South Africa

Analysis: Why we won’t be getting any nuclear power plants from Russia anytime soon

By Dirk De Vos 25 September 2014

The Department of Energy recently issued a statement regarding a new partnership in nuclear energy. But let’s not get excited. Nuclear power is a diversion from the real issues in the energy sector – and the culmination of a whole lot of dreaming. By DIRK DE VOS.

The recent media release issued by the Department of Energy, on the agreement regarding a strategic partnership in nuclear energy, will go nowhere.

We are advised that the agreement was signed between the Director-General of state-owned Rosatom but on behalf of the Russian government and Ms Tina Joemat-Pettersen, our minister of Energy, at the 58th session of the Atomic Energy General Conference. While the actual agreement is not available, the announcement reads that it “lays the foundation for the large-scale nuclear power plants (NPP) procurement and development programme of South Africa, based on the construction…of new nuclear power plants with Russian VVER reactors with a total installed capacity of up to 9,6GW (up to 8 NPP units)”.  It goes on: “Rosatom seeks to create in South Africa a full-scale nuclear cluster of a world leader’s level – from the front-end nuclear fuel cycle up to engineering and power equipment manufacturing.” (sic) It ends with the sentence: “This agreement opens the door for South Africa to access Russian technologies, funding, [and] infrastructure, and provides a proper and solid platform for future extensive collaboration”.

So, not that clear at all.

The media appear to have taken this further: Agence France-Presse (AFP), picking up on a Itar-Tass news agency release, reported that Russia’s atomic energy agency would provide up to eight nuclear reactors by 2023, in a $50 billion strategic partnership between the two countries, and went on to quote the Rostam’s Director General – estimating the value of the deal at between $40 to $50 billion. To AFP’s credit, their headline put the ‘$50bn deal’ in inverted commas because it is not a done deal by any stretch. South Africa is just going to have to acquire the skills for the double-think that is a characteristic of the nuclear energy sector. Already, the Rosatom view has been qualified with a senior government source telling Reuters “[t]hey jumped the gun” and Xolisa Mabhongo, an executive at South African state agency Nuclear Energy Corporation confirming that there would be a bidding process before any final contracts were signed.

The whole drive for nuclear power is very hard to understand, especially since it goes against the government’s own policy document, the Integrated Development Plan, which advises that commitments to long range, large-scale investment decisions “should be avoided” in order to ensure “decisions of least regret”. Nuclear builds take a long (a decade) to be completed and therefore do nothing to ease our current pressing energy problems. If nuclear were to get the green light, other shorter-term solutions would still be needed and then, when nuclear eventually comes online, we will find ourselves sitting with thousands of megawatts of excess and extremely expensive baseload capacity. The IRP makes another technical observation: nuclear power stations which would be located in the coastal regions would require significant accompanying investments in the national grid. The grid is now optimised for taking in electricity, which is mostly generated in the north and north east of the country, and mostly consumed in the central, southern and south-western parts.

It is not that one should dismiss nuclear power entirely, but any nuclear-power policy must serve a coherent energy policy which in turn serves the best interests of South Africans. It should not work the other way around.

So who is this Rosatom, then, and what is their track record? Full details of Rosatom are hard to find, but the organisation is tracked by a Norwegian-based NGO, the Bellona Foundation, which has a significant presence in Russia. It was cobbled together from the husk of the Soviet era nuclear programme, incorporating more than 250 enterprises and scientific institutions, including all civil nuclear companies of Russia and nuclear weapons complex’s facilities. It covers everything from exploring, mining and enriching uranium, constructing and operating nuclear power plants, nuclear plant decommissioning and managing and storing spent nuclear fuel. It emerged from Russia’s energy 2003 strategy of 2003, which prioritised reducing reliance on natural gas-based power supplies which could be more profitably exported.

Rosatom is part of a central concept in Russia’s President Putin’s economic policy of having national champions or vertically integrated companies in strategic sectors that are expected to become self-sustaining, but also to advance the interests of Russia. Rosatom is the result of Putin’s efforts at restoring its nuclear energy industry, subsidised up to 2015 by $42.7 billion from the federal budget to nuclear power and industry development before 2015. Quite quickly, Rosatom has become a major player in the global nuclear sector. Rosatom owns the world’s 2nd largest uranium reserves, is the 5th largest uranium miner, is the 4th largest in electricity generation, provides 40% of the world uranium enrichment services and 17% of the world nuclear fuel market.

Even for South Africans, used to large state-owned companies, the corporate and governance structure of Rosatom is unusual. It is governed by its own legislation, enacted in 2007, roughly translated as “On the State Atomic Corporation Rosatom“.  The Corporation is not a part of the government apparatus and does not report to government either. It has been headed by Sergey Kirienko from the outset, who, in terms of the specially adopted legislation, is appointed by the Russian president and can also be dismissed by him. The president retains wide-ranging powers. For example, by decree various enterprises and organisations can be placed under the auspices of Rosatom and become a property investment of the Russian Federation. While it is separate from the state, its funding is closely tied to the state budget.

