The European Commission (EC) said in a statement published in European Union Official Journal on 12 January that it "doubts" whether state aid measures proposed by Hungary’s government in relation to the extension of its Paks nuclear plant (Paks II) "is proportionate".

The EC also questioned the calculations of the capital costs and investment return rates used by Hungary’s government and said the Hungarian government could submit its comments on the state aid investigation within a month.

Last November, the EC took the first steps towards possible legal action against Hungary’s government for awarding a contract to Russia in 2014 for two new reactors at Paks. The EC launched an ‘infringement procedure’ "for lack of compliance" over the project with EU public procurement rules. The EC is conducting a state aid investigation to "assess whether a private investor would have financed the project on similar terms or whether Hungary’s investment constitutes state aid". If the project is found to involve state aid, the EC will "investigate whether as planned it would lead to distortions of competition in particular on the Hungarian energy market".

Hungary’s government said the EC’s statements contain "a number of inaccuracies and misunderstandings" as well as "unfounded and misleading assertions". Prime minister Viktor Orbán said the EC’s action could make Hungary a "victim of double standards". The Hungarian government said it "is ready to face a formal investigation, as part of which we shall maintain that the project does not involve state aid".

Hungary wants to grant investment support to Paks II in the form of equity for the construction of the reactors, arguing that keeping nuclear generation in the national fuel mix is necessary to replace phased out capacity, address the need for new generation capacity and meet European climate objectives. Attila Aszódi, the government commissioner responsible for Paks II, said in November that he still expected construction work to start in 2018, with Paks 5 and 6 starting commercial operation in 2025 and 2026, respectively.

In December, the Prime Minister’s Office in Hungary disclosed an independent financial analysis of Paks II prepared by the Rothschild Group, in order to clarify its stance as the European Commission is preparing a competition law investigation into the project. A copy of the document was sent to Competition Commissioner Margrethe Vestager.

"The Rothschild report addresses each of the profitability concerns expressed in the earlier third party critiques, which misleadingly suggest that construction of the new nuclear units would not make financial sense," a press release said. "The findings of the international banking group are quite to the contrary: Paks II is a profitable investment, which makes business sense for Hungary. The study provides detailed proof that government subsidies are unnecessary, the project is competitive and profitable on its own in a free market environment."

The Rothschild Group has analysed the factors with an impact on projected price of electricity. Based on these, it has found that the market price of electric power is likely to increase significantly, which makes market prices likely to exceed the cost of producing electricity at the proposed new units. This means that sales revenue at Paks II will be sufficient to cover all the costs, including the cost of capital, interests, fuel, operating costs, maintenance, waste disposal, and eventual decommissioning.

The report also confirms that the Paks 2 project would be in conformity with the goal of liberalised and joint European common energy markets. The project contributes to improved security of supply, to meeting climate protection objectives, and sustainability of affordable power supply without a need for any guaranteed takeover price or other form of government subsidy. The 100-page report is available in English on the website of the MVM Paks II project company.

There are currently four Russian-designed VVER-440 units in commercial operation at Paks which are supplied with fuel from Russia. The Paks units started operation in between 1983 and 1987, and in December 2012, Hungarian regulators renewed the operating licence of unit 1 for an additional 20 years.

Russia has appointed JSC Nizhny Novgorod Engineering Company Atomenergoproekt (JSC NIAEP), a subsidiary of Rosatom, to construct the new units, while Hungary has appointed MVM Paks II Nuclear Power Plant Development Private Company Limited by Shares (Paks II) to own and operate them. The parliament approved a €10bn ($10.7bn) loan agreement with Russia to finance the two VVER-1200 reactors at Paks. However, Orbán said last November that "Russian funding has not been drawn upon". European Atomic Energy Community (Euratom) last April approved a contract between Hungary and Russia on nuclear fuel supply for the project.