The South African Government’s policy on nuclear power I – Current status

Introduction

Are you confused by all the noise surrounding Government’s plans for the building of new nuclear power stations? 

These briefs below set out the energy policy framework, the status of the new nuclear power project, responsibilities, what to expect over the coming months and what to look for in further developments. Some aspects are dealt with in detail, but that is needed to make sense of what has become quite a convoluted topic. 

We have intentionally avoided a discussion on nuclear energy in principle. Instead, we focus on the most immediate practical issues which confront South Africa in this field.

A note on measuring energy

Electrical energy is measured in terms of watts. An incandescent light bulb may be rated at 100 watts (100 W). That refers to its capacity to use energy. The quantity of energy consumed is measured in watt hours (Wh). Thus if a 100 watt bulb burns for an hour, it uses 100 Wh. If it burns for ten hours, it uses 1 000 Wh. 

The prefix kilo – applied to watts or watt hours means 1 000 units. So the light bulb burning for ten hours consumes 1 kilowatt hour (1 KWh).

The prefix mega- means a million units (MW or MWh), the prefix giga- means a billion units (GW and GWh) and the prefix tera- means a thousand billion units (thus TW or TWh).

Current status of new nuclear projects

The Department of Energy’s “Nuclear Energy Policy” document of June 2008, provides the basic framework for South Africa’s policy. Nuclear energy is one of the policy options for electricity generation and the policy document encourages a diversity of both supply sources and primary energy carriers.

The most recent detailed presentation by Government on the status of new nuclear power projects within this policy framework, was made to Parliament’s Portfolio Committee on Energy on 11 October 2016 by the Minister of Energy. During her address to the committee, the Minister stated that the next phase in the process is to establish key national positions and strategies and that she would “ensure that the process is above board, that the pace, scale and price of the programme is within the accessible range of our country. We will ensure that the process is not only transparent and above board but free of corruption”. 

She further stated that the missing link in the programme so far has been communication and the participation of communities. This was the reason for the decision not to publish a Request for Proposal (RFP), which had been expected by October 2016. She stated that the updated Integrated Resource Plan (IRP) and Integrated Energy Plan (IEP) were supposed to be presented to the Cabinet committee on 12 October 2016, but that committee had requested a postponement. Once these documents have been approved by Cabinet, they would be provided to the public for consultation. In his Medium Term Budget Policy Statement to Parliament on 26 October 2016, the Minister of Finance confirmed that the Treasury will work with the Department of Public Enterprises and Eskom to ensure that the scale and phasing of the programme are in South Africa’s best interests and that the procurement arrangements are transparent and compliant with the law. 

Procurement

The recent comments by the Minister of Energy regarding the need for public consultation and the fact that the whole process has been delayed to permit the finalisation of the IRP and to allow for consultation, stand in stark contrast to the actions of Government over the past few years. The latest stance by the Minister is also in complete conflict with the statement issued by the Department of Energy on 22 September 2014 that the Russian Federation and South Africa had signed an Intergovernmental Agreement on Strategic Partnership and Cooperation in Nuclear Energy and Industry. This agreement was signed by the Minister herself (Ms Tina Joemat-Pettersson) on behalf of the South African Government. 

According to the press statement,

The Agreement lays the foundation for the large-scale nuclear power plants (NPP) procurement and development programme of South Africa based on the construction in South Africa of new nuclear power plants with Russian VVER reactors with total installed capacity of up to 9.6 GW (up to 8 NPP units). These will be the first NPPs based on the Russian technology to be built on the African continent. The signed Agreement, besides the actual joint construction of NPPs, provides for comprehensive collaboration in other areas of the nuclear power industry, including construction of a Russian-technology based multipurpose research reactor, assistance in the development of South-African nuclear infrastructure, education of South African nuclear specialists in Russian universities and other areas… 

South Africa today, as never before, is interested in the massive development of nuclear power, which is an important driver for the national economy growth. I am sure that cooperation with Russia will allow us to implement our ambitious plans for the creation by 2030 of 9.6 GW of new nuclear capacities based on modern and safe technologies. This agreement opens up the door for South Africa to access Russian technologies, funding, infrastructure, and provides a proper and solid platform for future extensive collaboration.

