PREPARATIONS UNDERWAY FOR PAKS NUCLEAR EXPANSION

C O N F I D E N T I A L SECTION 01 OF 03 BUDAPEST 000725

SENSITIVE
SIPDIS

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

E.O. 12958: DECL: 10/02/2019
TAGS: ENRG ECON EPET PGOV TRGY BEXP BTIO KGHG US HU
SUBJECT: PREPARATIONS UNDERWAY FOR PAKS NUCLEAR EXPANSION

REF: BUDAPEST 338

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Classified By: Economic Officer Jeffrey M. Jordan, reasons 1.4 (b),(d)


1. (C) Summary: Work on the possible expansion of Hungary's
Paks Nuclear Plant proceeds apace as experts work to define
Hungary's power generation needs in the coming decades and
potential suppliers begin their marketing efforts. The
tender is expected to occur sometime in early 2011.
Political considerations are likely to play into the final
decision on who will provide the new reactors and,
accordingly, European and Russian diplomatic efforts are
already underway to support their respective national
champions. Westinghouse, the U.S. company likely to bid in
the tender, plans to apply with the Embassy's Commercial
Section for advocacy (strictly protect). End summary.


2. (U) Econoff and two representatives from the Embassy's
Commercial Section recently paid a visit to Hungary's Paks
Nuclear Power Plant, where Senior Technical Advisor Andras
Cserhati gave an overview of progress toward expanding the
plant's capacity. Parliament gave its near unanimous
approval last spring for the state-owned MVM to initiate
preparatory work toward increasing the capacity of its
nuclear plant (reftel).

PAKS EXPANSION GEARED TO FILL PROJECTED SUPPLY GAP


3. (SBU) After describing nuclear energy's important role in
Hungary's energy mix, roughly one-third of Hungary's
electricity in 2008, Cserhati made a case for expanding
Hungary's nuclear power capacity based on the need to replace
aging conventional capacity, mainly coal- and oil-based, and
meet growing electricity demand. Prior to the economic
downturn, MVM/Paks forecasted annual demand growth of 2
percent per year, implying a need for roughly 7000MW of new
capacity by 2025. The company's revised projections show
demand growing at 1.5 percent per year and a need for 6000MW
of new capacity in the same timeframe. Hungary's installed
capacity is currently about 9000MW. According to Cserhati,
non-industrial electricity consumption is the primary driver
of this projected demand growth. (Comment: It was not clear
if these projections took account of the currently planned
6-8000MW of private sector investment in conventional
generating capacity. Moreover, a forecast of 1.5-2 percent
annual demand growth through 2025 seems out of sync with
ongoing trends in Hungary toward energy efficiency and
conservation, not to mention Hungary's declining population.
End comment.)


4. (SBU) According to Cserhati, Hungary wishes to install one
or two light/pressurized water reactors with a 60-year
lifespan and a load following capacity of 50-100 percent
(i.e., able to power down to 50 percent capacity). He
emphasized that Hungary is not interested in purchasing
"first-of-a-kind" technology. Based on these criteria,
Cserhati listed four models most likely to be invited to
participate in the tender: U.S. Westinghouse's AP1000,
Russian Atomstroyexport's AES-92, French-German Areva's EPR,
and possibly AREVA-MHI's ATMEA1. (Comment: Hungary's
insistence on a proven technology would seem to automatically
exclude the European-Japanese ATMEA1, for which there is not
yet even a working prototype. End comment.) Cserhati
indicated that Hungary had to forego its initial interest in
a smaller 600MW reactor design as the industry shifted focus
toward larger capacity reactors. Allowing that "what we need
is one thing, what is on offer is another," Cserhati said
authorities would now have to choose from among the 1000MW
reactors offered by the U.S. and Russian suppliers and
AREVA's 1600MW behemoth.


5. (SBU) Responding to Econoff's question about a possible
oversupply of electricity in Central and Eastern Europe,
given well-advanced plans by many of Hungary's neighbors to
build new nuclear capacity, Cserhati said that Hungary is

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pursuing its own nuclear plans in the context of a wider
effort to integrate the region's electricity market.
Cserhati conceded that, in addition to integrating the
physical grid infrastructure, the development of an effective
regional market would also require some degree of
harmonization of the countries' regulatory regimes. He was
not able to provide details on progress in this area, but he
emphasized that a decision to construct new reactors would be
based on regional demand projections and indicated that
projected electricity shortages in the Balkans might help
justify the new capacity.

POTENTIAL INVESTORS QUEUING UP


6. (SBU) Cserhati echoed our previous interlocutors in
claiming that the Paks expansion would be accomplished "on a
business basis," without tapping government budget resources,
though he conceded that a government guarantee might be
necessary for at least a portion of the debt. Based on his
cost estimate of 3 billion euro ($4.4 billion) per 1000MW
reactor and 19 billion HUF ($102 million) to cover the grid
upgrades needed to accommodate an additional 2000MW of power,
the price tag for two new reactors is likely to approach $9
billion.


