State powered up over nuclear, but not everyone buys it

Rosatom nuclear power plants. (AFP)

Rosatom nuclear power plants. (AFP)

Energy Minister Tina Joemat-Pettersson signed the latest intergovernmental framework agreement on nuclear co-operation on November 7, this time with China. It reinforced the government’s commitment to nuclear expansion, despite public opposition.

Nuclear energy safety issues remain hotly debated but, experts argue, the biggest obstacle to South Africa’s nuclear ambitions are the costs. Even with innovative vendor-financing models – whereby vendor countries help finance the upfront capital costs of nuclear power – the final price tag could potentially ruin South Africa’s power utility Eskom and erode the country’s already precarious balance of payments.

The department of energy, under former minister Ben Martins, previously backed the vendor-financing model – as it is seen as one way the country could afford the estimated R400-billion to R1-trillion the programme could potentially cost.

The Chinese agreement comes after similar agreements were signed with France, South Korea and Russia.
The latter announcement created much confusion in the market after Russian state nuclear vendor, Rosatum, and the South African energy department released very similar statements implying that the firm was the preferred choice for South Africa’s 9 600 megawatt nuclear procurement programme.

All the agreements have been treated with the same cloak of secrecy. Minister in the presidency, Jeff Radebe, reportedly revealed last week that the Cabinet has yet to see the agreements.

Nuclear power costs
In a presentation given recently at a debate on nuclear power hosted by EE Publishers, Dirk de Vos, a corporate finance expert, illustrated the various pitfalls nuclear procurement presents. Nuclear power cannot be financed by third parties, such as commercial banks, because of expense and the risks involved.

But the vendor-financed build, own and operate model, which has been touted as a method to finance the nuclear build still requires guarantee from the government, De Vos told the Mail & Guardian in a later interview.

“It’s not the same as financing it directly but it is providing a guarantee,” said De Vos. “That [guarantee] becomes a contingent liability on the books of the South African government.”

Measured on a levelised cost of energy (LCOE) basis 75% of nuclear energy’s cost come in the form of capital costs, essentially those incurred during investment and construction. Much like renewables, its fuel and operations and maintenance costs are far less than that of other technologies such as coal.

The LCOE is a calculation of the cost of generating electricity at the point of connection and incorporates among others, investment costs, operations and maintenance, performance and fuel costs. It allows for the comparison of the cost of electricity from alternative sources, such as coal or renewable energy.

But nuclear capital costs are among the most expensive in the world, De Vos showed in his presentation.

Data from the International Energy Agency and Organisation for Economic Co-operation and Development placed the world median price of nuclear construction at $4 100 a kilowatt (kW) in 2010. In 2008 Eskom’s estimates placed the capital costs of nuclear at an even higher $6 131/kW.

Cheapest rate through state
More recently, the government’s own estimates, in the draft update of its electricity policy road map, the integrated resource plan of 2013, priced nuclear capital costs in at $6 500/kW.

According to De Vos’s presentation, existing nuclear construction costs, such as Hinkley Point C nuclear power station in the United Kingdom, being built by French firm EDF, come in at about $7 900/kW while Rosatum’s Paks plant in Hungary is about $7 031/kW.

This makes nuclear energy extremely sensitive to the cost of financing – essentially the interest rates at which you can secure funding for projects such as these.

The cheapest rate of financing would be through the government and not a third party, such as a nuclear vendor, which would be “necessarily more expensive”, argued De Vos.

These issues are aggravated by the risk of delays and cost overruns on such mega projects. In 2013, of the 59 units under construction globally, 18 were experiencing multiyear delays while the remaining 41 had not yet reached projected start-up dates or had only been recently started, according to De Vos

While the government would succeed in avoiding paying out the upfront capital, a power purchase agreement guaranteeing the purchase of nuclear power would be required for it to be viable.

It gave nuclear power a “privileged status”, De Vos argued, as every kilowatt hour produced by a new nuclear energy plant would need to be purchased, Eskom would be able to sell its own cheaper coal-fired electricity. This raised the spectre of mothballing its existing power stations, potentially “wrecking Eskom”.

In addition, vendor funding still translated as an outflow of funds from the country, which would further hurt South Africa’s balance of payments, said De Vos.

EDF had been guaranteed a price at Hinkley Point C of $15 540/ megawatt hour, or about R1.66/ kilowatt hour, according to De Vos.

This is compared to previous estimates by the National Energy Regulator of the cost of electricity from the Medupi power plant, under construction in Limpopo, coming in at 98c/kWh. Eskom meanwhile, in its latest financial results, puts the average cost of buying power from all independent power producers, including municipal base load suppliers and renewables firms at 88c/kWh.

Hidden costs
De Vos stressed that the country’s grid is not optimised for nuclear power. Most of the power stations are built near the rich coal fields of Mpumalanga. Electricity is supplied south towards Gauteng and to the rest of the country.

New nuclear power stations would have to be built on the coastline, necessitating that power be transported in the opposite direction, which would come at an additional cost.

There were other “unexpressed costs”, De Vos added.

Due to the technical nature of nuclear power and questions of safety a separate and specialised regulatory regime is required. In South Africa this architecture does exist, but not at the scale needed to oversee the government’s planned six nuclear power stations. The individuals with the necessary skills to meet this need were well into their 60s, De Vos said.

Effect of price increases
Finally, too little is understood about the effect that a price increase would have on demand.

Until recently South Africa had some of the cheapest electricity in the world, making the economy one of the most energy intensive in the world. As power prices increase, particularly if it is at levels seen for nuclear power in other countries, South Africa’s demand for electricity could plummet as businesses and domestic customers scrambled to use less power and improve efficiency.

Grové Steyn, a partner at Meridian Economics, raised similar concerns in his presentation.

The construction and operational risk could not be entirely shifted on to nuclear vendors, he pointed out, and would “remain with the state and the economy”.

“Given its size, the nuclear route will introduce major systemic risk to the economy,” Steyn said.

He added that in contrast with other power options, South Africa does not have the institutional and skills capacity for a nuclear industry.

But proponents of nuclear power still believe it is the right option for South Africa.

Des Muller, managing director of Group Five’s nuclear construction services division, argued that nuclear provided a clean base load power alternative that would reduce the carbon dioxide emissions. South Africa had substantial uranium reserves, ensuring adequate fuel security.

Counter to De Vos, Muller said the country’s grid was able to accommodate nuclear power stations and “benefit from economies of scale”.

The country already had an established nuclear industry and world-class educational institutions for further training, argued Muller. The long-term job creation could be a “game changer”, he believed, potentially creating more than 260 000 jobs in engineering, construction and associated support industries.

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