Could Ukraine War Trigger a Meltdown for Paks 2 Project?
Hungarian Minister of Foreign Affairs and Trade Péter Szijjártó (left) and Rosatom Director General Alexey Likhachev (center) at an event this summer.
Photo by Rosatom.
Despite the country’s commitment to electricity generation over emission-producing fossil-based energy sources, the prospect of doubling Hungary’s nuclear energy output seems little closer. The expansion of the Paks power plant has seen many delays over the years. Were Russian financing of the venture to dry up due to sanctions over the war in Ukraine, it would surely be the project’s death knell.
An already troubled (and, if completed, eye-wateringly expensive) investment, the Paks 2 nuclear power plant project seems little closer to completion today than when it was announced almost 10 years ago, despite the very public statements of progress in the past few weeks. (For more on this, see page 16.)
Hungarian Prime Minister Viktor Orbán certainly produced a headline-catching deal with Russia’s Vladimir Putin in 2014 when he announced the expansion of the power station at Paks (130 km south of Budapest by road). The agreement came without public consultation at the start of an election year that the PM’s Fidesz party comfortably won.
The Paks nuclear power plant produces approximately 40% of Hungary’s electricity. The expansion, adding two more reactors, was deemed necessary since the end of the lifespan of the four existing units was within reach, while power demand in the country was rising and is set to grow further.
Indeed, on Dec. 7, 2022, the Hungarian Parliament voted to extend the operating life of the four tried and trusted Soviet-era VVER-440 reactors. According to Nuclear Engineering International, the units were originally due to have been decommissioned between 2032-37; it is now assumed that they will work until at least 2052-57.
(Under Hungarian law, the decision to extend the life of the units did not require parliamentary approval, but the government decided to consult the deputies – most of whom belong to its two-thirds majority – on this issue, given what it said was the great importance of the matter.)
The government has repeatedly stated the importance of focusing more on nuclear as a carbon-free alternative capable of delivering with today’s technology. Ironically, given the deep level of Russian involvement in Paks 2, the war has been repurposed as another reason for pressing ahead.
“We have once again extended the life of the existing power units of the Paks nuclear power plant,” the Hungarian government said on its Facebook page last December. “Energy prices during the war and problems with the energy supply of Europe have also affected Hungary,” it noted.
Most opponents of the project have long been against nuclear power due to its environmental impact and risks. The accident at the Fukushima Daiichi power plant in Ōkuma, Japan, in March 2011 was still fresh in the memory in 2014. It prompted Germany, famously, to announce the closure of its plants, a process that was only completed on April 15 of this year. Still, the Hungarian government has stood by its plans, saying it is a green and sustainable energy source that doesn’t produce harmful emissions.
The venture has, however, proven problematic, as evidenced by its implementation contract being revised six times since pen was first put to paper.
A crucial element of the package signed in 2014 was not only that Paks 2 would be built with Russian technology, but that the project financing would also come from a Russian loan deal.
The latest revision on the execution of the project was signed in August of 2023, with Minister of Foreign Affairs and Trade Péter Szijjártó once more insisting the project was a crucial national strategic interest.
By then, the first new power-generating unit was already supposed to be in operation, with the other additions coming in 2025-2026. However, the project continues to suffer from delays in implementation, not least for ecological reasons; it was discovered it would be built at a location that might be affected by earthquakes, and precautionary measures were therefore required.
From a practical perspective, the deal signed also states that the nuclear waste from the plant would go to Russia. Domestically, the venture was challenged because these terms weren’t properly clarified in the government license issued to execute construction.
All this seems even more problematic, given how sanctions have cut off almost all trade with Russia, and the severity of the measures implemented by the European Union look likely to be lasting and, if anything, to escalate.
As indicated above, 80% of the EUR 12 billion budget for the investment was to be financed by Russia. The duration of the loan was originally set at 30 years with an interest rate of 4-5%.
Over the many years of delays, the Hungarian government has been criticized for not choosing Scandinavian or South Korean technology suppliers, among other things, but the financial terms of the project have been a particular area of scrutiny.
Among the many modifications of the contract, in June 2021, Parliament approved a revision of the financing contract, extending the duration of the agreement so that the necessary installments would only become due after the launch of the facility, now planned for 2031.
Russia’s invasion of Ukraine and the resulting sanctions have put, at the very least, a question mark over the finances and whether the project can be built under the original conditions. Hungary has repeatedly and forcefully said it will not tolerate any EU sanctions that touch on nuclear power, insisting that it is a matter of national sovereignty. However, under the initial agreement, the government was to finance EUR 2 bln of the investment; right now, even that seems questionable, at least in the short term.
Minister of Finance Mihály Varga announced that, for the sake of the state budget, the government is suspending a range of projects, even those underway. This is necessary for Hungary to reach the 2.9% deficit target based on Maastricht criteria next year. The 2023 gap is already more significant than planned, with no growth foreseeable this year to compensate.
After the latest modification of the Paks 2 contract in August, Rosatom has finally started fieldwork on the site, after what officials describe as the preparatory stage. The Russian company and its main Hungarian sub-contractor, Duna Aszfalt Zrt., have started moving one billion cubic meters of dirt and establishing the main facilities.
Critics point out that even this may be an exercise in pointlessness. Given the overall financing of the project, the limitations on Russian sources that, since the invasion of Ukraine are very much in doubt, and there are legal challenges against the venture both on environmental and contractual grounds, there are many more hurdles yet to come.
A change in government seems unlikely in the foreseeable future, but opposition parties have repeatedly stated that they would shut down the Paks 2 investment and concentrate instead on a more decentralized power grid development.
This article was first published in the Budapest Business Journal print issue of October 6, 2023.
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