The agreement with Russia was signed on 21 September 2014 but was only tabled in Parliament by the Minister on 10 June 2015. The comment may be added that whilst this agreement is brief, it is nevertheless clearly more detailed on specific projects (even detailing certain priority projects) than the agreements signed with other countries, which are typical framework agreements, without any specific project details. The text of the press statement quoted above also creates the impression of a done deal - subsequently denied by the Minister. If this is correct, an unanswered question remains: how can the agreement with Russia and the press statement be explained and why was such priority treatment apparently accorded to the Russians?

Subsequent to the signing of the agreement with Russia and as recently as 26 December 2015 the Department of Energy stated that Cabinet had on 9 December 2015 approved that the RFP for the Nuclear New Build Programme of 9.6 GW should be issued and that the process is to be guided by the 2010 – 2030 IRP, as published in 2011. 

This background makes it quite clear that a lot of back-tracking has been done by the South African Government on this issue. There may be several reasons for this effective about-face. These would include the fact that the legal, technical and financial complexity of the whole project was underestimated, coupled with a belated realisation that fast-tracking the project runs the risk of falling foul of legislative and regulatory requirements, which could lead to a wave of negative publicity and an increasing danger of public interest litigation. 

Litigation has already started in this sphere, in the case brought against the Minister of Energy by Earthlife Africa and the Southern African Faith Communities’ Environment Institute, in which the High Court has been approached to declare not only the agreement with Russia as being unlawful and unconstitutional, but also any action to procure a new nuclear capacity, as a result of a failure to exercise certain prescribed powers under the Electricity Regulation Act and the absence of a fair public participation process. This case is set down for hearing in the High Court on 13 and 14 December 2016. 

A further reason for the more careful approach taken by the Minister is certainly the stance of the Treasury, which has consistently defended the view that the cost should be affordable for the Government’s finances. The fact that Eskom is now to procure and finance the new nuclear power plants does not necessarily put this outside of the Treasury’s reach - since Eskom is a state-owned enterprise and is therefore subject to the Public Finance Management Act. 

The South African Government’s policy on nuclear power II – Policy

The Integrated Resource Plan (IRP)

The IRP for 2010 – 2030 was published in March 2011. It contains an overall assessment of all aspects which are relevant for determining future electricity requirements and how future electricity demand should be addressed. The 2011 IRP provided for, in addition to all existing and committed power plants (including 10 000MW committed coal), 9 600MW nuclear, 6 300MW coal, 17 800MW renewables and 8 900MW other generation sources. An update to this IRP was completed in November 2013 (even if apparently never approved by Cabinet), which referred to the fact that the electricity demand outlook had changed dramatically from that expected in 2010. 

The 2013 updated IRP also stated, inter alia:

- The nuclear decision can possibly be delayed. The revised demand projections suggest that no new nuclear base-load capacity is required until after 2025 (and for lower demand not until at earliest 2035) and that there are alternative options, such as regional hydro, that can fulfil the requirement and allow further exploration of the shale gas potential before prematurely committing to a technology that may be redundant if the electricity demand expectations do not materialise.

- Considering the changes in consumption patterns and technology costs over the past three years it is imperative that the IRP should be updated on a regular basis (possibly even annually), while flexibility in decisions should be the priority to favour decisions of least regret. This would suggest that commitments to long range large-scale investment decisions should be avoided.

- If, and only if, electricity net-send out is greater than 265 TWh in 2014 (or 270 TWh in 2015) AND there is no expectation of large-scale gas development, then the nuclear procurement should proceed. However, if it is clear that there is no commitment to a nuclear capital cost below $6500/kW then the procurement should be abandoned as the additional cost would suggest an alternative technology instead.

Eskom’s 2015/2016 annual report states that its energy output in the financial year 2015/2016 amounted to 219 979GWh of electricity - i.e. 219.97TWh and that this equates to approximately 90% of the electricity used in South Africa. It is therefore clear that the threshold levels set by the IRP have not been exceeded and Eskom’s own statistics further show that its total electricity sales have decreased by 4.5% over the period 2011/2012 to 2015/2016. Regarding the capital cost level of USD6500/kW mentioned, clarity will only be obtained once responses have been received to the RFP. The second brief deals with capital cost issues in more detail.