More unusually, especially in the context of nuclear energy, its powers cover important aspect of the licensing and control over the activities of entities engaged in development, preparation, experimentation, transport, storage, liquidation and dismantlement of nuclear weapons and military nuclear energy installations. Rosatom also has the responsibility for assuring government control for the safety of nuclear materials transport, for radiological installations, and also for taking measures to warn of nuclear and radiological disasters. It therefore exercises significant oversight functions over its own activities and this function is not monitored by the Russian state either. Instead it operates under its Director General, appointed at the discretion of the Russian president.

This is not an insignificant point: When there is no history of independent nuclear regulators standing at arm’s length to the state, the processes and detailed assessments required to guarantee safety of any future facilities in the country were they are to be built are not necessarily top priority. Nuclear firms from western countries can point to a tradition of independent regulation. Safety is not just about reactor design; the Rosatom reactors  1200 MWe VVER (AES-2006) appear up to standard. Safety in nuclear is about relentless quality control, which is harder when there is no regulatory background, or when there are questionable records on quality control and corruption.

Perhaps “jumping the gun” has something to do with the pressure Rosatom is facing from its various foreign nuclear power station builds, which it says amounts to $100 billion due to tighter economic sanctions imposed against Russia for its role in Ukraine’s civil war. This includes a $8.4-billion nuclear power project in northern Finland (where Rosatom has a 34% ownership stake) and a $10 billion nuclear plant expansion deal brokered between Rosatom and a Hungarian utility company. The Hungarian one is especially  interesting. It is reported that Benedek Javor, a Hungarian member of parliament, requested that the EU investigate Rosatom deal because he says that it secured its deal without a public procurement process in violation of EU regulations. Javor told the EU that “It was only at the last moment, as a result of secret negotiations between the Hungarian and Russian parties, that the transaction was transformed into a nuclear power plant construction project to be implemented by international agreement between the two countries.”

It is very hard to get a competitive bidding process in nuclear power plant construction going. This is important because section 217(1) of South Africa’s constitution states that, “When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.”

Rosatom’s success in building its book is widely ascribed to the financing terms it is able to offer. This is described in detail in different postings in a fascinating blog run by Aaron Stein who runs the nonproliferation programme at the Centre for Economics and Foreign Policy Studies in Istanbul, where he works on security and proliferation issues in the Middle East. In one posting, he gives a fascinating and detailed history of the efforts to build a (desperately needed) nuclear power plant  at a site known as Akkuyu. The history goes back to the 1980s, when Turkey’s government developed a build-operate-transfer (BOT) financing model for nuclear procurement. This would see the supplying company pay 100 percent of the construction cost, operate the reactor for a specified period of time, and then transfer the operation and ownership to a local firm. The foreign nuclear firm would recoup its expenses through guaranteed electricity sales at a fixed cost.

Eventually in 1996, Stein describes how Turkey tried to open a bidding process, but after intense lobbying by nuclear firms and several missed deadlines, this mismanaged tender process was cancelled in 2001, only to be revived in 2008. Because Turkey insisted on its BOT financing model and the tight construction deadlines imposed, only a Russian-led consortium submitted a bid. The BOT financing model was one of the major reasons for this lack of interest. The problem for Turkey was the price of electricity to be generated from the facility. Eventually, this tender was also cancelled. Rather than pursue a new nuclear tender, Turkey and Russia opted to negotiate bilaterally and came to an agreement for four reactor units at a total cost of $20 billion. The power purchase agreement is complicated to describe but it starts at 12.35 US cents/ kWh (R1,35/kWh) on a must-buy basis. By way of a benchmark, Eskom’s average selling price for electricity in its 2013 financial year – or to put it another way, the power purchase agreement that South Africa has with Eskom – is 63c/kWh. It is not just Turkey which sits with this problem. The United Kingdom has guaranteed EDF a price for the power the new nuclear Hinkley Point plant generates at 15.54 US cents/kWh (or R1.71/kWh). Both these price points are well above the prices achieved in South Africa’s renewables programme.

Pushing financing and construction risk to the vendors has prevented Turkey from getting a competitive bidding procurement process going. Now, while there might be merit in pushing construction risk and the obligation to bring a fully funded project in certain types of infrastructure, nuclear is not one of them. Because of its very nature, you can’t simply push these risks away. If construction of a nuclear power plant, for whatever reason, does fall behind, one cannot allow corners to be cut in an effort to get back on schedule. In any event, the costs of pushing risks onto the entity building power plants of any type means that they are brought back into account in the electricity tariff required by that power plant – they don’t just disappear.

Despite everything, nuclear energy is just uneconomic and will not solve our immediate energy problems either. Countries that select power supplies through democratic, transparent and market-based methods aren’t building new nuclear reactors. The cost differentials between nuclear energy and anything else can’t be fixed by sharpening pencils – the gulf is just too big. None of this means that we should not be vigilant. Rosatom’s footprints in Hungary and Turkey should be closely tracked.

Perhaps the biggest problem with our government’s apparent fixation with nuclear power is that it diverts attention away from the very many things in our energy sector that desperately require our attention. We can but hope that our decision makers will consult the IRP and put these nuclear dreams aside. DM

Photo:  A general view of the nuclear power plant in Bushehr, Iran, on 20 August 2010. The plant went online on 21 August 2010 in a ceremony attended by Russia’s Rosatom Nuclear Energy State Corporation and officials of Iran’s Atomic Energy Organization. EPA/ABEDIN TAHERKENAREH

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