The Chernobyl game

May 30, 1997

When John Surrey was asked to chair a panel to assess the case for replacing the Chernobyl nuclear station, he was swept up into a world where the rules of the energy market meant very little. Martin Ince unravels an international web of intrigue

Plenty of academics relish the idea of being taken seriously by the world's movers and shakers. But dispensing advice to the rich and powerful can be a fraught and tangled business.

John Surrey, a professor at the science policy research unit at the University of Sussex, has been an adviser to parliamentary committees and companies since the 1960s, on coal, oil and nuclear power. But even he was intrigued by an invitation, last summer, to meet Jacques de Larosi re, president of the European Bank for Reconstruction and Development. The president asked Surrey to chair an international panel to answer one of the messiest questions on the bank's agenda - what to do about replacing the Chernobyl nuclear power station in Ukraine, site of the worst disaster of the nuclear age.

There were four nuclear reactors at Chernobyl, one of them destroyed in 1986 and only one still in action. There is general agreement that the whole plant must close; Surrey was asked to advise on what should happen next. In the Soviet era, two new nuclear stations, Khmelnitsky 2 and Rovno 4 were planned - but years later, they are still incomplete. Should the European bank find the cash to complete K2/R4, as they are usually called? And where would the billion dollars needed to do so come from?

Surrey was initially happy with the project. De Larosi re's aim seemed to be research which would help avoid any irresponsible lending and give the bank ammunition against being bullied by the Group of Seven industrialised nations which are its biggest shareholders. From Surrey's point of view, there would be an international panel of experts which he would chair, and whose independence was guaranteed. Back-up could come from colleagues at his Sussex research unit, and there was a guarantee that the panel's report would be published. His colleagues included physicist Ferdinando Amman from Italy, an expert on energy economics and large particle physics machines; Peter Bradford, former chair of utilities regulatory agencies in New York and Maine; David Freeman, former head of the Tennessee Valley Authority, the biggest United States electricity utility; Lennart Hjalmarrson, professor of economics in Gothenburg, Sweden, and Aviel Verbruggen, a professor in Antwerp, Belgium.

Surrey also knew that there had been previous studies of Chernobyl replacement including one by Lahmeyer, a consulting engineering firm. He decided that visiting Ukraine was essential if his report was to go beyond earlier efforts - and was immediately swept into a world where few of the rules of the energy market meant much. For example, he found that the nuclear fuel for Ukraine's reactors comes from Russia, but is supplied by private entrepreneurs in return for canned beef. This sounds bad, but in fact the traffickers are licensed by the government. At the same time, the official output of the Ukrainian economy has collapsed, and western firms like Motorola and Tate and Lyle are complaining of meeting serious local corruption in carrying out their Ukraine operations.

Surrey and his colleagues met impressive local officials striving to keep things together in almost impossible conditions, plus environmentalists and businessmen. As they accumulated data, the case for completing K2/R4 looked worse and worse. For one thing, there is no shortage of modern power stations, running on fossil fuels such as coal, in Ukraine. Even in the depths of winter, there is no lack of capacity for generating power.

More significantly, there are plenty of alternative uses for the bank's money. For instance, there are frequent power shortages because of a lack of fuel and spare parts: putting up loans to increase working capital could ease both problems. Money could also be spent on improving the Ukrainian coal industry and shutting inefficient mines. The coal from many of them is so poor that it has to be mixed with imported Russian oil or gas before the power stations can get it to burn. And the 13 large nuclear reactors still in use in Ukraine could work better. They run about 60 per cent of the year but the figure could probably be got up to 75 per cent with some investment, saving vast sums of money. This improvement could be achieved as part of a programme that would also enhance safety by eliminating a fault whereby safety rods stick inside the reactors. Lastly, Ukrainian energy use is exceptionally inefficient, using at least four times more fuel for its output of electricity than is used in western economies.

In this context, putting $1 billion into a three-year project to complete two nuclear power stations rates poorly as a priority for the European bank's cash. The two stations are about three years off completion, or seem so to western eyes, but there is no guarantee that they could be completed on schedule in the chaotic conditions of present-day Ukraine. French experts set the costs of completion for the two stations at $940 million. But Surrey's group, after looking at the cost of enhanced safety measures, repairs necessary to undo damage incurred during the six years the sites have been idle, and other possible cost overruns, conclude that a best estimate for the cost of completion would be $1.2 billion and that it could go as high as $1.5 billion. Even after this outlay, the team found, it is possible that K2/R4 will mean more expensive electricity in Ukraine.

