Polishing the future

30 October 2016

Political will and a clear financing structure for the Polish nuclear programme will be needed if the 6000MW of new nuclear capacity, planned for the country, is not to be delayed beyond 2030, the new date when the first of the new reactors are expected to become operational. Rumyana Vakarelska explains.

Two potential sites for the first plant were approved earlier this year – Lubiatowo-Kopalino and Zarnowiec in northern Poland by the Baltic Sea – but a number of strategic planning decisions on the programme are still pending.

Polska Grupa Energetyczna (PGE) was appointed in 2009 by a previous Polish coalition government led by Donald Tusk
to build the plants. It originally planned to commission the first unit in 2020. In January 2014, the Council of Ministers of the same government approved a new nuclear power programme that set 2024 as the date for the first unit to go online. However, this starting date has now been moved to 2030 and possibly will go back even further.

A consortium of energy companies known as PGE EJ1 was created and assigned with the task of building the 6000MW of new nuclear power plants in Poland. While the selection and the approval of the sites, which includes ongoing environmental testing, has taken a long time and meets new IAEA post- Fukushima risk assessment requirements, Poland is now looking at further delays.

“Nuclear power will be in the [updated] strategy, but the earliest chance to build it will be after 2030 and perhaps in a modified form,” said PGE’s chief executive Henryk Baranowski at a nuclear conference earlier this summer. “We are not suspending work on the project,” he added. “We continue to analyse and discuss it with the Government. When we’re ready, we will take the next step, there’s a chance that it will be this year.”

Baranowski did not specify what modifications might be made to the project, although close observers of the situation have speculated that the Government might prefer to build smaller units to reduce capital costs. “Developing the right funding model is probably the most important action that Poland can undertake to attract the global investment community in its nuclear programme,” said George Borovas, a partner and global head of the nuclear practice at law firm Shearman & Sterling. “A CfD structure similar to the UK would certainly be a strong possibility, especially since this structure has been reviewed by the European Commission with respect to EU State Aid rules,” he said. “However, the Polish nuclear programme represents a very attractive opportunity in the middle of Europe and we have seen most of the major nuclear reactor vendors actively engaged,” Borovas continued.

Choosing technologies

“Areva and GE-Hitachi have previously expressed an interest in Polish new nuclear construction, and it is also thought that the French-Japanese Atmea joint venture could be interested”, said an industry analyst.

However, experts are cautious about the reactor vendor choices before Poland for a few reasons, including the availability of complex reactors at lower cost, technical feasibility and the possible delays that the choice of reactors alone could incur. “From a buyer’s point of view, all the European utilities are getting out of nuclear except EDF,” said Stephen Thomas, a professor of energy policy at London’s University of Greenwich.

“RWE, E.ON, Iberdrola and ENEL all had stakes in new reactor projects and all have exited,” Thomas noted. This could potentially prolong PGE’s nuclear technology choice, and consequently, the launch of the first nuclear reactor rescheduled for 2030-31.

“If the start-up is not expected before 2029, that implies construction start in 2023 or even 2024”, said Thomas. “An order has to be placed a year ahead of this for high- value, complex items like the reactor vessel, steam generators and turbine generators,” he added.

“In addition, in terms of vendors, despite all the publicity about new reactor designs, like SMRs, any design that is not fully developed and has not gone through comprehensive review by a credible safety authority is a non-starter,” said Thomas. 

For the planned tender at the end of 2015, which did not take place due to Polish general elections and a change in government, PGE EJ1 invited numerous companies to participate, including Areva, GE Hitachi, Kepco, SNC Lavalin and Toshiba/ Westinghouse, according to one Polish analyst.

According to the initial schedule, the planned integrated tender had to be published at the beginning of 2016, and the results were due before 2019.

Financial challenges facing the programme

The biggest challenge facing PGE is that the company is looking at a new means of financing the nuclear project after the Law and Justice (PiS in Polish) Government, which took office in November 2015, rejected contracts. PGE also faces the problem of its short-term commitment to the use of lignite coal produced in Poland while it deals with a pending decision on the choice of nuclear technology.