The question therefore arises as to why no updated IRP has been completed since the last update in 2013 and why the absence of an updated IRP during this period has only now led to a delay in the issuing of a Request for Proposal (RFP). This is especially so since out-dated IRPs may have limited relevance in the light of changes in electricity consumption, new alternative technologies and changing forecasts regarding economic growth and electricity demand - hence the statement in the 2013 updated IRP above that the IRP should be updated regularly.

In addition, the Minister of Energy is required by section 3 of the National Energy Act, No. 34 of 2008, to publish an analysis on an annual basis, forecasting energy supply and demand for no less than 20 years, together with different scenarios and must also publish all assumptions used in the regard. This legislative requirement has not been complied with. It is also interesting to note that Section 6 of the same Act requires the Minister to publish an Integrated Energy Plan on an annual basis, based on the analysis envisaged in Section 3 of the Act (referred to above) - but for some reason, Section 6 remains the only section in that Act that has not come into force.

The answer to this question as to the absence of recent updates to the IRP is to be found in Government’s overly hasty approach to a subject that requires careful consideration, planning and meticulous compliance with legal requirements. 

It is also surprising that the Department of Energy nevertheless continues to proceed with presentations, as the one to Parliament’s Portfolio Committee on 11 October 2016, which show an “Execution Plan” with a first new nuclear unit to be commissioned in 2023. This presentation was made directly after the Minister of Energy’s more careful and nuanced approach was conveyed to the Parliament’s Portfolio Committee on Energy. For some reason, the cart therefore continues to be placed before the horse.

Against this background, the following is taken from an article in Business Day of 25 October 2016 by Professor Anton Eberhard of the University of Cape Town’s Graduate School of Business:

It is crystal-clear: a least-cost electricity plan for SA does not include nuclear energy, even if a carbon emissions cap is imposed that would enable us to meet our climate change mitigation obligations. Thus if Eskom proceeds with the procurement of nuclear power stations, it will not be a rational decision and almost certainly will be subject to legal challenge. The original decision by the Cabinet to opt for nuclear energy is already in the courts.

Eskom executives have launched a concerted public relations campaign in recent months, arguing that renewable energy is too expensive. They are correct that the first generation of IPPs in SA were costly, but they omit the inconvenient fact that prices for solar and wind in the latest IPP bid rounds have dropped dramatically and are now down to 62c/kWh, cheaper than Eskom’s average cost of supply at 84c/kWh and far cheaper than Medupi or Kusile or new nuclear power.

The recent coal IPPs, announced by the department, are also cheaper than Eskom’s new build. Of course, we should not consider only the costs of individual supply technologies, but also the system costs to ensure reliable supply. Solar and wind resources are variable and need to be complemented with flexible power sources such as gas, hydroelectricity, storage or demand-side management. The blended cost of solar plus wind plus flexible system resources is cheaper than Eskom coal or nuclear.

In summary, in analysing the conclusions of an updated IRP, these are some of the questions which need to be answered:

- Are the estimates of economic growth and future electricity demand based on reasonable assumptions?

- How are forecast construction cost comparisons arrived at? (See also the discussion in the next and final brief on the topic of construction costs.)

- Have cost comparisons between various technologies been dealt with in a satisfactory manner (and this relates to both all-in construction cost and operating cost)?

- Is an increase in nuclear power capacity necessary? If so, what is this based on?

Who is responsible for policy?

This question arises from comments made by former Eskom CEO Brian Molefe, who is quoted in the Sunday Times of 24 July 2016 as follows:

It [the IRP] was supposed to be revised every two years, but it hasn't been. The fact is, the current IRP on which the renewables programme is based is outdated and I don't think renewables are contributing as much as people say they are. I don't buy the argument that they have contributed to a reduction of load shedding.

If anything, they've increased the burden. We have to buy solar and wind even when the wind generates at 2am. There's nothing we can do with it at that time. And of the installed capacity of wind and solar energy, availability is only 30%. If you have 2000MW installed, there is only 600MW available at any one time, yet we pay for 2000MW.

