Kiev, Ukraine The March 2002 parliamentary elections in Ukraine
gave a mere 12 percent support to the party of President Leonid Kuchma,
with a plurality of 45 percent going to the reformist bloc led by ex-prime
minister Victor Yushenko. While many are celebrating Yushenkos political
victory as offering Ukraine hope that its 11-year economic collapse may
come to an end, his political gains may also revitalize Ukraines
controversial nuclear power program. Because Western governments and international
financial institutions view Yushenko as virtually the only person in Ukraine
they can seriously talk to, his victory may breathe life into a project
which many would prefer to consider dead: the nuclear reactors known as
K2/R4.
The Deal, The Concerns
A 1995 Memorandum of Understanding between the G7 (the group of seven
leading industrialized countries), the European Commission and the Ukrainian
government promised support to the country suffering from the consequences
of the worlds worst nuclear catastrophe. Ukraine promised to close
the Chernobyl power plant in exchange for financial support to mitigate
the consequences of the radioactive disaster and to build compensating
facilities.
Kuchma has sought to use the money to complete the Soviet-designed nuclear
reactors Khmelnitsky unit 2 and Rivne unit 4 (K2/R4). Construction on
these units began in the 1980s and was about 80 percent complete in 1992
when building stopped due to a funding shortfall and parliamentary opposition.
Energy experts, public interest groups and some government officials
and parliamentarians have questioned the need for the nuclear energy system,
its potential profitability and its safety.
The K2/R4 project poses many serious safety problems, most of which are
due to structural flaws in the original Soviet design. The International
Atomic Energy Agency has identified a wide range of problems, including
an increased risk of fire due to improper cable layout, faulty steam generators,
reactor containment vessels which are susceptible to rupture, faulty control
rods and poor and obsolete instrumentation and control. Standard probabilistic
safety analyses for the reactors have not been performed, and will not
be performed until after plant start-up. Also, serious safety issues regarding
human error and safety culture have not been addressed.
The reactors at K2/R4 are far from meeting international safety standards
and would not be allowed to operate in any Western country. Furthermore,
Energoatom, Ukraines state-owned nuclear energy company, is planning
to begin operation of these reactors before remedying acknowledged safety
problems, and it will only correct some of the known safety problems at
the first refueling. The plant will not achieve even the Soviet-designed
safety level until after three years of operation.
It does not make sense to waste public funds investing in two unsafe
reactors when almost half of Ukrainian power plants are unable to get
enough money even to operate, says Yury Urbansky of the National
Ecological Center of Ukraine. Ukraine has tremendous potential for
energy efficiency, and that is where investments should go.
The dramatic decline in economic activity in the Ukraine in the 1990s
led to a significant drop in energy demand, leaving installed capacity
at double the peak load demand. Over the last decade, many Ukrainian power
plants have closed and been neglected due to a lack of demand. Throughout
much of the 1990s, only about 30 percent of consumers were paying their
bills to Energoatom in cash. Today, only about 60 percent pay in cash
many are not paying at all, and others are paying with bartered
goods, such as tomatoes.
Foreign donors the source of monies for any new nuclear construction
agree that the yet-to-be completed units must be upgraded to meet
minimum safety standards. Doing so will require the involvement of Western
companies like Raytheon, Framatom of France and Siemens of Germany. The
fact that the units are so near completion complicates the challenge of
combining Soviet and Western technologies, however. Many design deficiencies
are already implemented in concrete and installed equipment. Some experts
argue that starting construction from a greenfield site would be cheaper
than rebuilding the existing structure to meet internationally accepted
standards.
The Blackmail
Following the Memorandum of Understanding, the G7 and the European Commission
chose the European Bank for Reconstruction and Development (EBRD) to be
the leading institution to develop and support the K2/R4 project. The
London-based multilateral development bank was created to support Central
European and former Soviet states as they transitioned to market-based
economies. Although the Bank was expecting to provide only $215 million
the biggest single loan EBRD had ever provided out of a
$1.4 billion package, it was chosen to be the principal K2/R4 decision-making
institution. Other funders included Euroatom, Russia and export credit
agencies (ECAs) of the United States, France, Spain, the UK and the Czech
Republic.
Although a governmental institution, the EBRD is still a bank and is
expected to make a profit. But the profitability of K2/R4 has always been
doubtful. In 1996, an independent panel of experts hired by the EBRD concluded
that K2/R4 was not economical. Completing these reactors would not
represent the most productive use of $1 billion or more of EBRD/EU funds
at this time, the panel concluded. A 1999 PriceWaterhouseCoopers
audit concluded that Energoatom is virtually bankrupt. However, within
four months of the PriceWaterhouseCoopers reports submission to
the EBRD, political pressure forced the project through the final review
of the Banks Operations Committee.
Ukrainian President Kuchma has sought to blackmail international donors
into supporting K2/R4. He argued that Chernobyls remaining reactors
would not be closed until the money for K2/R4 was provided. The Ukrainian
government also threatened Western leaders with a plan to complete K2/R4
on their own, with Russian support, in conformity with the archaic safety
standards of the 1970s. That pressure successfully led the EBRD to agree
to fund K2/R4.
Mindful of the bad economics and safety concerns, the German government
attempted in 1999 to convince Kuchma to stop the K2/R4 project. Ukraine
has tremendous potential in energy saving and more efficient energy production
and transmission, the Germans pointed out, since Ukraine is one of the
least efficient countries in the world. The Ukrainian economy uses seven
times more energy per dollar of GDP than Japan. On a trip to Kiev, German
Chancellor Schroeder also proposed revisiting a proposal to build a modern
gas-fired power plant in which Chernobyl staff could be employed.
