely on all forms of energy,” said Andrei Tarnea, head of the Romanian Information Centre in Brussels. “In some areas it has large resources for hydro but less so in others and so it invests in oil, gas and nuclear power.” As of 2004, according to the Romanian Ministry for Energy, the country’s power supply came from: coal (37.55%); nuclear (10.07%); natural gas (16.01%); heavy oil (3.26%); hydro (31.61%) and others (1.5%).

The issue of just what to do with this power when it is generated has also taken several steps forward. Back in the New Year, the World Bank provided financial support for the initial privatisation of some of the country’s electricity distribution companies. While small-scale in itself, the move represented a major step out of the shadows for Romania’s nuclear and related power industries. Furthermore, the sector has taken decisive steps towards European integration, with all key energy companies being snapped up by European investors.

The Romanian government plans to increase power output across the country by upgrading existing energy-producing facilities. Investments are targeting the completion of the second unit of the Cernavoda nuclear plant, the completion of 21 hydropower plants and the privatisation of electricity distribution.

“The shut down of obsolete thermal power plants in order to observe the EU environmental protection requirements is to be compensated by the increase of other energy sources, including nuclear and renewable,” said a senior source at the Romanian Ministry for Energy. “Cernavoda will replace the production of thermal units and contribute to the reduction of CO2 emission by 4 million tonnes per year. Nuclear energy represents, together with other domestic sources, an important tool to limit our dependence on imported primary energy resources.”

In many ways, the picture appears to be positive. The country recently finished its accession negotiations with the EU. On the other hand, decaying infrastructure and a legacy of state-control, has left Romania with an unprofitable and unwieldy energy market. Although it is 15 years since the end of the reign of Romania’s dictator Nicolai Ceausescu, the legacy of the Soviet-era lingers on in the Romanian energy sector, and the nuclear industry is no exception.

Nuclear ambitions

In order to understand the present state of play in the Romanian nuclear power sector, it is instructive to put the country’s energy sector in some kind of historical context. Under Ceausescu, the country built some 100 hydroelectric plants, yet by the time of the 1989 revolution, according to the World Bank, just 35% of the country’s hydroelectric potential had been tapped. Meanwhile, to offset declining petroleum and gas reserves, Ceausescu pinned his hopes on nuclear power, which was incorporated into a series of five-year plans.

In the late 1970s, when Ceausescu’s megalomania was reaching its height, he announced plans for between 15 to 20 nuclear reactors. The first of these was the Cernavoda nuclear station on the Danube, just 150km from the capital, Bucharest. While foreign expertise oversaw the project, there were concerns about Romania’s use of forced labour, which led to further fears about faulty construction and manufacturing.

On the plus side, safety at the plant is not widely regarded as a major issue in the nuclear sector. This is because it was built by Canadian, Italian and American expertise, making it the first nuclear generating plant in Eastern Europe to employ safe technology similar to that used in the West.

Construction of the first unit at Cernovoda began in 1980, and of units 2-5 in 1982. However, work on these units was suspended in 1982 to focus on unit 1. At one point, Ceausescu even offered a ‘countertrade’ agreement, whereby Romania, which could not afford to pay back its loans, could export goods in a barter arrangement.

After the 1989 revolution, much of Romania’s nuclear infrastructure was either dissolved or mothballed. Unit 1 at Cernavoda was connected to the grid in 1996 and is now operated by the state nuclear power corporation, Societatea Nationala Nuclearelectrica (SNN), which was established in 1988. The reactor has a lifetime load factor of 83.3% and, according to the World Bank, the operating and maintenance costs are ¢1.25/kWh. Unit 1 remains Romania’s sole nuclear power station and the only Candu reactor operating in Europe.

Today, though, government support for nuclear energy is strong, though this falls well short of Ceausescu’s crazed vision. Nuclear energy provides 10% of the country’s energy at very low cost. The principal users of nuclear energy are district heating plants, the steel and chemical industries and the residential and commercial sector.

Electricity consumption in Romania has been growing since 1999 and grows about 4% a year. “The problem is that the production capacity Romania had in Communist times was not up to standard nor economically efficient,” said Tarnea. “It was designed to provide power for requirements that are no longer needed. Nuclear power, along with the other energy sources, has had to adapt to drops in reduction and then to slow growth. There’s a tremendous amount of pressure on the energy sector as a whole in terms of privatisation and deregulation, security and technical competence.”

