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Nuclear to make a$60bn comeback

TWENTY years after the disastrous accident at the Chernobyl nuclear power plant, atomic energy is making a comeback in Russia. Nuclear fuel will help meet rising electricity demand and free up gas supplies now feeding thermal plants for export. The state will retain control over the strategically sensitive nuclear sector, but part privatisation of the industry is being considered to help pay the colossal expansion costs, writes Isabel Gorst.

What Russian nuclear physicists call "Chernobyl syndrome" set in after 26 April 1986, when two explosions at the Chernobyl plant in Ukraine – then part of the Soviet Union – spread a dangerous radioactive cloud over much of Europe. Confidence in the safety of nuclear power evaporated globally. Public protests were not allowed in the USSR. But the Chernobyl disaster had far reaching political implications, spawning an intrepid opposition movement determined to block expansion of the nuclear power industry.

"The Chernobyl tragedy marked the beginning of the end of the Soviet Union," says Yuri Eldyshev, deputy editor of Russia's Ecology and Life magazine. "Overnight, Soviet technological might was exposed as an illusion."

But it was the economic slump that followed the collapse of the Soviet Union as much as action by environmentalists that paralysed nuclear expansion in the 1990s. Atommash, the country's main nuclear-energy equipment builder, went bankrupt in 1995. And the industry only began to recover in 2000, when, thanks to high oil and gas prices, the Russian economy began to stabilise.

Russia's Energy Strategy, detailing government energy policy until 2020, calls for nuclear production to more than double to reach 300 terawatt hours by 2020. By that time, nuclear's share in Russian electricity generation will climb to 23%. In European Russia, where most nuclear plants are located, the share will be 32%.

By the time the Energy Strategy was published, in 2002, the influence of Russian environmental groups, along with that of most political activists, had waned. Polls indicate that 78% of Russians are against the installation of nuclear reactors near where they live, says Greenpeace. But the opposition is not publicly active. "Nowadays," says Eldyshev, "if people think about energy security at all it is to worry about whether there will be enough power to meet their future needs."

Both Rosenergoatom, a state agency for nuclear power, and the International Energy Agency have published data suggesting the Chernobyl accident has not caused a sharp increase of radioactivity related deaths. But environmentalists counter that the disastrous effect of the tragedy is grossly underestimated by officials. Says Lyudmila Komogortseva, a Duma (parliament) deputy in Bryansk, one of the regions worst hit by Chernobyl radioactivity: "We were hit by the equivalent of an atomic bomb."
Russia is not the only country renewing its love affair with atomic power. As oil prices soar, the US, Europe and Asia are looking to nuclear as a way out of their looming energy-supply quandary. Even in Germany where Greens have long blocked the construction of nuclear plants, the government is reviewing its energy policy.

Vladimir Chuprov, head of the energy department at Greenpeace Russia, says "the logic of the Group of Eight (G8) industrial nations and the nuclear power industry gets lost when you look at the facts. Nuclear power accounts for a tiny proportion of Russia's energy balance and cannot solve the problem of diminishing energy supplies. In 20 years, our so-called cheap oil will run out, but so will cheap sources of uranium."

Greenpeace advocates greater use of Russia's abundant alternative energy potential, especially geothermal and biomass. Investment in conservation would result in large energy savings and be much cheaper than nuclear power. "But no one is doing it," he adds.

Turning up the heat
UES, Russia's electricity monopoly, has been in the throes of reform for over five years (see box). Signs that the comparatively archaic nuclear power industry was in for a shake-up came in 2004 when the Ministry of Atomic Power was abolished during sweeping reforms of government administration. Rosenergoatom was set up to replace the ministry and now runs Russia's 10 nuclear plants, which have a combined capacity of 22.2 gigawatts. These account for 3.5% of all energy production and around 16% of electricity output (see Table 1).

In November, Sergei Kirienko, a former prime minister, took the helm at Rosenergoatom. Kirienko, who has a reputation as a dynamic reformer, said $60bn would be required in the next two decades to install some 40 new nuclear generation units in Russia. Part of the industry might be privatised to help raise capital to fund the expansion, he said.

Russia has extensive oil, gas and coal reserves. But the economic boom has taken energy planners by surprise. Demand is rising far faster than expected and too little investment has been devoted to increasing fuel production. Oil and gas exporters are reluctant to divert supplies away from lucrative foreign markets to feed domestic power plants.

