South Africa

South Africa

Understanding Eskom’s nuclear ambitions: An interview with David Nicholls

In an exclusive interview, CHRIS YELLAND, investigative editor at EE Publishers, posed 10 questions to David Nicholls, Eskom’s chief nuclear officer, to explore issues surrounding Eskom’s proposed new nuclear procurement programme for South Africa, and to try to understand Eskom’s thinking. These are his responses, published in slightly edited form.

Questions around financing of the proposed nuclear new-build in South Africa were specifically excluded from this interview, as this will form part of a subsequent article.

Please comment on suggestions that the nuclear procurement process followed to date by the Department of Energy (DoE) is secretive, illegal and flawed, and that transparency will worsen under Eskom?

Over the last few years, the information discovery and analysis process has been handled by the DoE, in parallel with Eskom in a supporting role. Yes, some people do believe that the nuclear new-build is a done deal, that terms have been agreed to, and that we are now catching up with the paperwork to make it look legal. But Eskom is now handling the procurement, and we are not aware of any such agreement.

Contrary to worsening transparency under Eskom, we will at all times do what we can to avoid being secretive, and publish information publicly. As for being illegal and flawed, I can’t really comment on the claimed illegality, but if no agreement has been made, I can’t see how such “agreement” can be illegal. As there are only four or five potential vendors competent to supply this kind of technology and likely to submit bids, and these vendors are known to Eskom, we could have opted for a closed bid process.

However, Eskom will almost certainly go out to open tender, with the request for proposals document published on the Eskom and National Treasury websites, just as we did with the request for information issued in December 2016, to ensure that we are seen to be transparent.

The DoE and Eskom indicated it intended to issue a substantial request for proposals for new nuclear by mid-2016 and then by end-2016, but at the last minute this was changed to a brief request for information issued in December 2016. Why was this?

I can’t comment on earlier DoE announcements as to when the request for proposals would be issued, or on the reasons for their delays. What I can say is that on 14 December 2016 a Section 34 determination was gazetted, which designated Eskom as the procuring agent for the nuclear new-build, in place of the DoE. That was when our procurement process really started, although we had been thinking earlier about what we could do. We are well aware of National Treasury’s guidelines, and the Public Finance Management Act requirements, which require certain interactions with National Treasury. Although we had asked for meetings with National Treasury, these had not taken place before 14 December 2016. Eskom picked up the task as a clean sheet in the middle of December 2016, and took a view that we should issue a request for information to confirm some of the assumptions, insofar as we can. This was the reason the request for information was issued in December 2016. We are approaching National Treasury now to discuss various exemptions and waivers we require, as is conventional for any large project of this nature.

Could a request for proposals have been issued without knowing if, how much and when nuclear power was required in SA in terms of an updated IRP, and without specific authorisation by Treasury?

Whilst there is a pre-existing, gazetted Integrated Resource Plan for Electricity, IRP 2010-2030, and a gazetted Section 34 determination, Eskom still needed certain authorisations from National Treasury in order to commence with the commercial process through issuing a request for proposals. These include, for example, the criteria for bid selection. On the matter of cost and affordability, although we have a pretty good idea about what nuclear power stations cost based on our surveys of export deals and their scope in the last 10 years or so, there is no nuclear power plant price list out there. The request for information may provide indicative prices based on previous projects, but will not provide estimates for new projects. So the only time you really know the price is when you have a formal bid in front of you, and the fine details have been negotiated. And if you can’t start the process before you know the outcome, you will never start.

What is the envisaged procurement timeline, and when will the request for proposals probably be issued, evaluated, project approvals obtained, and orders placed for a nuclear new-build in SA?

The request for information calls for information to be available at the end of April 2017. Our target is then to get the request for proposals out by mid-2017, with evaluation of the vendor proposals by the end of 2017. That would be an ideal situation, and I am not going to pretend that it couldn’t be later. We will then need to negotiate with the vendors, one at a time, to select a preferred vendor, and then move into the localisation discussions. But from the moment we’ve selected the preferred vendor, my belief is we will start contracting the long lead items at risk. We will then start doing things like submission of the licensing application for the chosen technology to the nuclear safety authority. And it will probably take about a year, or longer, from initial start to get the contract finalised. As for site work, this would start with putting in some roads to get access to the site, physically clearing the site, terracing, digging holes in the ground, and pouring of concrete. I estimate this would primarily be constrained by the Environmental Impact Assessment process, and approval and issuing of the necessary permits. But this work could conceivably commence in 2018, or if we are lucky, maybe even in 2017 for early, off-site work, like roads.

There have been suggestions of a hostile working relationship between Eskom and National Treasury since the public spat in 2016 surrounding coal contracts. Is this delaying the request for proposals?

From Eskom’s vantage point, since being designated the procurement agent, owner and operator of the nuclear new-build in SA on 14 December 2016, there have been no delays due to National Treasury. We have the request for proposals virtually ready to go, and there were clearly no delays by National Treasury in Eskom’s issuing the request for information. We are now approaching National Treasury to discuss the proposed request for proposals, and we don’t foresee any problems. But neither I nor the Eskom nuclear procurement team have any previous working relationship with National Treasury, and therefore we can’t comment further at this stage. We assume there won’t be any delays by National Treasury because this is a national project with Cabinet blessing.

Please can you advise Eskom’s estimated pre-tax real levelised cost of electricity from an Eskom-driven nuclear new-build in SA, and the assumptions on which this is based?

