HUNGARIAN PARLIAMENT APPROVES NEXT STEP TOWARD

C O N F I D E N T I A L SECTION 01 OF 05 BUDAPEST 000338

SIPDIS

DEPARTMENT FOR ISN/NESS MHUMPHREY, EUR/FO JGARBER AND
MBRYZA, EUR/CE JLAMORE, EUR/ERA, EEB/FO, OES/EGC, PLEASE
PASS TO NSC KHELGERSON, COMMERCE DEPARTMENT SLOPP, ENERGY
MAPICELLI AND MCOHEN

E.O. 12958: DECL: 05/04/2019
TAGS: ENRG ECON EPET PGOV TRGY BEXP BTIO KGHG US HU
SUBJECT: HUNGARIAN PARLIAMENT APPROVES NEXT STEP TOWARD
NUCLEAR POWER EXPANSION

REF: 08 BUDAPEST 1227

Classified By:
Acting P/E Counselor Jon Martinson, reason 1.4 (b),(d)


1. (C) Summary: Hungary's Parliament recently approved the
next step towards the eventual expansion of nuclear energy in
Hungary. A feasibility study and tender offer will soon be
underway for the probable addition of two new 1000MW reactors
at the Paks nuclear plant at a total cost of about five
billion euro ($6.5 billion). At least one US company,
probably Westinghouse, will likely be invited to participate,
but most observers expect a Russian firm to win the bid.
There is strong political consensus behind nuclear power
expansion, but skeptics emphasize the enormous costs and
risks of nuclear power, both from economic and environmental
standpoints. They believe such a project is impossible
without extensive public financial support, unlikely given
Hungary's economic and fiscal woes. Given the risk of
overcapacity in Hungary's electricity generation, the
expansion of nuclear power may only make sense in the context
of a regionally-integrated market for electricity. End
summary.

GOH LONG ON PROMISE OF NEW NUCLEAR POWER, SHORT ON DETAILS


2. (SBU) The Hungarian Parliament, in a rare show of
cross-party consensus, on March 30 approved by a nearly
unanimous vote a measure granting preliminary approval to
start preparations for the expansion of Hungary's nuclear
energy sector. This latest move marks the next step in a
process Parliament initiated a year ago when it requested
that the GoH explore the possibility of constructing new
nuclear reactors for power generation (reftel). According to
Tamas Zarandy, a senior official at the Ministry of
Transportation, Telecommunication, and Energy, the
Parliament's approval gives a green light to begin a
feasibility study on the construction of new reactors. Most
observers expect the new reactors to be built at the Paks
site, where four reactors currently provide roughly 35-40
percent of Hungary's electricity, and where space already
exists for two additional reactors. The existing reactors
are currently undergoing capacity upgrades from 440MW to
500MW per reactor and plans are underway to extend their
operability by 20 years to 2032-2037.


3. (SBU) Hungary currently possesses just over 9000MW of
electricity generation capacity. Experts project that by
2025-2030 it will require 5000-8000MW of new capacity to
replace outmoded plants and to satisfy forecasted demand
growth. Advocates for expanding Hungary's nuclear sector
emphasize that nuclear energy presents a cheap, emission-free
power source to replace older conventional generating
capacity and meet new demand, while complying with rigorous
targets for cutting CO2 emissions. Based on costs of
generation, waste management, and decommissioning amounting
to only about 10 forint/kWh (roughly $0.04),about half the
cost of gas-fired power generation, Paks is currently the
most cost-efficient electricity producer in Hungary.


4. (SBU) Supporters also couch their arguments in terms of
energy supply security and diversification. Although steps
to expand the plant were already underway, the January gas
cutoff focused policymakers' minds and added impetus to a
project that could reduce Hungary's significant dependence on
Russian-supplied gas. Gas-fired plants currently provide
about 40 percent of the country's electricity and this figure
is likely to rise as new generating capacity is increasingly
based on natural gas.