“On finance, I think you have to think there are two risks that anyone financing a nuclear plant will be concerned about: market risk and technology risk,” said Thomas. “Market risk is the risk that the market price will fall below the costs of the nuclear plant and will bankrupt it. The simple way is to remove the exposure of the plant to the market by giving it a long-term take-or-pay contract with a rock-solid buyer at a fixed real price that will more than cover its expected costs”, Thomas said. “This is all a CfD is, a 35-year fixed price contract with a government agency, such as the Low Carbon Contracting Company in the UK, according to the finance model of Hinkley Point C.”

The new Polish Law and Justice Government and PGE are now looking at other means of financing the nuclear project after rejecting the CfD funding model. The Law and Justice Government is also widely seen as being close to the country’s coal production industry.

“The financing projections for a nuclear plant which were presented to me in terms of the CfD mechanism are unacceptable from the economic point of view,” Krzysztof Tchorzewskithe, the Polish Energy Minister, said at a press briefing in June, noting that the financing projections “are too costly”. “The alternative is to finance the construction with a certain risk on the behalf of the investor,” he said. However, he did not elaborate on financing costs, or on the estimated cost of the plants.

“What is certain is that nuclear power cannot be carried out today under purely a market formula, so identifying the optimal financing method will require in-depth dialogue”, said Baranowski in an interview to the Polish press. “The result will have
to meet the demands of the investors, and separately, of the consumers,” he continued.

PGE plans to continue using hard coal and lignite as its feedstock fuels for the next two decades or so. Currently, the company generates about 70% of its electricity from lignite. Baranowski said its 5.3GW Belchatow plant had lignite resources until 2040, while its Turow plant had resources until 2045. If the company gets a concession for the Zloczew deposit, Belchatow’s operating life would be extended until 2060.

In terms of renewable energy, Baranowski said PGE was interested in developing offshore wind in the Baltic Sea. “Now
we’re calculating the profitability of such investments and we’re analysing possible financing models,” he said. In the past, PGE has said it is planning to construct three Baltic Sea offshore wind farms with a combined capacity of 3450MW.

Technology risks

“Technology risk is the risk of nuclear plants’ performance, e.g. construction cost, operating cost”, said Thomas. “So if the reliability is worse than expected, the costs are higher and the plant will not be profitable.”

He added that “traditionally, nuclear plants were built on the basis that whatever costs were incurred were passed on to the consumers, i.e. consumers took the risk. “This is still the case in countries like China, Russia, India, and for the two US projects (Vogtle & Summer), the energy regulator has effectively given assurances the utilities can pass on the costs.” However, “sovereign loan guarantees cover financiers (but not the plant owner) against both market and technology risk,” said Thomas.

“Essentially, If the plant is not profitable and the owner goes bust, the taxpayers repay the loans,” he continued, noting that a clear financing plan for the investment in the new Polish nuclear capacity is needed.

So, according to the experts, financial and technological risk go increasingly hand-in- hand and this is yet another task for the Polish government to resolve, as it aims to building long-term nuclear capacity. Noting that a new reactor design like an SMR was unlikely to be used in Poland as it had not yet gone through a comprehensive safety review, Thomas said that “leaves Poland with the Areva EPR, but Areva is bankrupt and construction experience can be challenging.”

He added that “next is the Westinghouse Toshiba AP1000, but Toshiba is in serious financial difficulties and the record of the AP1000 is as bad as the EPR. The Hitachi ABWR has got an established design, but the four plants in service have a poor record and the design has gone through two major updates since that version. In addition, the Russian AES-2006 has a poor construction record, the credibility of the Russian regulator is questionable, as well as Russia’s financial position to provide finance.”

More public consultations and law updates will be needed. “Public disclosure, participation and acceptance of a new nuclear programme is a key consideration that requires a clear policy as well as legal and regulatory framework,” said Borovas. “Over the past years Poland has been making consistent efforts to engage the public in support of the nuclear programme.”

