SA can’t afford proposed nuclear build

NEWS of an agreement signed between Russia and SA on Monday indicate broad plans for long-term nuclear-related co-operation. The scale of the potential deal or its detailed form in relation to procurement is still unknown. What seems obvious is that the R1-trillion (or so) nuclear investment will not be free.

SA treats nuclear power procurement differently from other options. The Electricity Act, which explicitly excludes “new generation capacity derived from nuclear power technology”, governs energy procurement.

A simple average of the range estimates for the proposed nuclear build is R881bn; by comparison, the arms deal was worth R72bn in today’s money. International experience also indicates that cost overruns on nuclear build are usually anything between 50% and 200%. Even if we do not take likely cost overruns into account, the proposed programme is likely to end up costing us four to 20 times as much as the arms deal. We all know how important a transparent and trusted procurement process at this scale will be.

SA’s previous tender process for nuclear power supply was abandoned in 2008 after it was deemed to be financially unviable. Eskom had expected a price of $2,500/kW, but bids came in at $6,000/kW. The Department of Energy’s Integrated Resource Plan (IRP) 2010, formally published in May 2011, included 9,600MW of nuclear power. Estimates of the investment costs for a 9,600MW nuclear build programme range from R320bn to R1.4-trillion — excluding likely cost overruns.

In 2011, the National Development Plan advised: “Although nuclear power does provide a low-carbon base-load alternative, SA needs a thorough investigation on the (10 listed) implications of nuclear energy, including its costs, financing options, institutional arrangements, safety, environmental costs and benefits, localisation and employment opportunities, and uranium enrichment and fuelfabrication possibilities. An in-depth investigation into the financial viability of nuclear energy is thus vital.”

In his state of the nation address in June, President Jacob Zuma identified energy security as a priority for enabling SA to achieve economic growth of 5% by 2019. Then the Presidency announced that a Cabinet subcommittee on energy security had been established to “oversee the development of SA’s future energy mix”. The new subcommittee is chaired by Zuma and includes the following ministries: energy, international relations and co-operation, public enterprises, finance, state security, trade and industry, economic development, mineral resources, environmental affairs, and defence.

In her budget speech in July, the new energy minister signalled a top-down approach deriving from “injunctions” from Zuma. She appears to be a minister determined to make decisions — regardless of sector expert advice.

The IRP2010 Update Report released by the Department of Energy in November last year specifically recommended that “nuclear procurement only be reexamined in 2015 — if demand exceeds 270TWh and there is no shale gas development”, it might “then go ahead”. This is broadly consistent with our own research.

On September 15, the Treasury announced that the Cabinet energy security subcommittee had approved a bail-out for Eskom. Three days later, a Treasury official told Parliament that “government guarantees for state-owned companies, which stand at about R466bn, had reached the upper limit of what could be considered prudent in the current economic and fiscal context”.

If Eskom cannot finance a new nuclear build programme and the Treasury cannot guarantee it, where will the money come from? Financing a huge investment such as 9,600MW of power carries high financial risk. While the tight electricity system makes us mindful of the costs of underinvesting, SA has already experienced the huge costs of overinvesting. Coal-fired power stations were “mothballed” a few decades ago — at significant cost to our economy and society.

The best available information indicates that no decision on nuclear power investment is needed until next year or 2019, depending on demand and comparative prices of other options. Why a large investment is being promoted so strongly can only have political reasons. Political rationality is fine, but not if it ignores good information. Right now, SA simply cannot afford this scale of investment.

Winkler and Martin are with the Energy Research Centre