What did they say and what did we find out about the Belene NPP?

Author: Kaloyan Staykov

After the presentation on Thursday of the summary of the Final Report on the possibility of realizing the assets of the Belene NPP by the Bulgarian Academy of Sciences, the news was that the project is viable, and the focus was on the price of electricity at which this is possible. However, these are the least important questions, as they depend on the assumptions made and how realistic they are. For example, if we assume that in the coming years the Bulgarian economy grows nominally by 17%, the Danish economy by 4%, and the Swiss economy by 2% and there are no crises, then Bulgaria will overtake Denmark in terms of GDP in 15 years, and Switzerland in 41 years. In reality, however, the average nominal growth of the Bulgarian economy in the period 2008-2016, which includes the economic crisis in 2009, was around 4.6%, that of Denmark was around 2%, and that of Switzerland was 6.4%, which makes the above assumptions closer to a hallucination than to part of an economic model.

Where does this predicted growth in electricity consumption come from?

First of all, the forecast for an undeniable growth in electricity consumption from the electricity transmission network, which is calculated based on the forecasts of economic growth, is impressive. It is not clear how the connection between the two is made, since with lower and lower electricity consumption, an increasingly higher gross domestic product is created. For example, with 1 GWh of electricity, 1.8 million leva of GDP is created. [1] in 2003, 2.4 million BGN in 2009 and 3 million BGN in 2015. That is, within 12 years, the economy and society improved their electricity efficiency by more than 1.5 times, which can be expected to continue in the future. The summary mentions factors that can only increase electricity consumption, but does not pay attention to the opportunities for energy efficiency, the introduction of zero-energy buildings, own production, etc.

Moreover, the very forecast for electricity consumption is based on incorrect historical data, which can be seen in the graph below.

Source: BAS Summary

According to the summary, electricity consumption has been steadily increasing in the period 2000-2015. However, data reported by the Electricity System Operator show that there was an increase in the period 2004-2011, and then a decrease. Thus, electricity consumption in 2015 was 9% lower than in 2003.

Source: Electricity System Operator

The following is the answer to the question "Is it possible for the Belene NPP project to be implemented on a market basis and to develop an option for separating the assets and liabilities of NEK related to the Belene NPP Project into a separate commercial company and conducting a subsequent procedure under the Privatization and Post-Privatization Control Act". According to the summary, the project is viable provided that the investment cost is below 10.5 billion euros, they are financed with funds in a ratio of attracted/own capital greater than or equal to 70/30 and the interest on the attracted funds (credit) is below 4.5%.

What will be the real price of the Belene NPP?

However, this does not mean that the project is viable and that the Bulgarian Academy of Sciences recommends that it be built, but it means that if it fits into these parameters, it can work. This brings us back to the problem with the example of how many years Bulgaria will be richer than Denmark – how realistic these forecasts are. The initial investment was estimated at under 6.9 billion leva, and in 2012 it already reached 10.3 billion euros. Five years have passed since then and it is normal for the price to be even higher. Moreover – from the experience of orders for repairs of roads, buildings, construction of highways, etc. we know that the initial price is always lower than the real one. In other words, an investment of 10.5 billion euros seems highly unrealistic.

Next comes the capital structure – 70/30 borrowed to equity. Such a ratio is indeed possible and achievable, but it is rather the optimistic limit for lenders who would prefer to participate with less than 70% of the funds. This is also evident from HSBC’s analysis of the construction project, which envisages 60% borrowed funds and 40% equity. That is, this also looks more like a wish than a reality.

Finally, there is the interest rate of 4.5%, which also seems too optimistic for a project that is currently in its 36th year and is buying equipment for a long production cycle for the second time (the reactors for which NEK was condemned in mid-2016). The project has been launched and stopped several times and hardly inspires enough confidence in future lenders, who would not only invest over 70% of the necessary funds, but also do so at a relatively low interest rate. For comparison, the recently approved by the European Commission project for a new Paks-2 nuclear power plant provides for an average interest rate for the 32-year period of about 4.5%, but Hungary's credit rating is one level higher than Bulgaria's, which means that interest rates for investments here will be higher, and the project is not being implemented on a market basis.

Reality will not fit the hypotheses of the Bulgarian Academy of Sciences

Ultimately, the question that the Bulgarian Academy of Sciences has to answer is extremely hypothetical – “is it possible for the Belene NPP project to be implemented on a market basis”, and they give a hypothetical answer – “yes, it is possible under certain conditions”. What is missing, however, is the probability that these conditions will be simultaneously met. In reality, this is the market test – are private investors and creditors ready to “park” significant funds in such a project and, if so, under what conditions, at what price, for how long, etc.

In other words, in theory the project might be viable under certain conditions, in the same way that I can outplay Grigor Dimitrov if he has his right hand tied, weights on his legs, and a blindfold. In practice, however, the situation is a little different.

This article was originally published on the author's personal blog.

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