The Nuclear Boys Return to Ukraine: The European Scheme to "Compensate" for the Chernobyl Shutdown

by Tony Wesolowski

PRAGUE -- Say you're a banker approached by a business seeking a loan for about $190 million. While mulling the request, you learn the would-be borrower's enterprise is on shaky footing. Namely about one in 10 of the company's clients actually pays their bills. After you investigate a little further, you find out the business in which the company is interested in expanding is already part of an over-saturated market.

What do you do? Turn down the loan?

If so, you're not the type of banker the European Bank for Reconstruction and Development (EBRD) is looking for.

Established in 1991 to assist the transition of former Eastern bloc economies, the EBRD is now considering a $190 million loan to Kyiv to finish construction on two nuclear reactors -- despite serious misgivings over Ukraine's ability to pay back the loan and whether the rusted gears of Ukraine's decimated economy even need the additional energy.

But Ukraine contends it will need the energy generated from the two reactors in western Ukraine, at Khmelnitsky 2 and Rivne 4 (known as K2/R4), to compensate for shutting down Chornobyl, the site of the world's worst nuclear accident in 1986.

The Chernobyl Deal

In 1995, Ukraine signed a Memorandum of Understanding with the G-7, vowing to pull the plug on Chornobyl by 2000.

For its part, the G-7 pledged some $1.8 billion to revamp Ukraine's rickety energy sector. Part of that aid package has been tied to the K2/R4 project, which will cost the Ukrainians some $1.8 billion. The EBRD financing could unlock a further $500 million loan from the European Union-funded nuclear regulator, Euroatom. The EBRD is expected to give the final word on the loan sometime in the first half of the year.

Construction on the two reactors began the same year as the Chornobyl disaster, but was halted in 1991 soon after Ukraine gained independence and the horror of Chornobyl prompted Ukrainian legislators to pass a nuclear reactor construction moratorium. The legislature later lifted the moratorium, but construction at K2/R4, which was halted when the project was about 80 percent complete, remained stalled due to a lack of funding.

Plans by the EBRD to finance the final construction of the two Soviet-designed VVER-1000 reactor generated a storm of international protest from environmentalists and neighboring nuclear-free Austria.

Critics worry the loan will create a precedent for spending sorely needed development money on other incomplete nuclear stations in former East bloc states.

The EBRD loan to Ukraine would be the first time an international development agency has funded the building of a nuclear station in another country. The International Atomic Energy Agency (IAEA), a pro-nuclear UN-affiliated agency, has also said the plant is unlikely to meet Western safety norms.

The loudest criticism of the project has been an outcry over the waste of adding to the 11 operating nuclear reactors in economically troubled Ukraine.

The Nuclear Options

One of the criteria the EBRD sets for loan approval is that each project be part of a least cost option.

To determine whether K2/R4 was the cheapest available option, the EBRD commissioned a team of experts from Britain's Sussex University in 1996. A year later, the Sussex team wrapped up its study.

"It became very clear that the case for completing the reactors was much weaker than had been suspected," explains Steve Thomas, one of the members of the Sussex team. "One very strong element was that there didn't seem to be any reason to replace Chornobyl. Electricity demand had fallen so steeply after the fall of the Soviet Union that Ukraine had twice the generating capacity to meet peak demand."

The Sussex study predicted that given Ukraine's economic crisis, energy demand was unlikely to exceed, let alone reach, previous peak levels until at least 2010. The International Energy Agency predicts no upsurge in energy demand until the same date.

This was apparently not what the EBRD wanted to hear. It rejected the findings of the Sussex group, and hired a leading U.S. nuclear contractor, Stone and Webster, to collect what the EBRD official in charge of the K2/R4 loan called "better data."

"One of the things concluded from that is that if you used the assumptions in the Sussex report in the model Stone and Webster developed you came to the same conclusions that the Sussex report did. If you used the better data, you come to a different set of conclusions," says the EBRD's William Franks.

Suddenly the project made economic sense. But Thomas says the so-called better data are suspect.

"The problem with the Stone and Webster report was that the assumptions going into the model were all determined either by the EBRD or by the Ukrainian company, Energoatom, that wants to build the nuclear power plants. So the report was far from independent."

The Prague-based Central and Eastern European (CEE) Bankwatch Network, a non-governmental group that monitors international loan activity in the former East bloc, notes Stone and Webster may also be something other than a purely neutral observer. The company has already done business with Ukrainian nuclear officials, and it is one of the major contractors to upgrade the so-called sarcophagus that entombs the reactor that exploded at Chornobyl in 1986.

The company has a checkered past in the United States as well. Stone and Webster was the designer of a nuclear reactor at Maine Yankee which was originally licensed to operate to 2008. That controversial plant was shut down in 1997 and has now been sold for spare parts.

The Sussex study seemed to gain backing earlier this year when the European Investment Bank, commissioned to study the feasibility of the Euroatom $500 million loan for K2/R4, concluded that Ukraine's problems in meeting electricity demand are mainly linked to fuel shortages in power stations due to non-payment for fuel and not to a lack of electricity generating capacity.

