It is hard to disagree with President’s Zuma’s call, in his State of the Nation address, for a radical transformation of the energy sector. One can’t deny that solving the energy issue is central to South Africa’s future economic growth. One could even find some encouragement in his statement that this “will require structural changes in the manner in which government departments, affected state-owned companies and the industry as a whole address the energy challenges”. But all this is undermined by the renewed push for more nuclear power. By DIRK DE VOS.
Since long before our time, South Africa has been characterised by its cheap and abundant electricity, generated and transmitted by Eskom. By revenues, Eskom is still one of our largest companies and it has profoundly shaped our economy, just as mining has done. That our economy and its industrial base is one of the most power-intensive, resulting in the highest power consumption-to-unit of gross domestic product ratios anywhere, is a result of a clear and consistent policy about what a national electricity utility should be. Other countries have followed the same model, where one utility controls almost the total electricity value chain, from the mostly coal-fired generators to your light switch, notably Eskom’s equivalent in France, Électricité de France EDF. But it is increasingly rare. Even France’s dirigisme has had to yield and open its electricity sector and introduce market mechanisms.
Several efforts have been launched to change the structure of our electricity sector, but these have all been stymied. The most recent effort is the Independent Systems Market Operator Bill, a very modest piece of legislation which would formally separate the electricity grid from generating activities, but stops short of a divestment by Eskom from the grid, which it would still manage and maintain. Even this modest piece of legislation has been stuck in Parliament for over three years.
While there are many who would like to retain the state-owned Eskom vertically integrated monopoly model, it is simply not an option anymore. The “bargain” that once existed, which was to ensure that Eskom was adequately capitalised with a defined and funded capital build programme, was already broken in the 1990s. This was perhaps inevitable. At the dawn of our democracy, Eskom had excess generating capacity and very little debt, but many South Africans had no access to electricity in their homes. Over the last 20 years, this situation has been turned on its head. Eskom itself is also now also stuck with a large and surprisingly expensive management and staff complement.
In the meantime, we have moved from being the country with the cheapest electricity in the world to the mid-table, and even that standing is a result of almost all our electricity being generated by power plants that have long been paid off. In short, even at current prices, we are still consuming electricity at a price that is chewing further into Eskom’s capital base. At our current electricity tariffs, including the permitted increases, Eskom is short of R50 billion for immediate needs. To get it on a more solid footing – perhaps another R200 billion. To put these amounts in context, these figures represent a quarter of our government’s total annual budget. The gaps are large and addressing them cannot be put off for much longer.
It is therefore incomprehensible that nuclear energy is even being discussed. Nuclear energy should have several things going for it in a world increasingly concerned with unsustainable emissions of greenhouse gases. More countries, including our own, have made binding commitments to reduce their own emissions and those countries that lag behind in making these commitments risk being shut out of the global economy. But the events at Japan’s Fukushima plant and, in recent memory, the meltdown at Chernobyl show that nuclear energy is not always safe, and when things go wrong, they go catastrophically wrong.
A proper solution for dealing with nuclear waste long-term remains elusive. But the biggest problem confronting us with nuclear power is less about the questions surrounding safety and risk and more about the problem that we confront with our current new builds, with Medupi and Kusile. It is about the enormous costs of building these big ticket items. It is hard to benchmark projects that cost R100 billion each, but the International Energy Agency tries to do this for different types of power stations and can be used as a rough guide. Depending on the costs of capital (or the applicable interest rate used), power stations produce what is known as a levelised cost of electricity: the cost per kWh produced over the life of the power plant. For coal-fired plants, like Medupi or Kusile, half of this is made up of capital costs. This means that the cost of building and financing the construction, before they generate any electricity, represents half of the cost of whatever electricity is produced thereafter. For nuclear plants, these fixed costs represent 75% of the total levelised cost of electricity, once commissioned.
The numerous cost escalations at Medupi in particular – but the costs of the delays in reaching its commercial operating date – should give us pause. A four-year delay on a R100 billion project adds more than R25 billion to the price tag, and that cost becomes baked into whatever electricity is subsequently generated. The experience of nuclear is worse. The recent record shows that project costs inevitably spiral out of control and completion dates are seldom met. A case in point is the still-incomplete nuclear power station being built in Finland, a country with a high level of project management and technical expertise. The result of this is that a nuclear industry can only exist when the state underwrites its costs. Countries that procure their power through democratic, transparent and market-based methods are not building new nuclear reactors. Only two are under construction in Europe. The USA announced that it would build 31 reactors in 2009, but only five are likely to be built. Of these, none are in states that rely on competitive power markets. The enormous cost of developing nuclear power technologies also means that development cycles are very slow. Nuclear power stations being built today are not substantially different from those built 40 years ago.
One consequence of all this is that the nuclear power sector has developed some of the unpleasant characteristics of the arms trade, characterised as it is by all manner of inducements. The Seriti Commission is still dealing with our own brush with the arms industry, over a decade later. And against the likely costs of a fresh nuclear build programme, our Strategic Defence Package represented a relatively piddling amount of R30 billion (in 1999 money).
Better alternatives to nuclear power exist. Some of these are set out in the Department of Energy’s Integrated Resource Programme for the period 2010-2030, recently updated in 2013. This is a good document, but its strength in presenting every possible option as objectively as possible under different economic growth trajectories means that one is not necessarily guided to what the drafters think is the best option for South Africa. One thing is clear from that document, though. It is decidedly cool on nuclear power and more-or-less recommends that these decisions should be deferred for at least another decade.
Perhaps the best reason for delaying a decision is that we need to figure out how our economy will change in a context where electricity costs are no longer what they were. The types of activities undertaken in South Africa, whether the type of mining, raw material processing, or types of heavy industry undertaken, are largely a function of cheap electricity. BHP Billiton’s aluminium smelters alone consume all the power produced by a big coal-fired power station and do so at prices far, far below the costs of providing this electricity. One has the rather perverse situation of South Africa importing bauxite (the ore in which aluminium is made), processing it into aluminium and exporting it again. This cannot last, but there are perhaps many other types of electricit- intensive activities that will have to close down and move elsewhere. The rest of the economy will also need to re-adjust and become more energy efficient. This introduces a new dynamic. There are fewer customers with continuous 24-hour operations and the remaining customer base uses electricity more sparingly, meaning that the daily demand profile becomes more “peaky” at peak use hours. There are different strategies to respond to this, but we still need to learn what our response should be.
“Build it and they will come” always works when what you are offering the best prices. For electricity, those days are now gone for good. A nuclear build programme fails for several reasons but critically, it produces electricity at a price higher than can be afforded. The result is the spectre of power plants generating electricity that cannot be sold, another way to describe “stranded assets”.
It is now high time that we stopped fiddling around with our critical energy sector and being waylaid by nuclear ambitions. Now is the time for coherent policies. We need to separate the electricity grid from generation and lift the burden of expensive and inappropriate generating projects off the electricity consumer and taxpayer and place it on the private sector. It is not like South Africa does not know how to do this: it is exactly this policy coherence that has unlocked R90 billion in private sector funds across 64 different renewable energy projects to produce amongst the best prices for renewable energy in the world in just four years, all while making localisation and socio-economic commitments unmatched in any other sector. Our government knows how it works – there is no excuse. Eskom has its own deep problems and these must be fixed, but we cannot have a situation where the fate of the country rests in the hands of what happens at Eskom. Certainly now is not the time to experiment with a nuclear build programme. DM
Photo: Beach goers walk in front of the Koeberg power facility in Cape Town, South Africa 21 January 2011. Koeberg power station is the only nuclear power station on the African continent. EPA/NIC BOTHMA
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