5. (C) Details on the timing and scale of the expansion, the
number and size of the new reactors, anticipated costs, and
financing are still vague. We continue to receive scattered
information from various officials, but most signs seem to
point toward a tender process beginning later this year for
two reactors that appear likely to come from Russia.

-- (Then) PM Gyurcsany, in a mid-February speech before

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Parliament, announced plans to double the capacity at the
Paks plant, based partly on the need to reduce dependence on
Russian-supplied gas following the January gas cut-off. This
would imply a need for two 1000MW reactors.

-- During a recent tour of the Paks plant, the plant manager
told the Embassy's Air Attache that authorization had been
granted to initiate a tender process for two 1000MW units and
that bids would be considered based on the Russian, French,
and Westinghouse/Mitsubishi designs. The plant manager
expects the Russian design to prevail based on Hungary's
experience with it at Paks and its proven track record,
whereas he contends the Westinghouse model is still a
prototype and the Hungarians do not want to be "guinea pigs"
for unproven technology. He indicated that the French 1600MW
design is an unlikely candidate because it exceeds Hungary's
capacity needs.

-- Attila Mesterhazy, parliamentary caucus leader for the
Socialist party, several weeks ago told the Pol/Econ
Counselor that the tender offer would be announced "soon" and
that, while a Russian firm would probably have an advantage
based on the fact that the existing Paks reactors use Russian
technology, he hoped potential US suppliers would be given
due consideration.

-- Paks Nuclear Plant spokesman Istvan Mittler told the
Embassy's Commercial Section in early April that bids under
the tender will be solicited by invitation only, and at least
one U.S. company, probably Westinghouse, will be invited to
submit a bid.

-- According to Mr. Zarandy at the Energy Ministry, however,
the parliamentary decree intentionally leaves open the
questions of how many blocks, what capacities, and when they
would be built. Depending on projected regional energy
supply and demand dynamics, he expects Hungary to opt for one
or two third-generation pressurized water reactors delivering
between 1000-1600MW. In his view, a winning bid would
probably need to include a demonstrable impact on local
employment as well as an offer for waste removal, obviating
the need to construct expensive waste management facilities.


6. (SBU) State-owned electricity giant MVM, which owns the
Paks plant, will probably organize the tender upon completion
of initial demand forecasts. According to Mittler, however,
MVM is still working to allocate tasks related to the tender
and probably will not be ready to move forward until sometime
this fall. Most officials expect construction to begin
around 2014, following a two-year feasibility and tender
selection process and a three-year planning and design phase.
An expected six-year construction would enable the
commissioning of the new reactors by 2020, but Zarandy
concedes that these forecasts could be delayed by a few years
due to the adverse financial climate.


7. (SBU) According to official estimates, each 1000MW
reactor would cost roughly 2.5 billion euro ($3.2 billion).
Zarandy foresees the expansion project being undertaken by a
joint corporation with the Hungarian state as ultimate
majority owner. The state would most likely hold its share
in the project through MVM, Hungary's state-owned electricity
giant. According to Zarandy, MVM would probably be
responsible for raising bank financing for the expansion as
there are currently no plans for direct financial support
from the state.

AN ENSEMBLE OF SKEPTICS CONFRONTS A CHORUS OF SUPPORT


8. (SBU) A number of experts outside the government,
however, raise important questions about the timing and
rationale for expanding Hungary's nuclear plant. Peter
Kaderjak, Director of the Regional Center for Energy Policy
Research and former head of the Hungarian Energy Office, sees
the latest flurry of activity surrounding nuclear power as a
diversionary tactic by an unpopular government faced with a
financial crisis and the need to implement austerity
measures. Given these realities, he is skeptical that the

BUDAPEST 00000338 003 OF 005


project will get past the planning stage, especially given
Hungary's current financial straits. Kaderjak believes
nuclear energy makes good sense for Hungary in the long run
but stresses that the private sector should undertake the
investment on a competitive basis. An MVM-financed project
is essentially the same as a state-financed project, and the
GoH's current approach toward nuclear energy crowds out the
private sector.


