Download Validity of the arguments against the investment projects in Maritza

How the investment projects in Maritza East may be evaluated?
Dr. Krassen Stanchev
Latchezar Bogdanov
Institute for Market Economics
Validity of the arguments against the investment projects in Maritza East
1. A major problem of comparative economic analysis is the inclination to compare real projects
to hypothetical, “ideal” opportunities. In reality, a choice can be made only among existing
projects. In the case of Maritza East 1, a number of critical comments were made in the sense,
that it would not be the best solution for the energy sector in Bulgaria. Currently this project
however (together with Maritza East 3) is the only case of negotiated readiness for
investment in the energy sector. Any comparison between a real investment solution and
hypothetical other opportunities, which by the way nobody is interested to finance, is
practically useless.
2. Similar arguments were also employed against the price proposed by AES for the electric
power generated by ME1. The assessments of “high” or “low” price would have a meaning
only in comparison. As far as we are aware, AES won an international tender with a lowest
offered price. While taking economic decisions on the market the buyer (in this case the
NEK) takes as a basis a comparison among the different sale offers, proposed to it, and
selects the best among them, regardless of its own desires or expectations.
3. If a comparison would have to be made between the price of AES and that of existing
capacities, several problems would arise. The first, and most significant, is the lack of
transparency of the costs in existing capacities. For example prices of 1.6 cents for HPP’s and
2.6 cents for TPP’s are quoted (The Banker Newspaper, 28.04.2001). We have no
information to what extent these are real prices, at which currently the producers may be
selling the electric power to the electric power transmission company. There are grounds to
believe, that only the current variable costs of generation are being taken into account. In the
medium- and long-term however, prices would also have to reflect costs, which have not
been included into these calculations. Given the advanced age of most of existing plants, the
accounting costs of depreciation are artificially lowered. In addition, the effect of the revaluation of the assets in 1997 most likely also lowered the scale of depreciation. All of this
indicates, that currently the plants are covering only their operational costs, which in other
words may be called de-capitalization.
4. Further as regards prices and costs it must be pointed out that the NEK has now been for a
long time a major debtor to the state budget and its suppliers. This means, that currently the
plants are not paying for a portion of their expenses. At the same time, the AES project
envisages payment of all expenses due. On the other hand, the state is indirectly subsidizing
part of the generation of electricity through the budget or the state (as yet) monopolies. In the
long term such a policy would run counter to the constitutional principle of equal conditions
of economic activity, not to mention the legislation on the protection of competition.
5. There are reasons to believe, that currently the producers or electric power do not meet all
requirements of the Protection of Environment Act. From a financial point of view, this
would mean expenditures for clean technologies and accident insurance costs (this is
particularly relevant for the Nuclear Power Plant). In view of the negotiations for accession to
the EU, such expenditures will have to be made in the near future, which is bound to increase
the costs of electricity.
6. The expected liberalization of the energy market places in doubt the long-term contracts with
fixed quantities and prices. In case the next governments would like to abide by this country’s
legislation and discontinue the indirect subsidization through the budget and the monopolies,
then both projects of Maritza East will become competitive.
7. The construction of new capacities is also contested because of the conflicting forecasts of
the NEK and the World Bank as regards expected energy consumption. Having in mind the
structural changes in the Bulgarian economy, and most of all the increased share of services
in GDP, we don’t expect a major growth in the consumption of electricity. On the other hand,
however, based on expert assessments, 40% оf the currently operating capacities will cease
generation by 2010. In this sense, given a smaller demand and even smaller supply, again a
shortage would likely appear on the market.
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to an assessment of the Bulgarian government, the rate of return, envisaged by the investors,
is high. While not being in the position to comment on precise calculations, we can
demonstrate by way of comparison, that the annual rate of return on the Bulgarian DISC
bonds (as at 7 May) was 14.68%, which shows the assessment of the market of the sovereign
risk of Bulgaria. As we already indicated above, comparison with projects, existing in reality,
is the only way of assessment of a given investment project. Currently the NEK does not
dispose of the financial means to implement such a project on its own and we are not aware
up to this point of any other projects, which do not envisage long-term contracts with the
NEK or even sovereign guarantees. In the event the government decides to finance on its
own (through a state guarantee) the construction of new capacities, this would amount to a
direct commitment for the budget, i.e. the taxpayers, who would have to assume the political
risk and the possible negative developments on the energy market. Thus the short-term
alternative of the provisions regarding guarantees against political risk would be a direct
commitment for the taxpayers.
