EC says Paks II involves restricted state aid

January 7, 2016

Paks2

The European Commission has officially notified Hungary that, on the basis of information and materials submitted by Hungary to date, the construction of two reactors at the Paks atomic energy plant involves forbidden state aid and is therefore a violation of EU law. Hungary has thirty days to submit any additional materials or arguments it believes might persuade the Commission otherwise.

The EUR 12 billion project is being undertaken entirely with funds supplied by the Hungarian State, including a HUF 10 billion loan from Russia.  Furthermore, the Commission notes that ownership of the entity responsible for realizing the investment was transferred from state-owned MVM (Hungarian Electric Works) to the Hungarian Prime Minister’s Office in November 2014.

Hungary has argued that the investment meets the so-called MEIP test, which is to say is being undertaken by a public investor on substantially the same terms and conditions as a private investor would have. However, the Commission has found that in its own studies the Hungarian government systematically overestimated revenues from Paks II while underestimating the cost of the investment, meaning that Paks II will most likely operate at a substantially lower Invested Rate of Return (IRR) than previously projected, if not at a loss.

A loss-making, state-owned public utility which supplying 50 percent of the country’s electricity could become a proverbial white elephant, requiring huge public subsidies to produce electricity that could be acquired from other suppliers at home and abroad for a fraction of the cost.

What is state aid?

According to the Commission, a measure constitutes state aid if it meets the following four conditions:

  • it is funded by the State or through State resources;
  • it confers an advantage to a beneficiary;
  • it favors certain undertakings or economic activities (selectivity); and,
  • it has the potential to affect the trade between Member States and to distort competition in the internal market.

In the Commission’s opinion, Paks II “entails a transfer of resources of the Hungarian State”, thus distorting regional energy prices and violating EU law.

The Commission asserts that the government’s plans for the nuclear plant expansion involve serious amounts of state aid for two reasons. First, the investment can only take place with state aid. Second, because the government’s own poor calculations regarding revenues and operating costs from Paks II will most likely result in the state having to provide even more aid to prevent Paks from closing its doors.

Failing the MEIP test

The MEIP test addresses the question of economic advantage. It considers whether a market investor would have invested in the Project on the same terms and conditions as the public investor at the time when the decision to make the public investment was taken.  Hungary has argued that the project will generate an invested rate of return (IRR) to warrant the investment.  This involves projecting the future price of electricity, which most experts believe will decrease over time.  In effect, the Commission has rejected the underlying economic calculations purporting to demonstrate that Paks II is the kind of investment a private investor would gladly undertake.

So what now?

In its letter, the European Commission calls on Hungarian authorities to “further justify” their arguments and “provide further information” about their calculations in writing within 30 days.

According to Dialogue for Hungary MEP Benedek Jávor, in order to secure the EC’s blessing, Hungary must now demonstrate to the EC’s satisfaction that state aid is both justifiable and lawful in the case of Paks II, and that private investors would not be willing to undertake the otherwise profitable investment without the use of state funds.

As things stand, the Commission believes the state aid is “selective and will result in a distortion of competition”.  Perhaps this explains the Hungarian government’s decision at the end of 2015 to reallocate HUF 8.4 billion (USD 29.5 million) previously earmarked to fund Paks II-related engineering and preliminary works to the national film fund.