Security exemption – last chance for Czech nuclear power?

Czech efforts to build nuclear reactors through competitive tenders have so far appeared, compared with abroad, naive at best. The French, who have long been leaders in European nuclear power, would not even consider awarding the construction of a nuclear power plant to anyone other than the French. The Hungarians awarded the project directly to Russia’s Rosatom, avoided a conventional tender and, like the French in the case of the Flamanville nuclear power plant, invoked technological exclusivity, claiming that there was no other way.

The British are taking a different approach, as they have no dominant power company of the kind represented by Czech ČEZ or France’s EDF. The new reactors there are to be operated and financed by various foreign companies from France, Japan or China, but they too will choose reactors to suit their own preferences – mostly those they manufacture themselves.

A tender, yes, but…

In the Czech Republic, the prevailing view is that reactor suppliers must be selected through a transparent competitive tender. This effort to organise a fair tender is right, but it is also clear that it cannot be done strictly under the Public Procurement Act. After all, everyone still vividly remembers how it turned out last time – during the unsuccessful tender to build new units at the Temelín nuclear power plant. In 2012, ČEZ first had to exclude France’s Areva, citing a breach of the tender rules (and apparently had no other choice), which strained Czech-French relations. In 2014, ČEZ then cancelled the entire tender.

Above all, it was confirmed that launching a tender for the years-long construction of a nuclear reactor, worth hundreds of billions of crowns, strictly under the aforementioned law makes no sense whatsoever. For a number of reasons. The terms of such a tender do not allow the country’s energy security criteria to be taken into account. During the lengthy process, the overall situation in the nuclear energy sector may change (as happened during the Temelín tender after the Fukushima accident in 2011). However, under the letter of the law, such changes can no longer be sufficiently reflected in the tender conditions.

The experience of the Temelín tender also showed how difficult it is to combine requirements concerning both reactor supply and construction financing within a single procurement procedure. In 2012, ČEZ had to launch a parallel tender for a financial partner in the expansion of the South Bohemian nuclear power plant, creating a rather confusing situation.

The rules of a tender conducted strictly under the Public Procurement Act also do not allow conditions to be set for the involvement of Czech industry – meaning subcontractors. For the construction of new reactors in the Czech Republic to make real sense, it should fulfil two strategic objectives. First, to secure the Czech Republic’s future energy needs and, second, to help further develop the know-how of the domestic nuclear industry. It has a long tradition here, but faces a gradual threat of losing its expertise. Yet it is one of the high-value-added sectors that domestic governments have traditionally pledged to support. The Czech Republic also has enormous potential for further research in nuclear energy. However, this dimension appears to be getting lost in the practical preparations for building new reactors.

“Wasted” money

If the Czech government now decided that it wanted once again to launch a tender strictly under the Public Procurement Act, it would most likely make potential bidders highly uncertain. Individual companies would hesitate over whether to enter a tender again when the Czechs might cancel it later. Participants in the unsuccessful Temelín tender, including companies such as Westinghouse and Rosatom, remember that at the time – just like ČEZ – they needlessly spent large sums amounting to hundreds of millions or even billions of crowns.

The task now is to find the right model that would be feasible in the Czech Republic while also passing scrutiny by the European Commission, which oversees European rules on competition and public support (state aid), as well as the single internal market – including public procurement rules.

All builders of nuclear power plants abroad seek some exemption from public procurement rules because they regard the construction of a nuclear power plant as a strategic project of exceptional importance. In the Czech Republic, similar efforts have failed to reach a conclusion. It therefore remains unclear how to avoid the strict letter of the law – and thus the strict application of European Union rules – and thereby gain the option to set more suitable tender criteria corresponding to a strategic contract in Dukovany or Temelín.

As recently as last year, there was talk of efforts to obtain a so-called sectoral exemption, which would allow a more appropriate tender procedure on the grounds that it concerns the provision of public services in a specific energy sector. According to available information, such efforts are foundering on the negative position of the Czech competition authority – the Office for the Protection of Competition (ÚOHS).

Security clause

The perhaps final hope is the so-called security clause in the Public Procurement Act – specifically Section 29(a). It stipulates that a public contract need not be awarded where this would conflict with the protection of the fundamental security interests of the Czech Republic. The key argument in this case is therefore that a tender procedure would not make it possible to take into account the broader issues of energy security and geopolitical considerations.

The view that the construction of a nuclear power plant is linked to the country’s strategic security interests is by no means new. Even in the past, it was clear that the government should assess whether it is safe for a company from one country or another to build nuclear reactors in the Czech Republic. This does not necessarily have to mean following the Polish approach, where it is clear in advance that Poland wants to exclude Russia’s Rosatom from the tender for a new nuclear power plant. It is no secret that Poland is far more radical in its critical stance towards Russia than other European countries. For example, the Americans cooperate quite significantly with Russia’s Rosatom in nuclear energy – GE is to supply turbines for some power plants being built by Rosatom, while Russians and Americans also cooperate on nuclear fuel development.

One more chance

From the Czech perspective, it is more interesting that the Poles are also logically looking for a way to procure the strategic construction of a nuclear power plant according to their needs. And their thinking apparently points in a similar direction to that of the Czechs – namely towards a so-called security exemption, which would make it possible to organise a tender in a more suitable manner. These considerations are also related to the Czech government’s approval in June of the creation of a new working group at the Ministry of Industry, involving the intelligence services, to assess the country’s security interests in nuclear energy.

Security risks that should be assessed include, among other things, the supply of software for the plant’s control and monitoring systems. Some time ago, for instance, the British considered whether the Chinese, as potential suppliers of new reactors, could build “weak points” into the computer systems of British power plants and, if “needed”, halt electricity generation in the United Kingdom. And although it appears that London will ultimately not prevent China’s entry into British nuclear energy, it is clear that energy security simply cannot be excluded as an issue from the tender process.

Plans to build nuclear units in the Czech Republic now look highly uncertain, and scepticism is increasing rather than diminishing over time. It cannot be ruled out that the “security exemption” is the last chance to organise a meaningful tender for the construction of new reactors.

The author is a consultant and energy projects specialist at the HATcom agency.