Pressure to find a nuclear solution to South Africa’s power problems continues unabated, despite persistent concerns over its affordability.
Experts point out that nuclear vendor financing may be the way to fund the country’s nuclear ambitions, but there are unresolved legal and financial implications.
There is speculation in the energy sector that political pressure cost former energy minister Ben Martins his job, because he failed to secure a nuclear deal with Russia’s Rosatom.
Martins was replaced by Tina Joemat-Pettersson in President Jacob Zuma’s recent Cabinet reshuffle and goes back to Parliament as chairperson of the portfolio committee on public works.
But Martins denied this and said no decision has been made about a preferred nuclear bidder, despite the hype that the Russians are the frontrunners.
He said the Cabinet’s multi-departmental national nuclear energy executive co-ordinating committee is responsible for making a decision and not the energy minister.
Zuma, in his State of the Nation address, said a Cabinet subcommittee on energy security will replace the nuclear energy committee. He said that the state will be adopting “innovative approaches to fast-track [energy] procurement” and the roles of state-owned enterprises (SOEs) such as Eskom, the South African Nuclear Energy Corporation and the Central Energy Fund will be “redefined”.
The presidency refused to comment on the speculation about Martins’s replacement but its spokesperson, Mac Maharaj, said the president will appoint the new subcommittee to deliberate on a new energy master plan.
The response to the establishment of the subcommittee and the redefinition of the SOEs’ roles has been cautious. One expert said that if it means greater support for the creation of an independent systems and market operator (ISMO) – a major step towards restructuring the energy sector – it could be good, as could be the elevation of energy planning and security supply to Cabinet level. But if they are being set up to circumvent procurement law, it could signal troubled times ahead.
The apparent urgency about nuclear procurement runs counter to key government policies, specifically the National Development Plan, which calls for an in-depth investigation of the financial viability of nuclear procurement, and the draft update of the integrated resource plan (IRP), published last year. The document, which is government’s electricity planning road map, suggested that a nuclear decision could be delayed given revised projections of electricity demand.
Nevertheless, a decision about ways to procure nuclear power could be expected within the next two months, the Mail & Guardian understands.
Elusive payment plan
The answer to how South Africa will pay for a planned 9 600 megawatts of nuclear capacity remains elusive. Eskom was named the owner and operator of new nuclear plants by the Cabinet, but it is in dire financial straits. It has declared a R225‑billion funding gap and has been placed on credit watch by ratings agency Standard & Poor’s.
This week’s ongoing interdepartmental discussions over recapitalising the utility were directed at ensuring that Eskom can complete the construction of its Medupi, Kusile and Ingula power stations, and that South Africa has security of supply, said Mayihlome Tshwete, spokesperson for the department of public enterprises.
According to the spokesperson for the treasury, Jabulani Sikhakhane, the “fiscal framework published in February sets out an expenditure, which implies that additional spending can only be achieved by cutting elsewhere”. Any new funding requests would also have to take into account the existing stock of government debt, debt still to be raised, or the government’s borrowing requirements and existing contingent liabilities, he said.
According to the Budget Review, the government’s contingent liabilities to support the parastatals amounts to more than R400-billion, its estimated net loan debt is almost R1.4-trillion and its borrowing requirement is slightly less than R139-billion.
The key issue is how to resolve the energy challenges in the quickest and most cost-effective way, he said.
The sequencing of energy projects according to the current IRP will depend on financial resources, the policy framework, commitment to clean energy and the discovery of vast reserves of shale gas, Sikhakhane said.
“Once the sequencing, size, design and the cost of the energy build programme has been determined, we will be in a better position to assess how much of it Eskom can carry on its balance sheet without compromising its credit ratings that are connected with the sovereign, given the R350-billion guarantee,” he said.
The cost of nuclear energy could reach R1-trillion and faces competing energy investment demands.
Nuclear vendor financing models have been touted as a way to get around this, which Martins confirmed is the preferred model. “It was never the intention that South Africa would fund the entire nuclear programme. The stakeholders that have an interest in it would substantially fund the nuclear programme,” he said.
Ross Harvey, a visiting research fellow at the South African Institute of International Affairs, said a likely arrangement is that a nuclear vendor would build, own and operate a plant and take full responsibility for the financing.
In turn, an electricity buy-back guarantee by the government is the most likely way for the vendor to recover costs.
But it is not clear what legislative and tender processes would need to be in place to manage procurement, he said, and much more work is needed to create “legislative coherence” to govern a nuclear bid.
And, although this model would eliminate initial capital constraints, the government would still have to make good on a buy-back guarantee, Harvey said. It is also not clear that, in the time taken to complete a nuclear build programme, there would be sufficient electricity demand, supported by heavy industrial activity, to support such a guarantee. In addition, other technologies could rapidly develop to provide cheaper base-load power.
Rosatom is constructing a similar “build, own and operate” project in Turkey.
Harvey estimated that, based on Rosatom’s investment there, a Rosatom plant would cost between $5-billion to $7-billion, which is a “massive investment to recoup”.