During one of the coldest Russian winters on record, Putin summoned Kirienko and Anatoly Chubais, the head of UES, to the Kremlin to discuss how to beat power shortages that threaten to sabotage Russia's economic revival. Putin said: "It is clear that few people believed the economy would expand so fast, even though we are constantly talking about prospects for growth. Now there is a real threat on the horizon of energy, especially of electricity shortages, which could significantly slow the economy down." Putin said that state, private and foreign investment should be tapped to help fund high-cost electricity projects. But he also said the state should retain "influence" over nuclear power.

The government has not finalised a plan for reform of the nuclear sector. Discussion is focused on the consolidation of all branches of the industry – including uranium mining, power plants, fuel and equipment producers and fuel-reprocessing – into one state-controlled entity. Kireinko wants Rosenergoatom reorganised into a joint-stock company, a necessary prelude to consolidation and, possibly, privatisation.

A new management team drafted into Rosenergoatom appears suited to the task. Sergei Obozov, the general director, is an expert in corporate restructuring. Another recent appointee, Anna Belova, earlier worked on the restructuring and reform of Russian Railways.

Companies likely to be included in the new state super-holding include TVEL, a nuclear fuels and equipment conglomerate that accounts for 17% of the world's supply of nuclear fuel rods. TVEL is state controlled, but has four subsidiaries with minority private ownership. The Kremlin is taking steps, with the help of state-run firms, to gain control over privately owned nuclear-equipment producers.

UES has already acquired a majority stake in Siloviye Mashini and Gazprombank has bought a stake in OMZ-Atom. Another candidate for consolidation is AtomStroyExport, a company specialising in the construction of nuclear power plants overseas. AtomStroyExport is majority owned by Gazprombank. This year, Rosenergoatom began topping up its stake, which now amounts to 46%.

Gazprom is usually eager to jump into new energy sectors, but has denied press reports that it plans to invest in nuclear plants. But the company has expanded into thermal power generation – buying shares in UES and Mosenergo, the Moscow utility. Whether Gazprom wants involvement in nuclear power or not, the economics of the electricity and gas industries are closely intertwined.

UES' thermal power plants absorb about 60% of the 360bn cubic metres of gas Gazprom markets in Russia each year. Evgeny Pogrebnyak, head of research at the independent Institute for Complex Strategic Studies, says there is "a big incentive" for Gazprom to invest in projects to boost nuclear's share in the energy mix. "If thermal plants burned less gas, Gazprom could export more," he said.

Privately owned Russian industrial groups are being sized up as potential nuclear investors. Aluminium giants Sual and Rusal operate coal-fired power plants to feed smelters, but they are unlikely to move voluntarily into nuclear generation unless new plants are designed to fuel their core processing business.

Foreign ownership of Russian nuclear plants would, if sanctioned, probably be restricted to minority holdings. The atomic industry is included among 39 strategic sectors listed in a draft Law on Foreign Investment in which ownership by non-Russians will be limited. The FSB, the successor to the KGB, has delayed enactment of the law with calls for even tighter limitations on foreign investment in the constantly broadening "strategic" category.

Given the complications of raising investment, the government is likely to end up as the major source of finance for capital-intensive nuclear projects. Pogrebnyak said: "It would be good use of government funds to channel part of the budget surplus into capital investment projects to ease energy shortages and allow for further economic growth." However, he added that high project-management and accountability standards would need to be applied to avoid the risk, often associated with state projects, of funds being inefficiently harnessed, or misappropriated.

International opportunities
This year, it is Russia's turn to serve as head of the G8. Putin has placed global energy security at the top of the agenda. Industrialised countries think Russia can prop up world oil and gas supplies. But energy initiatives launched this year by Putin indicate that Russia is also determined to capture the moment of the worldwide nuclear renaissance to establish itself as a global atomic energy player.

Russia's first priority on the global nuclear stage is to shore up its influence in the former Soviet Union (FSU). Putin said: "Russia is firmly determined to widen its co-operation within the Eurasian Economic Community in the field of global energy safety. One priority here is the development of collaboration in the peaceful uses of nuclear energy."