9. (SBU) Ada Amon, Director of Energia Klub, an energy and
environmental think tank and advocacy NGO, considers it
"nonsense to launch such a project at the start of a
financial crisis." She and Kaderjak point out that, on top
of the five billion euro pricetag for the reactors, the
project would require an extensive upgrade of the country's
high-voltage lines as well as an equivalent capacity in
conventional--probably gas-fired--plants to ensure system
balance in the event that one or both reactors have to be
shut down. According to Amon, this could more than double
the cost of the project and significantly increase
electricity rates. She believes it will not be possible to
finance a project of this scale without state guarantees and
interventions, which she claims are illegal under EU
competition law. In her estimation, the inherent costs and
risks, both economic and environmental, make nuclear plants
unviable as private sector projects.


10. (SBU) Balazs Felsmann, a local energy consultant and
former State Secretary at the Ministry of Transport,
Telecommunication and Energy, recently published a study to
debunk what he calls "the myth of cheap nuclear energy." He
claims that nuclear power is currently inexpensive in Hungary
only because the plant that produces it is a fully
depreciated, debt-free asset. Even under the most optimistic
assumptions regarding cost of capital, financing
availability, electricity demand, construction delays and
cost overruns, his model shows that the price of the power
generated would increase by about 50 percent over current
Paks prices, and that the present value of the income from
the new reactors over a 30-year lifespan would be less than
the upfront equity investment in the project, making it an
economically unviable project for the private sector.
Incorporating more realistic assumptions of a market-based
rate of return and, based on a broad sample of past projects,
probable project delays and cost overruns yields an
electricity price roughly 80 percent above the current Paks
price. The cost of additional reserve capacity, waste
management, and potential environmental problems would come
on top of this. He also references studies by MIT and the
University of Chicago that estimate nuclear power costs to be
at least 20 percent higher than gas-based electricity and as
much as 90 percent higher than coal-based. He echoes Amon's
claim that, due to the costs and the risks, international
experience shows very few nuclear projects being undertaken
by the private sector, adding that the US has not undertaken
a new project since 1978, and he questions the GoH's ability
to finance such a project.


11. (C) All of our interlocutors express concern that the
GoH is rushing into this project without a serious debate on
its merits while a strong lobby for Paks expansion dominates
public discourse and drowns out counterarguments. Felsmann
commented to Econoff that the latest parliamentary vote was
"on the basis of a one-page study" and highlighted in his
analysis that the GoH's current timetable contradicts its
2008 plans to pursue the new reactors as a replacement for
the existing ones when they are decommissioned beginning in

2032. (Comment: This apparent absence of a coherent strategy
on nuclear expansion is also evident in the Paks plant
manager's inability to answer our Air Attache's question as
to whether the new units would be intended to replace the old
Paks reactors or to meet growing electricity demand. End
comment.) A recent editorial in the local press casts
Parliament's "green light" as more of a "blank check" since
it passed the resolution without requesting a cost breakdown
from the Energy Ministry and it will have no further
opportunities to vote for or against the project.


BUDAPEST 00000338 004 OF 005



12. (SBU) Numerous skeptics also highlight that, given the
likelihood that a Russian firm would build the new reactors,
Hungary would only be substituting one form of Russian
dependence (gas) for another (nuclear fuel). Furthermore,
despite nuclear's credentials as a zero-emission energy
source, it is not renewable. If the much-touted "nuclear
renaissance" becomes a reality, increased uranium demand and
prices will further alter the project's economics.


13. (SBU) Energia Klub's Amon suggests that corrupt
connections between MVM/Paks and the political parties could
explain the strong political consensus for Paks expansion.
According to Amon, Paks is a well-known "playground of party
financing." Skeptics also point to a recent scandal detailed
in the Hungarian press in which MVM was funneling tens of
millions of dollars to shady offshore companies to suggest
that the entire political elite may be compromised.

