Czech power utility CEZ AS (BAACEZ.PR), Central Europe's largest company by market capitalization, just received initial bids in a $30 billion tender, the region's largest ever, to build five new nuclear reactors in Europe. But the utility, majority-owned by the Czech state, faces a strategic dilemma: whether to use western or Russian technology.
Czech power utility CEZ AS (BAACEZ.PR), Central Europe's largest company by market capitalization, just received initial bids in a $30 billion tender, the region's largest ever, to build five new nuclear reactors in Europe. But the utility, majority-owned by the Czech state, faces a strategic dilemma: whether to use western or Russian technology.

Almost 20 years after the Nov. 17, 1989, Velvet Revolution that toppled the then Czechoslovak Communist regime, the search for suppliers for new reactors in the Czech Republic, Slovakia and possibly in Turkey reopens the perennial issue of eastern Europe's reliance on Russia for energy.

Czech politicians view increased nuclear generation as a way to counter the country's limited choice of natural gas and crude oil suppliers.

The nuclear expansion is also crucial for CEZ to retain its status as Europe's second leading electricity exporter, behind Electricite de France (EDF.FR), while still being able to meet growing domestic demand.

At the same time, CEZ needs to scale back production at its polluting coal-burning power plants to meet European Union emission reduction targets.

"My view is very clear. I favor diversification of energy sources and transport routes," Vaclav Bartuska, the Czech government's chief energy advisor, told Dow Jones Newswires. He said that geographic provenance of nuclear technology should be diversified as well.

All existing Czech and Slovak nuclear reactors are based on Soviet designs, although one hybrid unit, in the Czech south Bohemian village of Temelin, uses western safety technology added in the late 1990s by Westinghouse Electric Company, LLC, the Pennsylvania-based nuclear firm owned by Japan's Toshiba Corp (6502.TO).

The leading bidders in the tender include Westinghouse, Russian state-owned nuclear technology company Atomstroyexport ASE and France's Areva SA (ARVCY).

All three companies confirmed they submitted the official tender qualification documents.

Other likely bidders are expected to include Japan's Mitsubishi Heavy Industries Ltd. (7011.TO) and Seoul-based Korea Hydro & Nuclear Power Co Ltd, though neither company immediately responded to inquiries from Dow Jones Newswires. Some 31 parties requested tender documents from CEZ.

CEZ said it will draw up a short list of bidders by early next year, and complete the tender by early 2011 to get the first new reactors onstream by 2020.

At present the Czech Republic and Slovakia get about 80% of their natural gas and oil from Russia.

Moreover, as of 2010, Czechs will get all nuclear fuel for their existing nuclear power plants from Russia's state-controlled TVEL, replacing the current Westinghouse fuel.

Earlier this decade the Westinghouse fuel used at Temelin was deforming when used, but the U.S.-based company later corrected the problem.

However, when CEZ in 2006 held a tender for nuclear fuel supply for the period 2010 to 2020, TVEL beat out Westinghouse.

"I like Russia and have no problems with Russian technology," Bartuska said, "but it's not good to put all our eggs into one basket."

While Bartuska said he has no preferred bidders, he said the country should have other energy suppliers besides Russia.

CEZ distances itself from geopolitical issues.

The company is basing its decision foremost on safety, then price and finally on conditions of construction, Vladimir Hlavinka, a member of CEZ's board of directors with special expertise in nuclear power, told Dow Jones Newswires.

Despite the Czech Republic being highly dependent on Russian energy, CEZ itself is much less so, Hlavinka said.

CEZ gets all of its coal from domestic mines, produces some hydropower in local waterways, and has struck a deal with Germany's RWE AG (RWE.XE) for natural gas supplies to a CEZ gas-fired power plant, to be built north of Prague.

CEZ's only reliance on Russian companies will come via its switch to Russian nuclear fuel, he said.

In both recent and past statements, Czech prime minister Jan Fischer and other leading Czech politicians have said they want a more Western orientation, while Czech President Vaclav Klaus has welcomed closer cooperation with Moscow, citing pragmatic factors including Russia's raw materials wealth, expertise and historic ties.

The EU and the United States are calling on central Europe's former Soviet satellite states to diversify away from Russian energy and to work with western partners on energy issues, following several stoppages of oil and gas flows from Russia to Europe in recent years.

Both the Russians and the Americans are deploying high-profile officials to get the upper hand in the competition.

In September Russian Deputy Prime Minister Alexander Zhukov was in Prague lobbying for Atomstroyexport, while in late October U.S. Vice President Joe Biden was in Prague lobbying on behalf of Westinghouse.

Michael Kirst, Westinghouse's vice-president for Central and Eastern Europe, said that, were Westinghouse selected, between half and 80% of the subcontractors used to build the new reactors would be Czech companies and that the Czech Republic may become Westinghouse's regional supply base.

In a statement issued Friday, Atomstroyexport said Czech subcontractors would cover 70% of construction and supply work were the Russian company chosen.

"We must find partners and suppliers, ideally locally as the Czech nuclear industry is one of the strongest in world and fully capable to build the AP 1000 units not only in the Czech Republic" but also in Slovakia and other locations in the region that are considering nuclear expansion, Kirst said.

The AP 1000 is Westinghouse's most modern reactor design and is what the company is offering CEZ. Westinghouse is building four nuclear plants in China and has six more under contract in the U.S. where work has already begun at two of the sites, in Georgia and South Carolina, Kirst said.

New reactors will complement CEZ's existing clean-burning nuclear plants and replace dirty coal-fired power units that now account for more than half the company's power generation base. CEZ is phasing out coal plants because the cost of greenhouse gas emissions is expected to rise as a result of the European Union's emissions cap-and-trade system.

In 2020 Czechs, Slovaks and Poles for the first time will have to pay for all their carbon dioxide emissions credits as part of the EU's emission-trading scheme. Currently all credits are given for free from national governments to industrial companies but the practice is being phased out.

"Expanding nuclear generation is definitely positive for CEZ," said Petr Novak, a power sector analyst at Atlantik Financial Markets in Prague. The new plants, while having a high upfront cost for construction, will have low fuel costs and no carbon dioxide emissions, unlike the coal-fired units, which will help the company's margins, Novak said.

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