This is a difficult question, because the assumptions themselves tend to be business-driven activities, but Eskom has a very straightforward view. We have issued ourselves an internal target that for this project to make sense, the levelised cost of electricity from the nuclear new-build must be between R0.80 and R1 per kWh for the first two reactor units. This is based upon the assumptions of Eskom’s standard discount rates, with export credit financing at rates Eskom is currently getting, and overnight costs for the plant that are inside the envelope we are seeing in the world market at the moment. So as key assumptions, we are looking at an overnight capital cost for the early machines in the range of $4,500 per kW, a reactor construction time of six years, plant economic life of 60 years, and fixed and variable operating and maintenance costs of about R0,27 per kWh including fuel costs, which is what we are currently achieving at Koeberg in today’s money. Regarding the weighted average cost of capital assumed, I don’t know. I think it’s the Eskom standard one, but I am not able to give you an answer at this stage.

Can you expand on the requirements and rationale in the request for information for Eskom to own the global intellectual property rights for the technology deployed in the nuclear new-build in SA?

The request for information is asking for information on behalf of the South African industry to clarify and understand exactly what we would be getting. Government policy is to use the construction of a nuclear fleet to build and sustain a domestic industrial capacity. To do that there has to be a market for it. So, we’re asking in the request for information – at design, overall plant and component level – to maximise localisation, and that also links to the intellectual property rights. We would like to secure the rights to build the plant ourselves, and ideally, in due course, to export locally manufactured nuclear components, or even the entire plant at some stage. This was the route taken by the French, the Chinese and the Koreans in technology transfers which they got from different countries to build their own nuclear power industry capability. Ownership of intellectual property does not necessarily mean licence-free ownership, and there might be a licence agreement for a portion of the project. So we’re not just saying: “Give it to us.” We are asking potential vendors: “What are you prepared to consider?”

Can you share Eskom’s preferred business model for the construction, ownership and operation of the proposed nuclear new-build in SA?

First of all, any business model is also dependent on what options are proposed to us by the bidders. But clearly, the Section 34 determination has designated Eskom, or an Eskom subsidiary, as the owner-operator of the nuclear plant. For ownership, we see a similar model to Koeberg. Eskom will own it, Eskom will operate it. At Koeberg, operation has been predominantly a South African run activity since it started up, but if we need operational help, we will contract it. Regarding construction, as with Medupi, Kusile and Ingula, Eskom will contract somebody else to build the power plants for us. Therefore, in a real sense, to begin with we expect a turnkey contract, as it was with Koeberg. This is the way most of the recent successful export deals in the world have been done. We want to benefit from the expertise and experience of the vendor. We want to buy a machine that the vendor is already building for somebody else, a generic machine that will not be unique to SA. To begin with, like Koeberg, the vendor would play a major construction role, and then hopefully, it will become more of a South African activity as time goes on.

Would the engineering, procurement and construction main contractor for the nuclear new-build be required to be a South African company in which the nuclear vendor, Eskom, South African contractors, BEE partners, etc., are shareholders?

Inevitably there are several key contractors involved, such as the reactor plant vendor, turbine plant vendor, civil works contractor, and others. These are all integral parts of the turnkey offer. What we expect is for the successful bidder to form a company to be the engineering, procurement and construction main contractor, with the key contractors as shareholders or joint venture (JV) partners. Classically, performance guarantees to the customer (Eskom in this case) are provided by the JV company, and also jointly and severely from the different principle parties. We would like the principle vendors to create a proper engineering, procurement and construction contracting company, which is staffed and does the physical work in South Africa as the local contracting agent. And we’d like the ownership of the engineering, procurement and construction company to be split between Eskom, and the vendors.

Initially the vendors would hold the majority of the shares in the engineering, procurement and construction company, say 74%, with Eskom (or another South African entity under government control) holding 26%. This is also key to the intellectual property discussed earlier, which would be transferred to this company by the vendors at the beginning of the process. Thus, the engineering, procurement and construction company would control the intellectual property, and Eskom, as a minority shareholder, would have access to it. However, Eskom would want the right to take on more shares in the engineering, procurement and construction company as more reactors are ordered, with the goal to move ownership and control of the intellectual property progressively from the vendors to Eskom.

This is a view we have at Eskom as one way of doing things. It’s a possible way – we certainly do not think it’s the only way – and we ask the vendors to indicate if they are happy with this.

Is a nuclear new-build in South Africa a flexible, least-cost decision of least regret in an uncertain world, where electricity demand is unpredictable, and where disruptive technologies abound?

Eskom has the view that nuclear power is the only credible option for new baseload generation in SA. Eskom currently has some 34,000 MW of existing coal fleet, ranging from middle-aged to pretty old. In the next 20 to 30 years we need to expand our baseload capacity, and also replace a large portion of the aging plant. For despatchable baseload capacity, there are four options on the table in the world today: coal, gas, hydro and nuclear. Within SA we have no gas and no short-term gas prospects – any gas we import is going to be at a cost. While technically gas can certainly work, the economic issues and low job-creation prospects are too significant. There are no significant new hydro opportunities within SA, and while there are some pump storage schemes we can still build, essentially hydro power would be imported, with issues surrounding foreign exchange, security of supply and low job creation. So that leaves coal and nuclear. Our view is that coal is going to be increasingly challenged by environmental requirements, while nuclear power has an exceptionally good track record locally and internationally on both safety and economic grounds. DM

Photo: A picture made available on 21 June 2016 and taken with wide angle lens shows two cooling towers of the nuclear power plant Grafenrheinfeld, Germany, 31 May 2016. EPA/DANIEL KARMANN


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