Eskom nukes the build numbers

Utility’s nuclear build cost and running projections are overheated, say experts

THE price at which Eskom is projecting it will deliver nuclear energy as part of the proposed nuclear build has been rubbished by energy analysts who say South Africa could end up paying much more.

The power utility is targeting R1 per kilowatt-hour for nuclear energy — and this week Eskom’s head of generation, Matshela Koko, said the state-owned company expected to be able to fund the nuclear build programme from its own cash resources.

But energy analysts have scoffed at this, saying cost studies and examples from other projects show the bill to be massive. At the rate proposed, the project would not be viable.

Frank Spencer, an independent analyst, said: “If it comes in at R2/kWh or even R1.50/kWh, it would make absolutely no sense to pursue from a commercial perspective.”

The government and private sector’s expectations of the costs are miles apart.

Eskom spokesman Khulu Phasiwe said projections that the power utility had done put the cost of additional nuclear power at R500-billion. But Spencer estimated the cost would be about R1-trillion.

Spencer said: “If the project can be built on time and financed and decommissioned, and all of those costs go into the financial model and it’s done properly and the cost of energy is R1/kWh, there might be a case for it.”

He said decommissioning costs associated with dismantling nuclear power stations in future were often omitted from modelling, which eventually inflated the cost of the project.

“I think the expectations are based on what we’re seeing in the UK — [but] the cost of energy let alone the cost of the build programme, and finally what the levellised cost of energy works out to once all of those costs are taken into account, will be significantly higher than that.”

The UK government is building the Hinkley Point C nuclear power plant in Somerset.

Professor Anton Eberhard of the University of Cape Town Graduate School of Business said: “If Eskom were able to contract nuclear power for a fixed price of less than R1/kWh, it would be quite interesting.” Wind energy costs 69c/kWh and solar photovoltaic is 87c/kWh.

Koko said in a column published in Business Day on Friday that the targeted levellised cost would be under R1/kWh and attained on the latest analysis of the cost of building nuclear power plants.

For the design at this cost to be successful, “Eskom will need to be able to identify potential factors that could reduce costs and lead times. One needs to identify a vendor with an active nuclear programme . . . a standard-reference plant design, and a successful track record of exporting nuclear reactors”, he said.

Eberhard said: “Nuclear vendors promise low prices but inevitably there are significant cost and time overruns. If these prices are not fixed in a contract then consumers end up with very expensive electricity.”

He cited the Hinkley C facility, where a 35-year contract for the equivalent of R1.65/kWh has been signed, as an example of a contract secured at a low rate.

Wariness about the cost of Eskom projects is not eased by the overruns incurred by the new coal power stations Medupi and Kusile in recent years.

Eberhard said Eskom’s balance sheet was currently too weak to raise additional debt to finance nuclear projects, and the private sector would not fund these. That left financiers from vendor countries such as China — “but these funders will require certainty on the electricity price that will enable repayment of these loans”.

Energy Minister Tina JoematPettersson recently announced that a request for proposals from nuclear vendors for a 9.6 gigawatt station would be issued at the end of this month.

Phasiwe said Eskom would “base our decision on the af-

If prices are not fixed consumers end up with very expensive electricity

fordability and how fast we are able to build this thing”.

Koko said that in 10 years’ time, Eskom, which is stabilising its finances by clawing back bad debt, could have R150-billion cash to kick-start the nuclear build. But analysts said companies were increasingly providing their own power generation using renewable energy. This could undermine Eskom’s revenue.

Last week, Moody’s placed Eskom’s credit rating on review for downgrade, saying that future tariffs may be affected due to the ongoing growth of independent power producers and a regulator that is hostile to Eskom’s tariff increase requests.

The agency also noted that institutional investors were beginning to display risk aversion to funding state-owned companies.

Michael Sachs, head of the National Treasury’s budget office, declined to comment on the costing of nuclear projects until the request for proposals had defined the nature of the project. Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za