POWER MARKET DEVELOPMENTS
The biggest deal22 August 2008
As soon as it was looking as if China had chosen Westinghouse technology on which to base its next generation of nuclear plants, Areva then signed the largest ever nuclear deal with the country. By James Bodgener
Amid a glitzy ceremony, presided over by Chinese president Hu Jintao and his French counterpart Nicolas Sarkozy, France’s Areva signed a massive nuclear power agreement on 26 November 2007 in Beijing’s Great Hall of the People. Valued at r8 billion ($12.6 billion), the package included two of Areva’s new European Pressurized Water Reactors (EPRs), and was touted by company CEO Anne Lauvergeon as the most valuable civil nuclear power plant deal in history.
But the truth was that Areva had offered an extremely attractive financing package, which the Chinese could hardly refuse, and secured the contract without having to compete in an international tender competition for the Taishan plant in question. This was despite the fact that the Chinese had earlier in the decade indicated their preference for tender competitions for nuclear projects, so as to be aligned with international norms.
The bottom line appears to be that work-hungry Areva secured the contract to supply a technology, whose first installation abroad at Olkiluoto in Finland had raised a lot of questions as a result of the project running into huge delays and cost overruns.Apart from the installation of the two 1700MWe EPRs at the new Taishan site outside Hong Kong, the contract with China Guangdong Nuclear Power Corporation (CGNPC) also included a decade’s worth of fuel. Construction by CGNPC with Areva at Taishan is due to start in 2009 and be completed by around 2013.
And in a complementary and, it seems, key sweetener, as a side deal EDF agreed to take a one third share in the operating company to be set up, Taishan Nuclear Power Company (TNPC). Effectively, this means that CGNPC can part pay for the EPRs with money advanced by EDF.
So far in China, foreign companies can invest in nuclear power projects, but are not permitted to hold controlling stakes. EDF will never be in a controlling position in the running of TNPC, and will at best transfer technology, which once more will be replicated by the Chinese.
Areva can argue that the contract preserves its lead in the market, which otherwise might have been relinquished to Westinghouse, or even Russia’s Atomstroyexport.
The only game in town
Despite a gathering renaissance in the USA, the Chinese nuclear power market is practically the only international one currently offering concrete opportunities for Western contractors – and it is huge.
China plans to spend a whopping 400 billion yuan ($50 billion) on nuclear power by 2020. This would mean an additional 30 new reactors to the 11 already in operation, and is a lifeline for work-starved nuclear power plant contractors.
Beijing is constantly revising upwards its figures for nuclear power. It now foresees more than 5% of the country’s electricity coming from nuclear power by 2020, compared with 2.3% at present, according to the usually reliably informed Caijing magazine. Previously, nuclear power was targeted to account for 4% of the nation’s power capacity by 2020, rising to around 40GWe from the current 8.85GWe, under a plan approved in 2007 by the National Development and Reform Commission (NDRC). A revision being mulled of the government’s nuclear power development strategy also considers new plants for the interior of the country.
At the same time, while Areva has sold its much-vaunted EPR technology, the Chinese have made it plain that technology transfer is a part of any nuclear deal with a foreign partner, and that they will go it alone as soon as they have acquired the expertise to do so. The Chinese are studying Generation III nuclear technology, and plan to develop China’s own reactor by 2017, senior officials have said.
For the lack of opportunity elsewhere around the globe, China has become a proving ground for the latest Generation III nuclear reactors. In addition to Areva, other foreign contractors with large nuclear power plant projects in China include Westinghouse, Atomstroyexport, and AECL. While there are other countries – mainly in Asia – with significant nuclear power development programmes in place, none of these programmes are as ambitious as China’s. “Currently, Asia is the only game in town,” said a senior Westinghouse official at the time its contract to build four AP1000 units in China was signed.
Route to Taishan
Areva came to its contract via a fairly tortuous route. Bids were formally accepted on 28 February 2005, from Westinghouse, Areva, and Atomstroyexport, for plants at Sanmen in Zhejiang, and Yangjiang in Guangdong. The companies were supported respectively by financing offers from the US, French and Russian governments.
In the largest such deal in its history, the Export-Import Bank of the USA approved $5 billion in loan guarantees for the Westinghouse tender; and France’s Coface similarly backed Areva’s bid. The Westinghouse Export-Import Bank financing package had run into difficulties with lawmakers from both US parties, who were concerned about nuclear weapons technology proliferation – and that the deal through technology transfer might set up a new global competitor.
