RWE pulls out of Belene

RWE's decision to withdraw from the Belene nuclear power project follows months of speculation and leaves NEK, Bulgaria's state-owned national electricity company, as the sole party involved in the proposed venture. The project was in part a victim of the credit crisis: financial guarantees provided by the Bulgarian government alongside BNP Paribas became unviable as the state's fiscal position deteriorated. However, RWE's decision to withdraw was also based on the fact that, despite the downturn and decline in most raw material values, the construction costs for Belene's two nuclear reactors had swollen to E6 billion by July 2009.

Furthermore, as the economic situation deteriorated, the justification for such a massive capital outlay became weaker on two critical counts. First, power demand projections made in 2007 are now considered to be extremely optimistic. Without sufficient demand for power, baseload prices will remain below the minimum threshold necessary to render nuclear generation viable. Belene would thus face excessive price risk (in that one cannot easily turn off a nuclear power station, should baseload prices fall too low).

Second, as the European economy has contracted, industrial output and power generation have both fallen, thereby reducing greenhouse gas emissions, so much so that a majority of parties in Eastern Europe are now long on carbon credits. This eliminates the cost advantage that nuclear power enjoys over fossil fuel generation. Hence, unless the carbon price recovers significantly, Belene's operating costs would not necessarily be able to compete against gas and coal-fired generation.

Since its election in September, the new center-right Bulgarian government has indicated that it is considering its position regarding the nuclear power plant. On top of the economic and financial considerations, environmental groups have also questioned the logic of building in an area prone to earthquakes.

Room for Russian partners

Although the new administration is keen to expose itself to as little risk as possible, there is no doubt that Sophia still supports the two new reactors and the overall strategic vision of re-establishing Bulgaria as the main electricity supplier to southeastern Europe. Additionally, the state has already invested E1.2 billion. As such, it is likely that the government will reduce its stake in Belene by 20-30% and seek a partner for the project.

That partner will likely be Russian. Moscow has made clear on several occasions its desire to invest in Bulgaria's infrastructure and went so far as to extend an offer for an export loan of E4 billion in 2008. As Bulgaria is critical to the success of the South Stream project, Russia's state agencies will be keen to offer sweeteners and invest in local projects in order to secure Sofia's participation in the planned 62 billion cubic meter gas pipeline.

For RWE, the announcement signals the third instance of retrenchment from an eastern European project this quarter. Two weeks ago, the utility terminated negotiations to buy Polish ENEA and last week it withdrew from the Croatian LNG terminal at Adria. Much of this is driven by difficult financial conditions and the resultant drive to focus on the most profitable core activities. Additionally, RWE may be less anxious to acquire new generation capacity as the recession has dented Europe's demand for power, meaning that existing assets will suffice for longer than originally anticipated.

This is a trend which will unnerve policy makers. In a downturn, asset sweating can provide a short-term way to minimize costs, but governments remain anxious to see investment, especially in low carbon generation. One possible outcome currently being debated is to rewrite the rules of the EU Emission Trading Scheme and prevent Phase II credits from being carried over to Phase III. If this happens, RWE's earlier enthusiasm for new gas and nuclear plants in Eastern Europe may rebound.

Datamonitor previously commented on the Polish energy market and RWE's decision to abandon attempts to acquire ENEA in October 2009. The article entitled "Poland is not realizing its energy investment potential" can be found on the Datamonitor Utilities Knowledge Center.

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