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25 May 2016 11:12 (South Africa)
Opinionista Dirk de Vos

Nuclear Build: Do we really know what we are entering into?

  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos
In countries where nuclear power policy serves an overall energy policy that serves the public, and not the other way around, no nuclear power plants are being built. Those part of the world that procure electricity using democratic, transparent and market-based methods do not build new reactors. It is not surprising. Nuclear energy is ruinously expensive, it is always over budget (by a lot) and suffers interminable delays.

Despite the world and its leaders coming to the view that global warming is a real threat which needs to be addressed, the nuclear energy sector, which can provide vast amounts of electricity without contributing to greenhouse gas emissions, has had another poor year. It follows a very poor trend line going right back to the 1980s. In fact, the number of new nuclear builds hides the real extent of the decline. Most of them are in just one country, China. Even in China, new renewable energy capacity outstrips that of nuclear 3 to 1. The industry limps along only because it gets massive subsidies and support from governments that still believe that the nuclear industry, in its current form, using current technologies, has a future.

There is another industry, somewhat similar to the nuclear industry that has experienced some of the same problems. The arms industry after the end of the cold war, and just about the time that South Africa became a democratic country, and was finding its feet in the family of democratic countries. How did the arms industry respond to its difficulties? Well, beyond being bailed out by countries that think an arms industry is strategic, it went around the world offering all sorts of inducements and bribes to countries that did not need more armaments. South Africa was just one victim of these false inducements. It is understood that the deal cost South Africa R70 billion in circa 2000 Rands, maybe not such a big deal in the scheme of things, but the real damage was the squalid nature of the whole thing, the corruption, the damage to our fledging democratic institutions and the “body politic”. South Africa is a much angrier, less trusting and cynical country now. That will have implications for the nuclear industry’s ambitions.

In countries where nuclear power policy serves an overall energy policy that serves the public, and not the other way around, no nuclear power plants are being built. Those part of the world that procure electricity using democratic, transparent and market-based methods do not build new reactors. It is not surprising. Nuclear energy is ruinously expensive, it is always over budget (by a lot) and suffers interminable delays. Every time. Even relatively small nuclear builds in rich advanced countries run into all sorts of problems such as the United Kingdom’s Hinkley Point C . Government guarantees, whether one’s own government or some other government, with its own agenda or strategic objectives, is the only way that these projects can proceed. Even then, it is doubtful because as Michael Liebreich, founder of Bloomberg New Energy Finance (and a nuclear energy supporter) advises, “…when you are in a money hole, you should stop digging” Because of special 35-year term loans Hinkley Point C, if it is ever built, is supposed to provide electricity to the UK grid at £92.50/MWh or around R2/kWh (average Eskom selling price in 2015 around 74c/kWh).

It is not just the upfront capital, it is what nuclear investments do to the cost of that capital for everything else in the country. A World Nuclear Industry Status Report states that “rating agencies consider nuclear investment risky and the abandoning of nuclear projects explicitly ‘credit positive’

For the nuclear industry target customers then have to be reasonably big economies, say, the top 70 economies or just rich ones (basic affordability). One then needs to narrow the list down to those countries with a strong executive president with weak or compliant cabinet, especially the finance minister, that owe their jobs to the president. One wants countries where the legislative arm is made up of well-paid legislators that owe their positions to the executive arm. It helps if the political opposition presents no real political threat. Those countries with insignificant democratic accountability and with high perceived levels of or a proven history of present promising prospects. A state owned monopoly electricity utility is also a help. If the president of the country really, really wants to build nuclear power stations, so much the better. So what about South Africa then? Does South Africa stack up? Actually, rather poorly. Bankers and finance types use the word “counter-party risk”. It means what it says. What is the chance of the other contracting party defaulting on whatever agreement is struck. And goodness, for any nuclear power vendor, South Africa is packed with counter-party risk.

The starting out criteria may look favourable, but for nuclear vendors, those criteria have to remain in place for a long, long time. There are only two ways that one can finance a nuclear build. You provide the finance yourself (and South Africa has to borrow this money from someone who believes it is repayable) or you get the vendor to finance the nuclear build itself. The vendor then recovers the investment through the sale of electricity over 30 years or more. This means agreeing on a 30-year or longer power purchase agreement (PPA) for electricity that is not in our own currency.

We have reached the ceiling of being able to raise more debt for any purpose as is clear from our declining credit rating. Attempting to do so for a nuclear build programme is simply out of the question. The idea that the BRICS bank might take a different view is just naïve. If there was any prospect of this, Brazil, in a worse financial state than us, would have applied already. Vendor finance is equally difficult because the vendor has to agree upfront the terms of the PPA and know that it will be in place, as agreed, 30 years hence. Given that Eskom is finding that demand for its electricity at existing prices is less than forecast, it is hard to imagine our economy being able to support the price of a nuclear PPA. Nuclear would decimate Eskom because all nuclear derived electricity would have to be supplied first and only then would coal fired power be able to be supplied. It would force Eskom to mothball its cheaper electricity in favour of full utilisation of the nuclear plants. Because most of the costs of a nuclear plant is in the actual build, the risks for a vendor waiting for payment must be huge.

There are other big problems. Even if South Africa does not look like a mature democracy, it is still subject to the constitution which is the supreme law. The legislature might not be of much use but the judiciary is very far from having been captured. Areva, a nuclear operator along with Eskom discovered this to its considerable cost just a few days ago. Eskom awarded a dodgy tender to Areva for the replacement of steam generators at Koeberg. A unanimous decision of the Supreme Court of Appeal set it aside.

It is worth recalling, especially when there is so much re-writing history, that when the ANC came into power in 1994, they were confronted by an almost bankrupt state. The Apartheid regime had racked up huge debts. There was a valid argument at the time that the democratic state should simply repudiate this “odious debt” as it had been incurred by an illegal regime and its creditors should therefore accept a write-off . For various reasons and after intense debate, it was decided that these debt obligations would be met. Those decisions will continue to be debated but this time we have a constitution and underlying legislation. Any agreement concluded in breach of the constitution can be challenged at a different time in the future. Given the scale of a nuclear programme, it is inevitable that such a challenge would be launched by a future government. No vendor or financier will be able to claim ignorance. It is impossible to get around this problem either. An illegal agreement is not worth the paper it is written on.

None of this excludes the numerous other provisions of the constitution, perhaps grouped as Rule of Law and/or due process provisions creating multiple opportunities (to use a term well understood by one of the hopeful vendors) for a Stalingrad Strategy also known as lawfare where every step and every decision is challenged, up and down the court system creating a total quagmire. Some amongst us know exactly how effective this can be. In the process we may severely damage our legal system but the stakes are too high, so it can’t be avoided.

Some of the hopeful nuclear vendors might not be entirely familiar with all this and expect a head of state to be able to deliver a deal. Well, ours cannot, and if they want to avoid a very costly and pointless exercise, they should get some good (local) legal advice. Nuclear vendors should know this: proceed at your peril, South Africans armed with our constitution are lying in wait. As much as we give the impression that we are ripe for the picking, we are not really that type of country. To rework an old legal saying, “caveat vendor”. DM

  • Dirk de Vos
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    Dirk de Vos

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