The Minister of Energy stated in a press statement on 17 August 2016 that she:

wishes to reiterate that South Africa is pursuing a diversified energy mix which includes Independent Power Producers and the Nuclear New Build Programme in support of the Government's programme of economic growth and development. Again we must emphasise that there is no "nuclear deal". 

More recently, in her address to Parliament’s Portfolio Committee on Energy on 11 October 2016, the Minister of Energy said that her Department is committed to renewable energy and will bring the project to full closure and that:

the CEO of Eskom is not making policy decisions but business decisions that need to ensure the country has sustainable and cost-related tariffs.

Eskom has now formally been designated by Government as the procurer for the new nuclear build programme, which would seem to be reasonable on the assumption that Eskom has greater internal resources and experience to draw on in this area than the Department of Energy. However, there is a very real potential for a conflict of interest when a monopolistic public utility which provides an essential service (such as Eskom), gets involved in laying down government policy in its own field of activity. 

The South African Government’s policy on nuclear power III – Cost and financing issues

Construction cost

In analysing construction cost estimates for new nuclear power plants, there are a number of aspects which need to be kept in mind and which may not be immediately evident from presentations by players in the industry:

In any comparative cost analysis of world-wide nuclear power plant construction, there are big disparities and it is difficult to arrive at a meaningful forecast on this basis. There are large variations in the construction cost in different countries and in addition, serious delays in some of these projects have led to cost overruns to such a degree that the final cost even ends up as a multiple of the originally envisaged cost. Massive cost overruns are not restricted to the construction of nuclear power plants, but they also occur in conventional power station construction, as is evidenced by Eskom’s own experience with Medupi.

Eskom’s 2015/2016 annual report states that the Board had approved a revised amount of R145 billion for Medupi . his compares with the amount of R80 billion initially estimated for construction costs in terms of an Eskom media statement issued on the day of the sod-turning ceremony at Medupi on 14 August 2007. This represents an 81% cost escalation. As far as the construction delays at Medupi are concerned, Eskom’s 2006/2007 annual report envisaged the first unit at Medupi to come into service in 2011, but this only happened in 2015.

Given the international and South African experience with delays and large cost overruns, will the preferred bidders in terms of the RFP be prepared to take any financial responsibility in this regard - or are cost overruns to be carried by Eskom (and by extension, the South African consumer) ? It may even be preferable for Eskom to pay a premium for a fixed price contract, which would normally be more expensive since the contractor effectively underwrites the fact that the contractual amount will not increase. Such a fixed price contract would at least mitigate the financial risk.

Is the cost of financing included or excluded in any construction cost estimate? In this context, the term “overnight capital cost” is often used, which excludes the cost of financing. When including interest during construction (and especially if delays are experienced), the all-in cost would exceed the overnight cost by very substantial amounts.

How are decommissioning costs dealt with in any proposal ? They are often included in the operating costs, where they would appear to be relatively modest numbers if expressed on short-term ongoing basis. However, the aggregate decommissioning costs for a nuclear power station represent very substantial absolute amounts.

If it is not mentioned upfront, it is therefore important to obtain confirmation as to where these costs are housed, to be able to make meaningful comparisons with renewable energy, where decommissioning costs are of a nominal nature. For a very recent example of the magnitude of the decommissioning cost of nuclear plants, one can look at the German experience, following the declared government policy of abandoning nuclear power.

According to a report in the Frankfurter Allgemeine Zeitung of 10 October 2016, it has now been agreed that the nuclear power companies will be responsible for the dismantling of the power stations and the German Government will look after the waste storage. In terms of this agreement, the German companies are to transfer a cash amount of 23.3 billion Euros (equivalent of R350 billion). The estimated additional cost for the companies to dismantle the power stations is 20 billion Euros (equivalent of R300 billion).

The total envisaged cost is therefore R650 billion. There are 8 nuclear plants are still in operation in Germany with a total capacity of 11 357MW and 27 decommissioned plants with an aggregate capacity of approx. 16 509MW (see here). To place this in some perspective: purely from a rough order of magnitude comparison of the respective aggregate capacities, these plants equal three times the South African target of 9 600MW new nuclear plants.

