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EON Exit From Finnish Nuclear Reactor May Trigger Failure

November 01, 2012

EON’s Exit From Finnish Nuclear Venture May Trigger Failure

EON AG’s plan to pull out of a joint venture that’s building a nuclear reactor in Finland increases the risk that the project may fail, thwarting the government’s plans to cut reliance on energy imports. Source: Fennovoima Oy

EON AG (EOAN)’s plan to pull out of a joint venture that’s building a nuclear reactor in Finland increases the risk that the project may fail, thwarting the government’s plans to cut reliance on energy imports.

EON, Germany’s biggest utility, is seeking to sell its 34 percent stake in Fennovoima Oy by the first quarter and focus on operations in Sweden and Denmark, it said on Oct. 24. Fennovoima is preparing to start construction on the reactor, with a capacity of 1,600 to 1,800 megawatts, at Pyhaejoki in northern Finland in late 2016.

“It is entirely possible that Finland’s Fennovoima project will fail as a result of EON’s exit,” Timo Vainio, an analyst at Pareto Securities ASA in Helsinki, said by e-mail.

Failure to realize the project will leave an annual gap of at least 12 terawatt-hours in Finland’s future power supply, or about 14 percent of current demand. The Nordic country imported 21 percent of the power it used last year, as it lacks the oil and hydropower supplies of neighbors such as Russia and Norway, according to the country’s energy industries association.

Atomic energy provides power to electricity-intensive export industries, including paper and pulp production, chemicals and basic metals, which contribute twice the European average to the Finnish economy, according to the International Energy Agency.

Supplier Choice

Fennovoima must find a replacement for EON by next summer, when the company will pick a reactor supplier and seek more funds from its shareholders, Chairman Pekka Ottavainen said.

“Despite EON’s exit, we maintain a firm belief and trust in finding takers for their share,” he said by phone Oct. 30 from Helsinki, without elaborating on potential buyers.

There are 62 other companies involved in the project, which plans to sell power at production cost for the lifetime of the plant to its shareholders. Voimaosakeyhtioe SF, a joint venture of the smaller investors who collectively own 66 percent of the project, has begun talks with EON about future ownership, according to Ottavainen, the chief executive officer of Voimaosakeyhtioe SF.

Finnish stainless-steel maker Outokumpu Oyj (OUT1V) “remains committed” to the project, Chief Executive Officer Mika Seitovirta said Oct. 24. Outokumpu has a 10 percent stake in the project, according to its website.

Finland’s Teollisuuden Voima Oyj is building the 1,600- megawatt Olkiluoto-3 reactor, which will be the world’s biggest once it is completed roughly six years behind schedule in 2015. A fourth Olkiluoto unit is planned.

Nuclear Expertise

The project will fail unless a utility company can be found to replace EON, Fennovoima’s only partner with nuclear expertise, said Markku Jaervinen, a financial analyst at Evli Bank Oyj in Helsinki, who estimates the value of EON’s stake in the project at about 700 million euros ($908 million).

“A financial investor will not be enough,” he said by e- mail. “A cancellation of the project seems very likely.”

Utilities are pulling out of nuclear projects across Europe as financial constraints and uncertainty over energy prices increases risk. EON’s withdrawal from Finland follows its decision in September 2011, along with SSE Plc (SSE) and RWE AG (RWE), to give up building nuclear plants in the U.K. Hitachi Ltd. (6501) of Japan plans to complete the acquisition of EON’s and RWE’s nuclear startup venture in the U.K. this month.

German Phase-Out

In Germany, the 17 reactors that supplied about a fifth of the nation’s power are being replaced by new solar, wind and coal capacity, following the 2011 disaster in Fukushima, Japan.

The Finnish government aims to boost the share of nuclear in electricity supply to 59 percent from 25 by 2020, while replacing fossil fuels and cutting yearly carbon-dioxide emissions by as much as 12 million metric tons, from 74.6 million tons in 2010. That target is now in jeopardy.

Finland also plans to promote increased electricity output from renewable energy sources, such as biomass and wind power, by 28 percent to 33 terawatt-hours by 2020, according to the 2008 national climate and energy strategy. The government will update the document by the end of this year.

Fortum Oyj (FUM1V), Finland’s biggest utility, is unlikely to snap up EON’s stake in the reactor, according to Benita Barretto, London-based senior utilities analyst at Berenberg Bank.

“Given the weak market outlook and better opportunities outside Europe -- in Russia and India -- that Fortum’s management are pursuing, we would be surprised to see them become involved in this project,” Barretto said by e-mail.

Peter Tuominen, Fortum’s spokesman for nuclear operations, declined to comment on Fennovoima. Fortum runs two reactors at its Loviisa plant on the south coast.

‘Aging Reactors’

“It would be good if we could continue to produce nuclear power in Loviisa, beyond 2027, when the operating license for one of our aging reactors ends,” Tuominen said.

Fortum is unlikely to be interested in Fennovoima’s greenfield project, since it may cost billions of euros more than installing a new reactor in Loviisa, where infrastructure and nuclear waste management solutions are already in place, said Juha Kinnunen, founder and chief executive officer of Inderes Oy, a Helsinki-based equity research and business analysis company.

The only possible candidate to fill the void left by EON is Vattenfall AB, Sweden’s biggest utility, said Ingo Becker, Frankfurt-based head of utilities research at Kepler Capital Markets. The venture is “highly likely to fail unless Vattenfall jumps in,” Becker said by e-mail.

Political as well as financial risks make utilities reluctant to commit to atomic reactors, Kinnunen said by e-mail.

“EON only recently got their fingers burned in Germany,” he said. “These types of risks also haunt their competitors, with even Vattenfall looking far-fetched as a candidate.”

To contact the reporter on this story: Torsten Fagerholm in Helsinki at tfagerholm@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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