Knowledge 2.0.
23 September 2017 21:51 (South Africa)
South Africa

Op-Ed: Can any South African Nuclear Energy Procurement ever Succeed?

  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions (qedsolutions.co.za) out of Cape Town.

  • South Africa
Photo: A general view of the construction site of the Belarusian nuclear power plant near the town of Ostrovets, some 180 km from Minsk, Belarus, 19 April 2016. EPA/TATYANA ZENKOVICH

Should the whole nuclear energy procurement process start up again, the few nuclear vendors that still remain should ask themselves: is it really worth the bother? By DIRK DE VOS.

As most of us know, the recent Cape High Court decision in favour of the applicants, Earthlife Africa Johannesburg (ELA-JHB) and the Southern African Faith Communities’ Environment Institute (SAFCEI), to set aside nuclear procurement agreements was an utter thumping.

All South Africans owe a debt of gratitude especially since both NGO’s operate under significant financial constraints (donations can be made here) and for some, this was a replay of the David and Goliath story in the book of Samuel. Malcolm Gladwell’s take on that story is worth retelling.

Gladwell suggests that David was never going to lose that battle. Firstly, he was an adept slingshot and a stone from his sling had the stopping power of a .45 calibre pistol. Secondly, Goliath, the giant, may have suffered from acromegaly, an affliction of many giants, that causes partial blindness. So, you have a lumbering (large) target who cannot see well against a highly adept boy with his slingshot. The outcome was not in doubt. In sporting terms, the Cape High Court decision was like a 10-0 score line in soccer or, in a cricket test, an innings defeat on the second day. We are yet to see whether the new Minister of Energy will appeal the decision but it is hard to see how a “rematch” in any higher court will result in a different outcome.

Briefly, the court’s decision did two things. It set aside the previous Minister of Energy’s decision to proceed with the procurement of nuclear energy due to a number of flagrant departures from section 34 of the Electricity Regulation Act (ERA), which governs how such determinations should be made. It also set aside the Russian Nuclear Agreement as it should have – and did not – receive Parliamentary approval as required by section 231(2) of the Constitution. This agreement purported to create a number of obligations and liabilities for South Africa (including taking on all liabilities for a nuclear accident). The Constitution requires that these types of agreements with substantive impacts be approved by parliament. More basic framework co-operation agreements with the USA and South Korea – which, being of a more technical, administrative nature, did not require parliamentary approval – were also set aside on the basis that they were not tabled in parliament within a reasonable time, as required by section 231(3) of the Constitution.

The most striking thing about the judgment is not the decision itself, but just how underhand, dishonest and profoundly inept the government has been in the whole affair. In a sense, they were worse off than Goliath – it was almost a process of self-sabotage. “Oh well”, says the nuclear lobby and in particular, NECSA – which by the way has just secured 85% of the total budget of R787 million allocated to nuclear by the Department of Energy for the next financial year, “the court decision said nothing about the wisdom of procuring nuclear energy as such and South Africa should just start the nuclear procurement process from scratch”. That is true. The court’s decision was mostly about procedural matters, but it raises an important question: could procuring nuclear power ever be done legitimately in a way that satisfies the Constitution and the rule of law? It’s an important question because the answer should guide whether anyone, especially taxpayer-funded entities, should bother even trying.

The answer is no and this is why. The Constitution was not drafted to prevent South Africa from procuring nuclear power, but, given the state of the nuclear energy sector in 2017, it makes it extremely difficult, if not impossible. It is perhaps this very reality that has driven the underhandedness that we have seen.

The problem, at its core, is that the nuclear energy sector is selling a crap product. One could go on forever about why nuclear energy is a problem, but here are the main points:

Nuclear is very different from any other energy options

There are no nuclear vendors that are not state-owned. Without state ownership, the nuclear sector would not exist. That means procuring nuclear requires first the state-to-state type agreements whether in terms of section 231(2) or (3) of the Constitution annulled by the Cape High Court. Further, simply having nuclear energy, let alone procuring new nuclear, requires a whole separate and expensive regulatory system, participation in international bodies like the International Atomic Energy Agency, and funding a separate entity like Necsa. Nuclear energy costs South Africa nearly R800 million per year – a cost not typically included in the price of nuclear energy. Nuclear’s safety issues cannot be solved technologically; its safe operation requires constant vigilance from highly trained experts. Enormous decommissioning costs and the storing of spent fuel have not been resolved. Despite efforts to delink civilian nuclear from nuclear weapons proliferation, the risk remains. No other energy option needs any of this.