Completing Cernavoda

Meanwhile, the completion of the Cernavoda nuclear plant is regarded by the Romanian government as major priority in the on-going efforts to rehabilitate the country’s ageing power system. For now, Romania has just the one operating nuclear power unit, but in 2000, Romania’s government decided that the completion of Cernavoda 2 was a high priority and supplied €60 million towards this. Further financing was secured in 2002/2003 when Canada loaned an additional €218 million, with the work on Cernavoda 2 led by AECL Canada and Ansaldo Italy. The Romanian utility CONEL (then called RENEL) reached agreement with Credit Suisse First Boston for financial, commercial, and legal advice to complete the financing. Romania’s share of the cost of Cernavoda is estimated to be $400 million. Last year, the European Commission approved a €223.5 million loan to SNN. The money will be used to fund work in meeting international safety standards. Latest reports from SNN say that unit 2 is about 40% complete. When completed, probably in 2007, it will have a capacity of 706.5MWe (650MWe net). According to the source at the Romanian Ministry of Energy, units 1 and 2 of Cernavoda will generate, after 2007, around 20% of the electricity produced in Romania.

Meanwhile, financing for the completion of Cernovoda 3 – also a Candu 6 unit – is expected to be organised in 2006 and, should this be successful, the unit could come on line in 2011. For this and subsequent units, according to the source at the Romanian Ministry of Energy, contracts will be promoted under the form of public-private partnership and cover all financing and without any state guarantees. For Cernavoda 3 the first step of a pre-feasibility study has been produced by SNN and approved by the dedicated unit 3 inter-ministerial committee. “The feasibility study is now under review,” said the source, “and we expect an important contribution from the financing markets and nuclear industry from the EU, North America and Far East.”

SNN also announced a declaration of intent this spring to develop and complete Cernavoda 4 and 5 by 2020. Estimates from the US Department of Energy suggest that Cernavoda 3 is 15% complete, Cernavoda 4 is 5% complete, and Cernavoda 5 is 4% complete.

Romania’s accession to the EU appears to be proving straightforward for the Cernavoda plant. By and large, nuclear safety does not fall under EU law, as nuclear safety standards are currently deemed the competence of the national government and their appropriate authorities. Despite this, the EU has called for an increase in nuclear safety to a standard dependent on the original reactor design. It says, for example, that reactors of VVER 440-230 and RBMK designs, including Kozloduy 1-4 in Bulgaria, Bohunice V-1 in Slovakia and Ignalina 1 and 2 in Lithuania cannot be economically upgraded to an acceptable safety standard and thus need to be closed. However, Cernavoda, along with the Krsko nuclear power plant in Slovenia, are recognised as the only western design reactors operating in Eastern Europe.

New market forces

Cernavoda is now subject to market forces as the country’s energy market becomes fully liberalised. “Regarding the participation of Nuclearelectrica in the wholesale electricity market, it has PPA (power purchase agreement)-like contracts with the distribution and supply companies,” said the government energy source. “This type of contract is valid for six years and will expire in 2006. The electricity price in this kind of contract is regulated. At present there are discussions regarding the reduction of the contracted quantities in these contracts.

“As a result, Nuclearelectrica will have the chance to sell electricity on the competitive market, at freely negotiated prices. Due to the relatively low costs of the electricity produced in Cernavoda, Nuclearelectrica will be a successful participant on the competitive market. It is expected to sell electricity at higher prices than the regulated one. There will be no restrictions for export of electricity produced by Nuclearelectrica.”

Meanwhile, attempts are being made to improve the efficiency of the country’s energy supply network, addressing how to distribute the electricity generated by Cernavoda. A spokesman for the Ministry of European Integration said this move is crucial in order to handle the anticipated increase in electricity from the second Cernavoda reactor.

According to the World Bank, the wider picture is to ensure that Romania enjoys a balanced energy sector, and avoids over-reliance on any one sector, whether it be nuclear, hydro or coal. Last December, the World Bank approved a partial risk guarantee (PRG) for the privatisation of Romania’s Banat and Dobrogea electricity distribution companies (Discoms) to the value of €60 million.

And indeed, the country’s efforts to streamline the industry ahead of accession to the EU does appear to include a desire to avoid over-reliance on nuclear power. Earlier this year, the World Bank approved a €66 million loan to the Romanian hydropower generator Hidroelectrica. The funds will support the first phase of the bank’s $1 billion Energy Community of South East Europe programme (ECSEE APL), which aims to integrate energy systems in southeast European countries into the internal energy market of the EU.

Romania was among the first countries to sign up to ECSEE. The loan will help finance the rehabilitation of Hidroelectrica’s Lotru Hydropower Station and provide technical assistance for its institutional development and project implementation. The rehabilitation of the Lotru Hydropower station will ensure reliable services to the national power grid for another 20 years, maintaining the power supply at the current level of 510MWe.

And to absolutely guarantee that Romania does not become over-reliant on nuclear power in future, growth in the oil and natural gas sectors will be also stimulated over the coming years by EBRD and World Bank projects aimed at increasing oil and gas production via the introduction of new equipment and new production methods. The EBRD has also become involved, supporting the privatisation momentum in the sector, particularly for the oil giant SNP Petrom, the electricity and gas distribution companies as well as electricity generation plants.

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