U.S. President Bill Clinton undermined this initiative, however, declaring
U.S. support for the K2/R4 project in return for Kuchmas promise
to shut down the last remaining operational Chernobyl reactor by the end
of the year 2000.
The Closure
On December 15, 2000, people around the world watched international networks
broadcasting from Kiev the Soviet-style ceremony of Chernobyls permanent
closure. President Kuchma gave the order to turn the key to shut down
the reactor.
Closure required little political sacrifice from Kuchma. It was simply
no longer possible to run the reactor. Even the license for the remaining
unit 3 had expired one month before the official closure. Kuchma put pressure
on regulators to allow another month of operation, but it was not possible
to give an order to outdated equipment. The reactor was actually shut
down in an emergency about two weeks before the planned closure. Thus,
on December 15, Ukraine shut down a reactor which in fact was not producing
electricity.
Holding up its end of the bargain, on December 7 the EBRD board voted
in favor of the K2/R4 proposal. It was a difficult and unusual vote. Nineteen
countries did not support the project on a board where decisions are almost
always made unanimously. The EBRD decision was followed by a European
Commission vote in favor of a Euroatom loan for the project.
EBRD attached a list of conditions to the loan, giving Ukraine up to
one year to meet them. The four major conditions were: permanent closure
of the Chernobyl power plant, agreement to meet International Monetary
Fund-imposed conditions, ensuring the independence of the nuclear regulatory
authority and confirming the support of other donors involved in K2/R4.
Further conditions covered a wide range of improvements in the nuclear
and energy sectors of Ukraine, including improvement of bill collection
and an increase in electricity prices.
EBRD president Jean Lemierre called for an EBRD board meeting for final
approval of the project in November 2001, just before the confirmation
deadline on December 7. In his letter to board members, he argued that
Ukraine had met all of the conditions. He recommended giving the project
the final go.
However, environmentalists and others raised questions. In particular,
the independence of the Ukrainian nuclear regulator was doubted. Although
granted the status of a state committee and independent on paper, the
authority did not have sufficient resources even to keep its qualified
staff from leaving. According to the deputy chair of the state nuclear
regulatory committee, the regulatory agencys average salary is one
sixth that of Energoatom.
More questions were raised regarding confirmation of participation in
the K2/R4 project by export credit agencies (government agencies that
make loans or provide loan guarantees in foreign countries to fuel purchase
of home country products). The EBRD president received letters from senior
management of all involved ECAs shortly before the meeting, declaring
that they would consider the project favorably. Many found
these letters surprising, since most ECAs grade the Ukraine as a country
where they do not work due to high economic and political risk. Moreover,
most of the ECAs had not even received applications for guarantees, so
they did not review the project through normal procedures.
Kuchmas Misstep and the Future
The EBRD Board never voted to confirm the loan, however. Just prior to
the scheduled board meeting, Kuchma decided to refuse the loan because
of the conditions attached. He had apparently been unaware of the conditions
agreed to by the previous government. The letter from the Ukrainian government
to the EBRD stated, among other things, that it would not be possible
to raise electricity tariffs in view of the upcoming parliamentary elections
and asked for renegotiation of the loan.
In Moscow on an official visit at the time of the EBRD board meeting,
Kuchma said that the EBRD had been cheating Ukraine for five years and
that accepting the loan would mean slavery for Ukraine.
Russia, he said, will help to complete the reactors
at a lower cost.
But negotiations with the Russian government ended up less successfully
than the Ukrainians expected. Russia proposed a $300 million loan to Ukraine
in equipment, not cash. Russia is eager to get rid of 1980s-vintage
nuclear power equipment. But the Ukrainian nuclear regulator had already
expressed its concerns regarding the quality of equipment manufactured
some 15 years ago. And even if Ukraine had accepted the Russian offer,
it would need cash to assemble the equipment, and Russia could hardly
provide that.
Back in Kiev, President Kuchma realized that the Russian option was illusory
only to discover that the EBRD opportunity had disappeared as well.
As one EBRD Director put it: K2/R4 is no longer an EBRD project.
I was not aware of the agreement between Yushenkos [the prime
ministers] government and the EBRD. I am ready to apologize to the
EBRD if it helps, said the president, as he desperately sought to
get the project back on track.
But Kuchma appears to have missed his chance.
Theoretically, K2/R4 can be proposed to the EBRD again, but it would
require another couple of years to again go through EBRD procedures, with
the EBRD holding to the position that reapplication for the loan would
require full review of all terms and conditions.
Still, ECAs have supported similar projects in Central and Eastern Europe
in recent years, and one or more might still come to K2/R4s rescue.
For example, the French government is poised to order COFACE, its ECA,
to release an export guarantee for the project even as it notes the high
risk profile of the countrys economic and political environment.
The COFACE guarantee would be used to buy equipment from the French nuclear
industry, which is suffering from diminished national and global demand
for its equipment.
So the saga of K2/R4 is not over. Having been close to death, the project
could again become a project for the EBRD and/or ECAs. The March 2002
elections has installed a new government perceived to be concerned about
the fate of the country, rather than the whim of the president.
Rather than fall into the trap of supporting K2/R4, say environmentalists,
the G7 should use the opportunity to step forward with new initiatives
to support non-nuclear energy alternatives for Ukraine.
We are appealing to the common sense of the European Commission
and the EBRD, says Yury Urbansky. By keeping K2/R4 as an option,
we simply delay implementation of safer, more economically sound and publicly
acceptable projects in the energy efficiency field.
Olexi Pasyuk works with the National Ecological Centre
of Ukraine. He is international energy coordinator for the CEE Bankwatch
Network.
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