Indeed, the Westinghouse deal has come under considerable domestic scrutiny in the USA, which Areva has largely escaped in France. This is all the more surprising, given that the company’s €610 million package guaranteed by Coface for Olkiluoto in Finland had to overcome strong allegations that it was illegal state aid.
“The Chinese have made it plain that technology transfer
Westinghouse also won approval from the US Nuclear Regulatory Commission for the export of its AP1000 technology and equipment. Areva had no such regulatory difficulties for its EPRs.
After public pressure from the USA, Westinghouse eventually won out in the tender in a tentative agreement announced by the Chinese in December 2006. This was a surprise, given the strength of Areva’s offer, and particularly, its financing arrangements.
The French government intervened strongly, and was assured that neither Areva nor EDF, the world’s largest nuclear electricity producer, would be shut out of China’s nuclear programme. Shortly afterwards, the Westinghouse decision was modified to accommodate Areva.
In the event, Westinghouse was awarded a $6 billion contract to construct four of its AP1000 reactors in Sanmen and in Haiyang north of Shanghai. Haiyang was introduced at this stage – there was no international bidding, or protest at the lack of it.
Areva was then lined up for a contract for the two units in Yangjiang in Guangdong province. But early in 2007, CGNPC parent China Guangdong Nuclear Power Group (CGNPG) switched Areva’s EPRs to a new location at Taishan, near Hong Kong.
The construction schedule for these had been advanced especially for Areva – and again, there was no international bidding, or protest. Originally, domestic CPR-1000 reactors were to have been installed at Taishan, but now will replace the EPRs at Yangjiang. Construction on the first two units at Yangjiang is due to commence this year, with commercial operation planned around 2013. A total of six CPR-1000s is planned for the site, to be constructed in two or three phases.
According to the Xinhua news agency, CGNPG was unhappy about the slow pace of negotiations with Areva and EDF, and decided to install CPR reactors at Yangjiang, and move the EPRs to Taishan, where electricity demand was less pressing. The Chinese by all accounts were not desperate to reach a deal with Areva.
It was not as if the Chinese needed the French euros; the sector was awash with yuan funds loaned or raised through leading Chinese institutions, notably the Bank of China (BoC). This made it all the more important that Areva came up with financing so attractive that the Chinese could not refuse. Areva secured the contract; and the domestic lending has continued.
On 10 April 2008, China Development Bank and BoC signed an agreement to provide a 100 billion yuan ($14.6 billion) loan to the Taishan and Yangjiang nuclear power plants. In March 2008, Liaoning Hongyanhe Nuclear power also reached a 39.5 billion yuan ($5.5 billion) loan agreement with BoC.
This followed $300 million in long-term loans extended by BoC in December 2007 for the first phase of construction of the Sanmen plant by the Sanmen Nuclear Power Company. The previous spring, BoC had signed a strategic cooperation agreement for credit valued at 60 billion yuan ($8.2 billion) with the China National Nuclear Corporation (CNNC), Sanmen’s parent.
CGNPG issued a convertible bond in 2007, for 15 years, with a coupon rate of 5.9%, and an AAA rating. In July, 2006, BoC issued credits and loans valued at a total of 60 billion yuan ($7.5 billion) to CGNPC to finance its projects.
Such was the fluid situation that one company was severely reprimanded by the watchdog China Banking Regulatory Commission (CBRC) for using funds loaned for nuclear power projects for other purposes. The China Nuclear Engineering & Construction (Group) Corporation had borrowed loans totalling 2.37 billion yuan ($346 million) from the Bank of Communications and the Bank of Beijing since 2001, claiming that the proceeds would be used to construct nuclear power plants.
But the CBRC, in a wide-ranging investigation starting early in 2007, discovered that over 87% of the loans were diverted into other areas. The company’s related property development operations accounted for 612 million yuan ($89 million), while 132 million yuan ($19.3 million) went into the stock market and other investments.
In its Finnish deal, Areva relied on the services of Bayerische Landesbank to assemble a syndicated commercial loan. However, Bayerische is not involved in the case of Taishan, and there appears to be no commercial funding with its higher interest rates as part of the package. But Areva has secured the protection of part payment in euros for Taishan, against dollar falls.
The questions must be asked: are the terms of the financing such that Areva can make a profit on the Taishan plant, as now seems doubtful in the case of the Olkiluoto plant in Finland? Or is Areva jockeying to make its real money from the construction of a €15 billion reprocessing and mixed oxide fuel fabrication complex for which negotiations were revealed at the time of the Taishan deal, and which are still ongoing, according to Areva?
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The Chinese have made it plain that technology transfer