(The CEE Bankwatch reports that 93 percent of energy payments in Ukraine in 1998 were made by barter.)

Asked to comment on the European Investment Bank findings, Franks insists that completing the project is the best option. "K2 and R4 are the least cost options in Ukraine because the existing capacity is old and inefficient and the fuel costs of that capacity are relatively higher than the fuel costs of K2/R4."

But Thomas again disagrees.

"Ukraine has 55,000 megawatts of generating capacity and a maximum demand of about 28,000 megawatts. It is about to take one of its coal-fired power stations, Burshtyn, which is slightly larger than the combined capacity of K2/R4, and disconnect it from the Ukraine grid so it can be connected to the West to export power. This shows very clearly that the problem is cash flow," he says.

"There is nothing basically wrong with Ukraine's fossil-fired power stations," says Thomas. "They are generally about 20 years old, significantly newer than the average coal-fired plant in the United Kingdom and USA where they frequently are the mainstay of the system."

Despite explaining why the nuclear project is unnecessary, the European Investment Bank went on to recommend the project be financed.

"The project is of a nature that is appropriate for loan financing," it concluded.

The Industry Influence

"The ridiculous final conclusion from the European Investment Bank does not reflect the content of the report and appears to be a direct result of the political pressure being exerted by Western governments which are driven by the interests of their nuclear industries," says Tobias Muenchmeyer, a nuclear expert for Greenpeace International.

No contracts to Western firms have been awarded on the project, but France's Electricité de France (EDF) has been working as an "adviser" for Energoatom. A number of other parties are likely to be interested in participating in the K2/R4 project, including Belgium's Tractebel, Germany's Siemens and the now British-owned nuclear division of Westinghouse.

Jean-Pierre Baret, EDF's official in charge of operations in Eastern Europe, vehemently denies Western nuclear contractors have pressured anyone on the project.

"This is Kyiv's decision. They are making it alone, no one is pressuring them," Baret told Multinational Monitor.

Asked to comment on remarks by Muenchmeyer that the K2/R4 was a "make work" project for the nuclear industry, Baret responds defensively, "Do you know what happened at Chornobyl? Do you want that to happen again? The thing that surprises me is that these environmentalists opposed to K2/R4 are also, in effect, opposed to shutting down Chornobyl."

That line is echoed by Franks, who claims the 1995 Memorandum of Understanding calls for constructing K2/R4 as part of a quid pro quo for closing Chornobyl.

However, Muenchmeyer explains there is no such linkage in the Memorandum of Understanding. Muenchmeyer and other critics of the project recommend that instead of investing in new generating capacity, Ukraine upgrade its already existing energy system as well as address problems of shockingly inefficient energy use.

One argument for the EBRD loan is that denial would merely push the Ukrainians to embrace the Russians and to accept a Russian loan package that would finance Russian enterprises to complete K2/R4. There is a precedent for such a scenario. After rejection by the EBRD, Slovakia's Mochovce was eventually completed with a hodgepodge of funding from Slovak, Czech and Russian banks, plus export agency credits.

But the financing does not appear to exist for a repeat of that scenario. The Russian counterproposal, which would be even less safe than the EBRD's, would drop project costs to about $900 million, but Moscow has offered only about $170 million in financing. And that was before its economy nose-dived last August.

Greenpeace's Muenchmeyer says it is unlikely Ukraine could come up with the necessary financing for the project without the EBRD.

All the cost estimates imply meeting deadlines and budgets, an unlikely scenario in the world of nuclear power plant construction.

Franks and Baret, like other supporters of the project, say there is no other option to building the two reactors if Chornobyl is to be shut down. But the Ukrainians had proposed another option -- a non-nuclear option that may have been quashed by the West.

The Geopolitics of K2/R4

The British Guardian newspaper recently published excerpts from a May 11, 1998 letter from Ukrainian President Leonid Kuchma to British Prime Minister Tony Blair, who was then serving as chair of the G-7, the grouping of leading industrial nations.

In the letter, Kuchma reportedly asked Blair for assistance in securing promised G-7 aid to fund K2/R4. Kuchma said Ukraine had opted to complete the reactors instead of building safer gas-powered plants because of G-7 insistence.

In a letter to the Economist, published on April 26, 1997, then-Ukrainian Environmental Minister Yuri Kostenko wrote that during negotiations with the G-7 in 1995, Ukraine had proposed construction of a combined-cycle gas-fired power plant that would be located not far from Chornobyl.

In his letter, Kostenko says the proposal was rejected in favor of an EBRD recommendation that Ukraine finish K2/R4.

The West, including the United States, was apparently worried a gas-powered plant would entail Ukraine buying more gas from Russia, therefore increasing Kyiv's dependence on Moscow.

Thus the EBRD's "irrationality" in the K2/R4 affair may be due to its acting less as a banker, and more as a geopolitical tactician.