Nuclear power plants built in the Soviet Union were all in Russia or Ukraine. Uranium was supplied from mines in Russia, Ukraine, Uzbekistan and Kazakhstan. Rebuilding old ties, Russia and Kazakhstan are negotiating a partnership to extract uranium and process nuclear fuel in both republics. Kazakhstan plans to build its own nuclear generators and may co-operate with Russia in the development of small and medium-sized reactors.

But Russia's nuclear ambitions stretch beyond the FSU. Speaking at a conference in China, in April, Kirienko talked-up Russia's nuclear ambitions: "We consider it our task in the near future to negotiate and sign agreements on the peaceful use of nuclear energy with all countries with which we have so far not concluded such contracts."

AtomStroyExport has contracts in China, India, Iran and eastern Europe and claims to hold 20% of the world market in nuclear reactor construction. Future demand is expected mainly from Asia, where energy demand is booming. But it will face competition from international nuclear construction firms.

AtomStroyExport is well placed in the race for contracts in China, which plans to build 50 nuclear reactors. It has completed installation of the first unit of the Tyan Van plant. Start-up in April was described by a Russian government official as the most important event of the Russia-in-China year, which began on 1 January. AtomStroyExport hopes to win contracts to build two more units at Tyan Van.

It is also looking for more business in India, where it is building reactors at Kudam-Kulan. But US competitors may arrive in India following the signing this year of a nuclear energy co-operation pact by the two countries. The US is encouraging India to build nuclear capacity instead of looking to Iran for gas imports.

AtomStroyExport's contract to build Iran's first nuclear reactor, at Bushehr, has drawn Russia into a dispute with the US, which is convinced Iran will use spent fuel to develop an atomic bomb. Russia has attempted to diffuse tension with a proposal to reprocess Bushehr's spent fuel. Putin has called for the creation of a Russian uranium-enrichment centre where facilities would be available for foreign use – about 80% of the world's nuclear fuel reprocessing facilities are in the US.

Since the collapse of the USSR, AtomStroyExport has lost ground in Central Europe, where 14 Soviet-built nuclear reactors are operating – in Hungary, the Czech Republic, Slovakia and Bulgaria. But it is returning to the area in partnership with foreign manufacturers. In Bulgaria, it has won a contract with Westinghouse to modernise the Kozlodui plant and it has teamed up with France's Framatome to bid for a construction contract at Belene.

Crisis in the capital

EVEN by Russian standards, the winter of 2006 was cruelly cold. Billboards erected all over Moscow in November by UES, the state-owned electricity monopoly, warned people that if the temperature dropped below –25ºC for any length of time, thermal power plants serving the city would be unable to meet demand.

Yuri Luzhkov, the mayor of Moscow, called in Anatoly Chubais, the head of UES, for crisis talks. Discussions centred not so much on plans to develop generating capacity, but how to rescue existing facilities from collapse. "Electricity shortages are Moscow's most serious problem," said Luzhkov. He added that if the extreme cold returns next winter, power cuts will be unavoidable and will lead to the halting of construction projects, and the closure of shops and offices.

By 2007, campaigning will have begun in earnest for the presidential election the following year. For the Kremlin, widespread blackouts in Moscow, the glitzy epicentre of Russia's newfound wealth, would be politically undesirable, undermining faith in the ability of President Vladimir Putin's administration to deliver sustainable economic growth.

Construction began in March of an additional 450 megawatt (MW) unit at one of Moscow's biggest thermal power plants. But the project will not be complete until 2008. There is not enough time before next winter sets in to rebuild and expand existing thermal plants to fill the gap between demand and supply. UES is considering import of a series of 25 MW mobile electricity generators for plants on the outskirts of the city.

Risks of energy shortages
The risks of energy shortages are not confined to winter. An accident at the Chagino power plant, south of Moscow, during a heatwave in May 2005 brought the capital to a standstill for over 24 hours. Chubais blamed a lack of investment in ageing equipment. UES plans to invest over $1bn in Moscow region this year, plus $6bn more during the coming three years. But he says only reform of the company, designed to bring private investment into power generation and to create a competitive electricity market, can save the industry from rot.

UES wants the government to sanction a big increase in electricity prices and recommends hefty connection charges for new buildings in the fast-developing Moscow region. Putin, however, has repeatedly said households should be shielded from sharp electricity-price increases. As election day draws nearer, he is unlikely to change his tune.

 

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