In summary, any analysis of construction cost estimates needs to answer the following questions:

 Who takes the risk of delays and ensuing cost overruns? If it is to be Eskom, Eskom’s consumers will be at risk, since additional costs will be recovered from them through Eskom’s tariffs. Are consumers happy to take this risk, given the global experience with nuclear power delays and cost overruns, as well as Eskom’s own experience with Medupi?

Is financing cost included or not? If not, what is the financing cost?

What are the decommissioning costs and how do they fit into the aggregate cost estimate?

Storage of high-level nuclear waste

A permanent solution to dealing with high-level nuclear waste (i.e. spent nuclear fuel) has not yet been found and implemented. Owners of nuclear power plants therefore have to be prepared and able to manage whatever high-level waste they produce for an indefinite period, on the assumption that any long-term offsite storage solution is not going to be found any time soon. Mention is often made in literature produced by the nuclear industry that countries are in the process of designing and constructing deep underground engineered facilities for the long-term storage of such waste, but no such facilities are operational yet, 60 years after the construction of the world’s first commercial nuclear power stations. 

Eskom’s website puts it as follows:

So governments have no need to rush their decision about what they will do with HLW (ie. high-level waste) in the long term. They are in a position to weigh all the options on behalf of their citizens. As a result, very few governments in the world have committed themselves to a final disposal strategy.

Eskom’s website also provides the following on Koeberg’s high-level waste: when removed from the reactor vessel it is stored in special "fuel pools". After ten years in a fuel pool it is "cool" enough to be moved into thick-walled casks which can be stored above ground for up to 40 years. A two-reactor pressure water reactor power station like Koeberg (capacity of 1 860MW) generates approximately 32 tons of spent fuel each year. Over a 40-year lifetime that would add up to 1 280 tons. 

If additional nuclear power stations are to be considered, the risks involved in the storage of high-level waste have to be understood and accepted.

Eskom is to finance the construction costs

The Minister of Energy has now confirmed that the nuclear power project is to be funded by Eskom off its own balance sheet (therefore distinct from Government). In analysing this new approach, we can take a look at Eskom’s 2015/2016 financial statements: Eskom has non-current debt of R307 billion and an operating cash flow (EBITDA) of R32 billion. It is obvious from these numbers that Eskom cannot “leverage” its balance sheet any further for debt in a conventional sense and presenting the debt subject in this way is not accurate. 

However, Eskom may still be able to finance the project, but that would be on the basis of the lender taking a view on Eskom’s future cash flows (and not its current balance sheet), in a manner commonly referred to as “project financing”. In this manner, Eskom’s debt service would be funded by its future tariff revenue (ie. by consumers) and lenders would count on Eskom’s effective monopoly remaining in place for many years to come, in order to ensure continuing cash flow which would fund the debt service obligations. It would therefore be more accurate to say that Eskom will seek to fund its debt obligations through its future cash flows, as funded by consumers, instead of Eskom “leveraging” its balance sheet. 

In addition, even if no out-and-out guarantee is provided by Government in this regard, reliance would be placed by lenders on what is seen as an implicit Government guarantee, as it is assumed that Government will not permit Eskom to default on its financial obligations. 

General conclusions

The next step is to await publication of the Integrated Resource Plan (IRP) by Government - the IRP is to provide an overall assessment of future electricity demand and how that demand is to be met. In order to ensure a meaningful measure of public participation on an issue of great importance to the South African economy, it will be important for South Africans to participate in the evaluation of the IRP, specifically as to the reliability and credibility of its assumptions and conclusions.

Even if Government has recently taken a more measured approach by delaying the issuing of a Request for Proposal (RFP) for new nuclear power stations until the IRP’s publication, a proper analysis will have to be made on the IRP’s conclusions and more specifically, on the need for more nuclear power and its affordability, when compared to the alternatives. This is necessary to avoid Government pursuing an option which may not be in the financial and broader economic interests of the country.

Anton van Dalsen is Legal Counsellor, Helen Suzman Foundation.

This articles first appeared as HSF Briefs.