Nuclear is in decline everywhere

At present, there are about 440 operating nuclear power plants, and more than 40 that have been taken out of commission in Japan after the Fukushima incident. At its height in 1996, nuclear generated nearly 17% of all electricity globally: it is now down to 11%. Nearly half of the reactors operating now are over 30 years old and as these older plants are decommissioned, they are not being replaced. Two vendors, the foundation of the nuclear sector, Areva and Westinghouse, are in deep crisis. Areva had to be saved by the French Electricity Utility and Westinghouse has just filed for protection from its creditors in the USA. Westinghouse threatens to bring down its unfortunate parent company, Toshiba. Areva’s problems have not gone away – it will have to deal with significant decommissioning costs of several reactors in its home country over the next few years.

What remains is not especially appetising. KEPCO, the South Korean operator, looks sound due to its strong home base but it has a fair bit on its hands. Chinese vendors don’t have any of the latest reactor designs and they seem to be focusing on developing so-called 4th generation reactors instead. Russia’s Rosatom has proven technology, the VVER reactors, but is a rather murky entity that operates as a state within the Russian state. Furthermore, Russian nuclear technology is built to ensure that it can only use Russian nuclear fuel. While Rosatom might be part of Russia’s own strategic global ambitions, as a company, it is a relative newcomer. It is not clear that a future Russian government would pursue the same ambitions or want to fund them.

Nuclear is very expensive and therefore has to be very big

Some commentators say that the mistake South Africa made is to procure too much nuclear and that we should procure much smaller bits. But there is a reason why nuclear power plants need to be big. They are hugely expensive and the only way to lower costs per kWh is to use economies of scale by scaling them up. Their very scale brings to mind the problems nuclear shares with other mega-sized projects. They are subject to an iron law: being over-budget, over time, over and over again. A scan through existing nuclear power projects in those parts of the world where independently-obtained information is possible, makes for sobering reading – including projects developed or sponsored by Rosatom. One consequence of the record of nuclear is that credit rating agencies hate them and shred the credit rating of any country that gets serious about procuring nuclear. Current estimates are that nuclear power is now twice as expensive - on a per kWh basis - as renewables, while renewables continue to fall in price.

There are other problems. Eskom is in a terrible state and that is a long-term problem that will have to be resolved in one way or another – probably through another taxpayer-funded bail-out or some type of privatisation. Any nuclear power would have to enjoy precedence over Eskom’s own fleet of generators and as we have seen, South Africa is demanding ever less electricity due to the steep rise in the cost of electricity. Eskom is in no position to be a credible nuclear procuring agent for the country.

Leaving aside the problems of nuclear energy, it might be worth looking at the hurdles a nuclear programme would have to clear to have any chance of success. As we have seen, the Section 34 determination required by the ERA has to be rational, lawful, reasonable, procedurally correct, and adequately provide for public participation. One requirement for this would be using an up-to-date Integrated Resource Plan that considers all impacts of energy options – that is itself a product of a technical analysis of electricity needs and one that cannot easily be doctored. Arguably, a determined political effort to amend ERA to make procurement easier could be successful, but section 217 of the Constitution remains. This section requires public bodies to undertake procurement to be "in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”. Besides, one would still have to fall within the strictures of the Public Finance Management Act, which aims to secure transparency, accountability, and sound management of revenue, expenditure, assets and liabilities.

Any state-to-state agreement (a particular requirement of the nuclear energy sector) would also have to be submitted, debated, and approved in the National Assembly and the National Council of Provinces. For this to be effective or worth doing, the specific details of the proposed deal would have to be disclosed and a matching provision made in the budgeting process. Section 215 of the Constitution states that all budgetary processes must promote transparency, accountability and the effective financial management of the economy, debt and the public sector. At worst, everyone would have to know upfront what the cost is and whether that could be financed on top of South Africa’s R2.2 trillion debt (that already looks unsustainable). If new taxes were required to pay for the costs - as would most likely be the case - well then that’s a money bill in terms of Section 77 of the Constitution.

Any project with anything like a trillion-rand budget is simply not going to slip through and any hurdle not cleared is fatal for a nuclear procurement programme. The process requires a large amount of transparency and this is the nub of the problem for any nuclear deal. The nuclear sector globally doesn’t roll that way. Instead, it prefers the shadows much like the arms industry and certainly fails a number of rationality tests in a world where an energy transition is well underway towards cheaper, cleaner, more flexible renewable energy. For the nuclear sector, declining as it is, the temptation to want to do a deal with a president who says that he can deliver on his/her side, the Constitution notwithstanding, must be huge. But that has already been tried and it failed in the Cape High Court.

Should the whole process have to start up again, surely the few nuclear vendors that still remain will have to ask themselves: is it really worth the bother? That remains to be seen. DM

Photo: A general view of the construction site of the Belarusian nuclear power plant near the town of Ostrovets, some 180 km from Minsk, Belarus, 19 April 2016. EPA/TATYANA ZENKOVICH

  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions (qedsolutions.co.za) out of Cape Town.

  • South Africa

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