Surrey is certain that the panel's conclusion - that completing K2/R4 is a bad idea - is correct. "My (Sussex University) colleague Steve Thomas, who is an expert economic modeller, tested a wide range of assumptions and found that the result is unusually stable," he said. Only under the wildest of conditions does the project make sense. However, Surrey also found that the clarity of the panel's findings was not matched by the bank's enthusiasm on receiving his report.

Instead, he said, it became apparent that the report was only one piece in a board game whose objective is control of the European bank and whose participants are the bank's officials on one side, and representatives of the G7 on the other, with the US State Department to the fore. This struggle has been fought out via a battle of reports, with one by US consulting engineers Stone and Webster, carried out for the G7 nations, carrying considerable weight. It found that K2/R4 is economically viable. The trouble is that the estimate of how much electricity needs to be used by the Ukrainian people to make K2/R4 worthwhile is implausibly large, involving phenomenal growth in the Ukrainian economy. And billions of dollars worth of other projects including refurbishing coal-fired and nuclear power stations, are even more viable and have a better claim to be funded.

The struggle for control of the European bank - and for it to avoid irresponsible lending - surfaced publicly on April 16 at a press briefing, when a German radio journalist asked de Larosi re who would decide on K2/R4 completion, the bank or the G7. He answered that the bank would decide, and would do so on its own criteria.

For Surrey and his colleagues, matters came to a head somewhat earlier, at a January meeting in London, where representatives of both the US State Department and the European Commission were extremely hostile to his panel's findings. The EC representative made no bones about telling Surrey that his panel was threatening to undermine both European industry, by denying it lucrative contracts for completing K2/R4, and G7 policy in Ukraine. Surrey says: "We are only discussing two completions. But K2/R4 is a way into eastern and central Europe, where there are many projects in the offing to complete Soviet nuclear stations or carry out safety upgrades on them. We were left in no doubt that many US and European firms want to be involved in these contracts and want K2/R4 to be the way in." The interest of such firms has been enhanced by the news that the Russians are offering to pay for nuclear stations in Cuba, Bulgaria and elsewhere, begun in the Soviet era, to be completed. There is also the prospect of work enhancing safety at nuclear power stations such as Ignalina in Lithuania. British, French, Italian and Belgian firms are involved in K2/R4 on EBRD work and these firms and others are likely to be contenders for full-scale contracts if the project goes ahead.

This has meant some odd politics even by East European standards. At one point the adviser to the energy minister of another East European country rang to encourage Surrey to stick with his conclusions as a way of reducing Russian influence in the former Soviet empire. Although western cash would help European and US companies to gain from projects like K2/R4, renewing such projects would also boost the remains of the Soviet heavy engineering culture that gave the world Chernobyl in the first place.

As Surrey sees it, forecasts of immense growth in Ukrainian power demand which have been used to justify K2/R4 are implausible precisely because of the changing economy of the area. He says: "Within the planned Soviet economy, the role of Ukraine was as a centre for heavy industry, making steel, chemicals, tanks and rockets. If the Ukraine becomes successful, it will be on the basis of far less energy-intensive industries. The markets the old industries served have now gone."

He cites meeting the managers of a former missile plant who now want to make wind generators. "They are trying very hard to adapt to the new world in which they are operating," he says, "but their initial plan involved making 1,000 wind generators a year." This would mean a new entrant producing about as many machines as exist in the world today.

This week, the EBRD said that because of the uncertainty of assumptions about K2/R4, and the continued shrinking of the Ukrainian economy, it could not be certain that K2/R4 was indeed the least cost option for Ukrainian energy. Instead of sending a recommendation on the project to its operations committee for a decision on whether funding K2/R4 would be good banking, its usual procedure, the bank's officials are seeking views from the bank's board, which represent its shareholders.

But Surrey's panel may be able to influence the outcome via other channels. David Freeman, one of its members, has been in touch with US vice president Al Gore, who as well as being a Green enthusiast is in charge of US dealings with Eastern Europe. The last act of the K2/R4 drama has not been played out yet.

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