Will Putin pay for SA’s $100bn nuclear plan?

Russia is seen as the frontrunner to win the right to build South African nuclear power plants that may be worth as much as $100-billion. With a six-month deadline to award contracts, who’s going to pay for the country’s biggest project yet remains a mystery.

Price-tag estimates for as many as eight reactors generating 9 600 megawatts, which the government wants to begin operating from 2023 and complete by 2029, range from $37-billion to $100-billion. Bids are due to start this quarter, with Russia’s Rosatom seen as a leader. Areva, EDF, Toshiba’s Westinghouse Electric, China Guangdong Nuclear Power Holding and Korea Electric Power have also shown interest.

The planned investment comes as the government battles to fend off a junk-grade credit rating and the Treasury seeks to rein in the budget deficit. Proceeding with the nuclear plants could result in a large increase in public debt, the International Monetary Fund warned in a report on June 24.

“There appears to be a simple-minded assumption that countries like China or Russia will provide cheap plants and offer finance,” Steve Thomas, professor of energy policy at the University of Greenwich in the UK, who has monitored South Africa’s nuclear plans since 1997, said in a phone interview on June 24. “That’s an illusion.”

Head start
Rosatom may have a head-start in the bidding because of the close historical ties between the ANC and Russia, according to analysts including IHS Country Risk’s Robert Besseling and Teneo Intelligence’s Anne Fruhauf. President Jacob Zuma has met his Russian counterpart Vladimir Putin several times over the past year and the two nations have signed a nuclear cooperation accord.

The agreement provides a “proper and solid platform for future extensive collaboration”, South African Energy Minister Tina Joemat-Pettersson said in a statement in September.

South Africa has concluded similar pacts with China, France, the US, Japan and South Korea.

Rosatom has agreed to fund construction of plants elsewhere. In 2013, Hungarian President Viktor Orban agreed a €12-billion ($13.3-billion) expansion to a nuclear power plant with Rosatom, funded with a €10-billion loan from Russia, payable over 30 years at below-market rates. Hungary’s Parliament classified the deal for three decades.

“We can’t comment on financial terms of our possible bid until South Africa starts the tender and clarifies the tender conditions,” Rosatom spokesperson Sergey Novikov said by phone from Moscow on July 3.

Eskom operates South Africa’s sole nuclear plant, the 1 800-megawatt Koeberg facility near Cape Town, which has been in operation since 1984. Five years ago, the government shelved plans to additional conventional atomic stations because they were too expensive and difficult to finance.

The government has revived its nuclear expansion plans as it seeks to address energy shortages that are already causing blackouts and to reduce its reliance on coal, which Eskom uses to generate about 80% of the nation’s electricity. While South Africa has had 80 days of load shedding this year, including 20 in June, there are none so far in July.

Costs
The new reactors could cost as much as $100-billion over 15 years, according to Des Muller, head of Johannesburg-based building company Group Five’s nuclear construction division. That’s more than five times what Eskom is spending on two coal-fired plants that will generate a similar amount of power.

A study published in 2013 by the University of Cape Town’s Energy Research Centre found nuclear plants weren’t needed and would not be cost-effective for 15 to 25 years, based on a projected cost of $7 000 per kilowatt installed.

The Department of Energy’s 2013 master-plan – which the government rejected – suggested deferring a decision on whether to build atomic power facilities until at least 2025, and scrapping the option if the cost exceeded $6 500 per kilowatt of capacity. Thomas estimates current costs at about $8 000 per kilowatt installed.

The nuclear programme will benefit the country for the next 80 years and promote industrialisation, said Zizamele Mbambo, a deputy director-general at the department of energy.

Investment return
“The return on investment will far exceed the investment,” he told reporters in Cape Town on June 2.

While the new plants will go ahead, the cost and funding arrangements still have to be worked out, according to the energy minister.

“The true test of affordability for nuclear power will be in the price and financial offering provided by technology suppliers,” she said in a written reply to a parliamentary question on June 11. “It is crucial to start the actual nuclear procurement as soon as possible. The expected cost of the project will be announced once the procurement process has been finalised.”

While Zuma and his deputy Cyril Ramaphosa back the nuclear programme, the Treasury is more circumspect.

“Nuclear would be a substantial financial commitment and government can only make the final commitment after careful and thorough modelling and an affordability assessment,” it said in an e-mailed response to questions on June 29.

The Treasury’s three-year budget released on February 25 provides for the budget deficit to be cut to 2.5% of gross domestic product by the year until March 2018, from 3.9% this financial year, and doesn’t allocate any money for new nuclear plants. Moody’s Investors Service rates South African debt at Baa2, the second-lowest investment grade, while Standard & Poor’s has an assessment one level above junk.

“I’ve always been skeptical of such an ambitious programme for a country like South Africa,” Chris Gadomski, a nuclear- power analyst at Bloomberg New Energy Finance, said by phone from San Francisco on June 29. “You have gone through this exercise in 2007 to 2008. What stopped it was the lack of finance. My thinking is that very little has changed in the country as far as the capacity to finance something like this.”

While the government may consider requesting companies to build, own and operate the nuclear plants subject to power- purchase agreements, developers do not favour such deals because the projects are so capital-intensive, said Elchin Mammadov, a utilities analyst for Bloomberg Intelligence.

Country finance
Most reactors in developing countries other than China and India are likely to be financed with 15- to 20-year subsidised loans provided by the suppliers’ host nations, he said by phone from London on June 29.

The government will battle to finance the plants even if it gets cheap loans, and off-take agreements are the only viable nuclear option if power-tariff increases can be contained, said Nazmeera Moola, an economist at Investec Asset Management.

“If the build costs a reasonable amount of money and it ends up being that the tariff required to fund it is viable, great,” she said by phone from Cape Town. “It all depends on how much it costs.”

Electricity prices in South Africa have almost quadrupled since 2007.

Detailed financial analysis should precede any decision to invest in additional nuclear capacity, said Harald Winkler, the Energy Research Centre’s director.

“There are serious questions that need to be answered as to whether South Africa is able to finance this programme and how any investment would have to be repaid,” he said by phone on June 26. “It’s very unclear.” – Bloomberg

  • With assistance from Paul Vecchiatto in Cape Town and Andrey Lemeshko in Moscow.

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