The issue of an additional construction cost of over 1 trillion won that arose during the construction of the Barakah Nuclear Power Plant in the United Arab Emirates (UAE) has led Korea Electric Power Corporation (KEPCO) and its subsidiary Korea Hydro & Nuclear Power (KHNP) to ultimately settle the dispute in international court.

On the 7th, KHNP filed an arbitration request with the London Court of International Arbitration (LCIA) against KEPCO, requesting the settlement of an additional construction fee of $1 billion (approximately 1.4 trillion won) that arose during the construction of the Barakah Nuclear Power Plant. KEPCO acknowledged the litigation in the afternoon of the same day.

Korea Electric Power Corporation and the UAE Nuclear Energy Corporation announce that Unit 3 of the Barakah Nuclear Power Plant began commercial operation on Oct. 24. The photo shows an overview of Unit 3 of the Barakah Nuclear Power Plant. /Courtesy of Korea Electric Power Corporation

The Barakah Nuclear Power Plant, which consists of a total of four units, was Korea's first overseas nuclear power plant project, awarded in 2009. The initial contract amount was approximately 20 trillion won. The project was completed last year with the commercial operation of the final unit. Final settlement work is currently being carried out among cooperating companies, including KEPCO, the primary contractor, and KHNP, which is responsible for operational support services (OSS).

The issue of additional settlement costs for the Barakah Nuclear Power Plant began in 2020. KHNP has requested the settlement of additional expenses amounting to $1 billion based on delays caused by the client, UAE, and the project executor, KEPCO, as well as rising labor costs.

KHNP, although a 100% owned subsidiary of KEPCO, asserts that since it has signed contracts as an independent corporation, KEPCO must settle for the services provided. On the other hand, KEPCO holds the position that it is a priority to recover the additional construction costs incurred from the UAE first, within the framework of 'Team Korea' that shares profits.

As the positions of both parties diverged, a grace period was set until the 6th of this month, and Kim Dong-cheol, president of KEPCO, and Hwang Joo-ho, president of KHNP, attempted to negotiate directly but were reportedly unable to narrow their differences. The OSS contract between KEPCO and KHNP includes a clause stating that any disputes will be resolved in the London Court of International Arbitration.

As unexpected large-scale additional construction costs have arisen since the contract was awarded, a lengthy legal dispute is likely to ensue regarding who will bear the 'bomb.' Both KEPCO and KHNP have already appointed law firms in preparation for the international dispute.

KHNP would have to bear a loss of 1.4 trillion won if it cannot settle the additional expenses with KEPCO. KHNP is concerned that if it does not receive settlement for costs from its parent company, KEPCO, issues of legal breach of fiduciary duty may arise in the future.

If KEPCO, the parent company, completely fails to receive additional costs settlement from the client, UAE, it will have to reflect an additional loss of over 1.4 trillion won in its financial statements. In this case, the cumulative return on investment for the Barakah Nuclear Power Plant managed by KEPCO, the project executor, would turn negative.

The cumulative return on the 'UAE nuclear power project, etc.' item on KEPCO's financial statements fell from 1.97% at the end of 2023 to 0.32% at the end of last year. Cumulative profit and loss plunged from 435 billion won at the end of 2023 to 72.2 billion won at the end of last year. If the additional expense of over 1 trillion won requested by KHNP is reflected, it would ultimately mean that a loss-making project has been undertaken.