HOW MUCH POWER DOES HUNGARY NEED?


14. (SBU) Kaderjak is also concerned that Hungary may
already face a risk of overcapacity in electricity
generation, given several large gas-based projects expected
to come on line in the next few years. According to
Kaderjak, the demand projections used to justify the new
reactors are based on forecasts that MAVIR, the Hungarian
electricity transmission operator and a wholly-owned
subsidiary of MVM, prepares every few years for the sake of
ensuring supply security and which, for this reason, tend to
err on the upside. Furthermore, the projections have not
been adjusted to take account of the drop in demand as a
result of the economic downturn. According to the Energy
Ministry's Dr. Zarandy, demand has fallen by 6-7 percent
since November.


15. (SBU) The baseload from the existing Paks reactors
already roughly covers Hungary's entire electricity need
during off-peak hours. According to Ms. Amon, the current
system cannot accommodate an additional 2000MW. Moreover,
new reactors are likely to crowd out further development of
wind power, a potentially significant source of renewable
energy for Hungary. Since the nuclear plant's output cannot
be easily regulated, conventional producers bear the burden
of adjustment in order to maintain system balance.
Meanwhile, the Hungarian Energy Office has capped wind power
generation at 330MW due to the difficulty of predicting wind
patterns and the resulting risk to the electrical system from
potential variations in electricity generation. (Note:
Kaderjak agrees that nuclear expansion would create problems
for wind power, but notes that other European countries have
prioritized wind energy development and made necessary
upgrades to their power grids to accommodate its variability.
End note.)


16. (SBU) Dr. Zarandy points out that third-generation
reactors would allow more flexibility to regulate output, but
he agrees that expanding Hungarian nuclear power only makes
sense in the context of a regional electricity market.
Hungarian demand on its own does not justify such a large
baseload capacity, but an expanded Hungarian nuclear plant
that supplies electricity to Austria, Romania, and the
Balkans could make sense given these countries' more
flexible, hydro power-based electricity generation systems.
According to Zarandy, Scandanavia's NordPool provides a good
example of such regional cooperation, where Norway's hydro
plants complement Sweden's and Finland's nuclear capacities
to provide electricity to a regional market. He concedes,
though, that strengthening physical interconnections among
the national grids will probably be much easier than
overcoming the significant barriers--arising from competing
commercial nterests, regulatory institutions, and historical
grievances--to such cooperation. (Comment: This is not to
mention the probable political obstacles to selling
nuclear-generated electricity to avowedly anti-nuclear
Austria. End comment.)

NEW REACTORS: WHITE KNIGHT OR WHITE ELEPHANT?


BUDAPEST 00000338 005 OF 005



17. (C) Comment: The Hungarians clearly have much to discuss
when it comes to the question of expanding nuclear power, but
unlike so many issues here where the lack of consensus and
desire to score political points results in a "dialogue of
the deaf," the apparent political unity on the nuclear issue
seems likely to be a monologue bypassing serious debate. New
nuclear reactors could constitute an important piece of a
balanced, regionally-focused electricity strategy that
includes conventional generation, further development of
renewable energy sources and improved energy efficiency.
This is particularly true in light of Hungary's EU commitment
to meet 13 percent of its primary energy needs from
renewables by 2020, compared with 4.9 percent in 2007.
Furthermore, the economics of gas-fired generation are
changing rapidly in Hungary, notwithstanding the problem of
excessive dependence on Russian gas, as the power plants to
be constructed in the coming years will be nearly twice as
efficient as the ones they are replacing. To the extent that
a sound analysis of the array of foregoing economic
considerations drives a decision to move forward on
constructing new reactors, even with some degree of
government support, they could enhance Hungary's long-term
energy security. Absent that, however, they are likely to be
a costly, government-subsidized drag on Hungary's energy
sector and economic development. Nonetheless, we will stay
tuned for potential opportunities for U.S. companies to
participate in any tenders related to nuclear energy. End
comment.

Levine