While examining the large-scale investments in Maritza East, alterative costs are assessed based
on the value of the perspective of nuclear energy and the expected and probable status of
conventional energy in the medium- and long term. With this in view it is important to take into
account the international context and structure of the costs of these alternative projects. The
alternatives must also be assessed on the basis of how feasible and how probable they would be
given the political and economic realities in Bulgaria.
International context
1. The plans for resumption of the projects in the nuclear energy sector, announced by the new
administration in the USA, have stimulated the imagination of advocates of such projects in
Europe and also in Bulgaria. In view of the peculiarities of the US economy and its natural
resources, the costs of the nuclear energy in the USA are significantly lower, mainly because
of the large share of state ownership of the land and the possibilities for practically unlimited
storage of spent nuclear fuel.
2. Europe would lose a contest in this area also because of the fact that the USA, by
implementing nuclear projects in the energy sector, postpone indefinitely the extraction of
their own resources of oil and gas. The absence of clear advantages of the European nuclear
sector (the only exception being the Swedish technology of packing spent fuel into glass),
would mean that the financing of such projects through the European political banks – the
EIB and the EBRD– would remain difficult or nearly impossible.
3. The short-term context is even more important for the assessment of the prospects of the
Bulgarian nuclear power sector. Two circumstances are particularly important: “the image”
of Kozloduy as a technologically backward and ultimately unsafe plant and the problems of
the Czech Republic, related to the commissioning into operation of the Temelin plant. The
prospects of the NEK to persuade the public and banking opinion in Europe in the possible
merits of a new plant in Bulgaria are in question, even in case of the highest quality expertise,
which Bulgaria would offer. Austria already formally requested the shutting down of
Temelin and a similar opinion was expressed last week also by the government of Germany.
In case the first post-reform plant (the one in Temelin) somehow slips through, such a good
fortune would be extremely difficult to achieve for the next projects.
Possible costs of the alternatives in the nuclear power sector
1. In principle the calculations of values in the nuclear sector are conditional. For the time being
the Bulgarian calculations don’t reflect: а) the costs of long-term storage of spent nuclear
fuel, b) the costs of commissioning into operation of future reactors, c) the costs of
modernization of existing equipment – if at all feasible – and sites, and d) logistics costs
(including design, EIA and contracting of resources and monitoring) of the entire presumed
project.
2. Even if such calculations would be made in relation to the assessment of the alternatives, the
failure to implement (or the postponement) of the projects in Maritza East also have their
price in terms of: а) protection of the environment, b) reduction of the emissions of
greenhouse gases and dust; and c) costs, related to the gradual degradation of the current
generation of the plant (in the absence of other investment intentions except for those for
units one and three).
3. There is no indication of calculations being made of potential benefits, including the
“intangible” ones.
Other issues and perspectives
1. Based on the World Bank forecast the expenditures required for environment protection in
relation to the process of accession to the EU (in EURO and in percentages) until the year
2015 would be as follows:
Type/scenario
Costs of harmonization
Total costs
As a share of GDP in 2015
Total annual expenditure
Total per capita expenditure
Lowest cost
5,49 billion
6,1 billion
4,1%
1,2 billion
144
Highest cost
8,02 billion
8,6 billion
5,6%
1,7 billion
205
These expenditures are also resulting from obligations of this country under international
agreements on scaling down of emissions of greenhouse gases. These expenditures would be
difficult to avoid and would equal in amount our external debt. The expenses for desulphurization and hard-particle filters at Maritza East equal 1-1.5% of the GDP for 2001. They
would have to be borne over a period of 2-2.5 years. But they better be made now, instead of the
costs increasing later. A rejection of the agreements on Maritza East would have to envisage
alternative sources for covering these costs.
2. A failure to conclude the agreements regarding Maritza East І and ІІІ would scale back the
forecast for greenfield investments over the three-year term and therefore would place in
doubt the financing of the deficit of the capital account of the balance of payments.
Furthermore, an unsuccessful end of the negotiations would place in question the
participation of leading investors in the privatization and deregulation of the energy and heatsupply sector in general.