7. (SBU) MVM/Paks hopes to attract funding from a combination
of financial investors and strategic investors. Financial
investors might include international commercial banks,
export credit financing agencies, the capital markets, and
international financial institutions such as the World Bank
and the EBRD. Strategic investors could include companies
with experience operating, constructing or investing in
nuclear plants; electricity dealers; network operators; and
large base load consumers. According to Cserhati, one or two
strategic investors would most likely take a minority equity
stake--the Hungarian state plans to retain majority ownership
via its ownership of MVM. He added that Paks is already in
discussions with several interested parties, including
Russia's Atomstroyexport, Germany's E.On and RWE, France's
EdF, Switzerland's Atel, and Finland's Fortum.

THE TENDER IS STILL 12-18 MONTHS AWAY...


8. (SBU) Cserhati, who also serves as chairman of the working
group responsible for organizing the tender, expects to begin
evaluating bids from the companies invited to participate
sometime in early 2011, with a goal to bring the first new
reactor online by 2020 and the second by 2025. The bid
requirements will be in accordance with the European Utility
Requirements and MVM/Paks has engaged the advisory services
of KPMG's Central and Eastern European Energy & Utility
division.


9. (SBU) In an effort to begin seriously evaluating the
reactor options before them, Paks experts have begun
consulting with counterparts in neighboring countries such as
the Czech Republic, Slovakia, and Slovenia, where plans are
also underway to expand nuclear capacity. A series of
conferences around the region organized by think tanks and
potential suppliers alike, includng one Westinghouse hosted
in Bratislava last month, is allowing vendors to bolster
their marketing and outreach efforts. Paks plans to host its
own conference soon (no further information) where it will
more fully define its preferences to potential suppliers.


10. (SBU) After positing that the reactors under
consideration are quite comparable to one another from
technical and safety standpoints, Cserhati said that the
decision will most likely be determined by financing
arrangements and the preferences of the strategic investors.
In a thinly veiled reference to the inclinations of the
Russian and probably some of the European investors, he noted
that "certain investors have clear preferences," adding that
Fortum is the only company likely to base a decision purely
on technical and commercial merits.

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...BUT THE REAL COMPETITION HAS ALREADY BEGUN


11. (C) In a recent telephone conversation, Gabe Pellathy,
Manager for International Business Development at
Westinghouse, indicated that the US firm's stiffest
competition will come from the French and Russian firms.
According to Pellathy, Westinghouse needs to win some
European tenders early on in this current round of nuclear
expansion projects or risk being excluded from the market.
He says the French are doing "everything they can" to block
the US from the European market and expects them to "play up
the 'buy EU' angle" in their approach to the Hungarians. He
added that E.On and EdF would most likely support Areva,
whereas RWE stands opposed to European monopolies and might
give Westinghouse a fairer chance at the business.
Atomstroyexport's advantage lies in the close relationship
between the Hungarian and Russian governments as well as fact
that engineers at Paks are already familiar with Russian
reactor technology. Also helpful to the Russian bidder is
that it will be able to offer the option to store spent fuel
in Russia.


12. (C) Pellathy hopes Westinghouse's recent successes in
outcompeting Areva and Atomstroyexport in China will bolster
its case for the AP1000's technological superiority. He also
notes that the Hungarian electric grid is more compatible
with the Westinghouse design. With roughly one-third of its
workforce located in the EU and potential financing partners
that include RWE, Czech CEZ, Swedish Vattenfall, and
Hungarian MOL, Westinghouse can also emphasize its own
European credentials. Nonetheless, Pellathy recently
informed the Embassy's Commercial Section that Westinghouse
will soon be filing for advocacy in the Paks tender (company
confidential, strictly protect).


13. (C) Comment: Diplomatic efforts on behalf of the
potential vendors appear to have begun in earnest, and will
likely intensify as the tender approaches. During our visit
to Paks, which we were hoping to tour, we hid our
disappointment when Cserhati casually remarked that officials
from the French Embassy had recently visited and taken a
plant tour, after it was already apparent that we would not
be offered one. Several local political contacts have also
informed us of another round of Russian-Hungarian
"intergovernmental meetings" to take place in Budapest on
October 15-16. Given that energy cooperation has tended to
feature prominently on the agenda of such gatherings in the
past, it is almost certain that Russia's desire to
participate in the Paks expansion will be a topic of
discussion. With Westinghouse's impending application for
commercial advocacy, Post, through its Commercial Section,
looks forward to joining the fray. End comment.

LEVINE