Poland will have to follow the Espoo and Aarhus Conventions on the use of nuclear power, as well as possible reviews of its new plants’ decommissioning provisions. However, earlier this year, the International Atomic Energy Agency (IAEA) concluded that Poland has implemented all the recommendations and suggestions of a 2013 Integrated Nuclear Infrastructure Review (INIR). The IAEA also concluded that the country is already implementing many of the actions that are expected for the next phase of developing its nuclear power programme.

Józef Sobolewski, director of the nuclear energy department of Poland’s Ministry of Energy, said that the country is “taking all the necessary measures” to ensure its nuclear power programme meets the highest standards of safety and security and best international practice. More importantly, he said: “Poland is actively preparing for the next phase of the programme and is considering inviting an INIR Phase 2 mission in 2017.”

The milestones that the IAEA has noted in the Polish nuclear programme include progress towards building new nuclear
in Poland, but the country is only at the beginning of moving towards specific steps of the implementation of its nuclear construction programme, starting with a review of the country’s Atomic Law that has to be passed in the Polish Parliament.

Some of the steps Poland has already completed include establishing a legal commitment to safety, security and non- proliferation, as well policies on radiological protection, energy security and waste management. It has established better coordination between the Ministry of Energy, the country’s nuclear regulatory body and the future owner/operator, PGE. Steps have also been taken with respect to the regulatory body’s independence.

Poland has also invested efforts and financial resources in human resource development, training and equipment purchase, in identifying the needs of the main stakeholders and in strengthening emergency preparedness and response. It has improved its safeguarding and handling procedures for dealing with nuclear materials. “Embarking on a nuclear power programme is a serious undertaking that requires significant financial resources, as well as the implicit responsibility to ensure the necessary infrastructure is in place,” said Milko Kovachev, head of the IAEA Nuclear Infrastructure Development Section. “A country should start a nuclear power programme only when it is ready and can be realistic about the time and resources involved.”

“A knowledgeable and independent regulator is essential to balance the role of the operator of a nuclear power plant and set standards for nuclear safety and a nuclear safety culture in a transparent way,” said Per Lindell, co-chair of the Tenth Technical Meeting at IAEA earlier this year, addressing the issues of countries that have yet to develop nuclear power capacity.

Poland’s next steps, other CEE region nuclear construction

The arrival of the new Government under Prime Minister Beata Szydlo’s Law and Justice Party last November led to reforms such as transferring the responsibility for energy policy, including the government’s Nuclear Energy Department, from the Ministry of Economy to a newly created Ministry of Energy, leading to a period of transition and adaptation. One of the consequences is the expected delay of the environmental verification work at the Lubiatowo-Kopalino and Zarnowiec sites, which should have started early this spring, but will now take between one and two years.

Poland currently provides about 80% of the country’s electricity generation from coal, while the first step of its nuclear power programme, with about 3000MW of capacity at the country’s first nuclear plant, will aim to help diversify the country’s energy resources and limit their impact on the environment.

“The great advantage of nearly all forms of generation currently being built apart from coal and nuclear is that they take no more than three years from the start of construction to first power (much less for onshore wind and solar) and energy efficiency should be quick to mobilise,” said Thomas. “The problem is therefore political will to mobilise alternatives.”

Eastern Europe is one of the few regions globally which is seeing considerable interest in new nuclear construction. Both the Czech Republic and Hungary are in the process of launching new nuclear construction projects at their existing nuclear units, while Lithuania is considering launching a round of new nuclear construction following the retirement of its Russian-built Ignalina nuclear power station. Both the Czech and Hungarian reactors currently in operation are Russian VVER technology, but Poland has not shown any interest in Russian technology for its planned nuclear programme and Rosatom was not invited to participate in the country’s planned tender.

Hungary is proceeding with construction of new units at its Paks Nuclear Plant with a country-to-country loan from the Russian state. However, this loan is currently being investigated for the legality of the funding as state aid by the European Commission (EC) in Brussels.

The Czech Republic is looking to re-launch a tender that it cancelled earlier this a year to add new units at its Dukovany and Temelin nuclear stations and the country has been looking at a variety of potential international reactor vendors. The previous tender was cancelled after Czech government concerns that it would be forced to provide a financial guarantee for the new nuclear construction. 


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