South Africa, World

South Africa’s Electricity Choice, Part 4: The dangers of dealing with Russia

By Anton Eberhard & Amory Lovins 18 February 2018

A nuclear deal with Moscow would not only squander billions, but would compromise SA’s sovereignty. By ANTON EBERHARD and AMORY LOVINS.

Read parts 1, 2 and 3 of this series here, here and here.

Courts may have struck down the nuclear agreement between South Africa and Russia but ministers in the Zuma government have indicated they are not done discussing nuclear power and Russian involvement. This is of major concern to many – not only because of a possible compromise in SA’s national sovereignty and independence but also due to the ulterior motives Russia might have due to its economic troubles and the dubious need to build nuclear power plants despite lacking the capital to finance it.

Procurement and financial risks

South African officials have made a wide range of statements in the past few years about whether the government intends a “fair, transparent and competitive procurement process”, or a process with that form but not its substance (as vendors may expect), or an opaque direct negotiation between the South African government and another government, most likely that of the Russian Federation. During a series of private presidential meetings over the past seven years, these two countries concluded an unusually strong and specific nuclear agreement. It gave Russia a veto over South Africa’s nuclear co-operation with any other country, enabled Russia to withhold any data it wishes from public scrutiny, exempted Russia from any accident liability and promised Russia favourable tax and financial treatment. While denying favouritism, South Africa did not appear to have offered similar terms to any other potential partner. Though the April 2017 decision of the Western Cape High Court set aside this agreement, officials have continued to imply that a nuclear deal with the Russians is likely.

The Government Gazette notice released by the Department of Energy on 21 December 2015, which confirmed Cabinet’s decision to move ahead with the 9.6 gigawatt nuclear procurement programme, suggested the possibility of creating special-purpose vehicles or other structures that might try to evade the letter or spirit of the constitutional (section 217(1)) and statutory (Public Sector Finance Management Act) requirements for “fair, equitable, transparent, competitive and cost-effective” procurement. The South African courts are sensitive to any appearance of sham competition. For example, in June 2017, the high court interdicted Eskom from continuing with a controversial R4-billion tender to replace its Duvha power station’s damaged boiler, citing tender irregularities.

An instructive international example worth considering here is that of Britain’s Hinkley Point C nuclear project. Several lawsuits, including one from Austria, a non-nuclear nation, against alleged illegal state aid to sponsor the project now pose a major risk to its financing. Its sponsors have not yet found that financing despite a £10-billion loan guarantee and a state-guaranteed 35-year inflation-indexed twice-market-price power purchase agreement backed by the then-AAA-rated UK government, which also indemnifies the owners against all political, policy and legal risks. Any one of the parties can veto that £20-billion project: the European Court of Justice, the 65%-35% co-owners (EDF and CGN), the French and Chinese governments that own most of those two enterprises, the British government and the private capital market.

South African policy makers are doubtless keenly aware of the legal and political risks of any seemingly non-transparent or unfair nuclear procurement process. But they may be less aware of fatal flaws in its economic and financial logic, as we discuss next. The risk to the fiscus is amplified by the perception of capital markets, which, regardless of deal structure, would view the nuclear project as a “large public debt increase” carrying “substantial fiscal risks” for South Africa’s economy. Perhaps this helps explain why the phrase used repeatedly since the February 2016 State of the Nation address is that South Africa will “only procure nuclear on a scale and pace that our country can afford”. So what affordability issues might not yet have gained sufficient policy attention?

Unless Treasury issued the loan guarantee it refused in 2008, South Africa’s nuclear supplier would demand of government a long-term power purchase contract. (Since South Africa is now junk-rated, a prudent vendor or investor would probably demand both guarantees at a minimum.) Even with such power purchase contracts, financiers may not like the counter-party risk, as the current British example makes clear. They would see that much of South Africa’s current electricity shortage is due to serious delays in its mega-coal plants, and that their cost overruns (about four times the original cost at Medupi) could foretell problems with South Africa’s nuclear construction too.

Russia’s favoured Build-Own-Operate model – the most logical of three reported options – locks in increasingly uncompetitive fixed (or escalating) electricity prices for decades. Customers with increasingly potent options of their own could escape high prices by leaving the grid – like Australians and Hawaiians buying rooftop solar and even batteries, which major vendors such as SolarCity now bundle in convenient packages. But if government repayments then stumbled for lack of Eskom revenue, Russia could simply shut off the power as Gazprom shut off Europe’s gas, or as Russia put its Turkish nuclear project in limbo when the two countries got into a spat. Utter dependency on Russia for electricity – as well as for nuclear safety and, the agreement implies, fuel – raises serious questions of South African national sovereignty and independence.

Despite a troubling domestic record on cost, delays, quality and transparency, and the same human-resource challenges that afflict Western vendors, Russia claims cheaper nuclear power abroad (5-6 US¢ per kilowatt hour “in most countries” but three times that, 12.35 US¢ per kilowatt hour, in Turkey). The expected dollar cost of a Russian 2.4 gigawatt plant on offer to Bangladesh has nearly trebled in six years. The rand exchange rate continues to slide due to anaemic growth, high debt, weak commodity prices, an insolvent utility, opacity and corruption. The rouble’s fall has largely been offset by the rand’s, and of course goods bought in roubles are made in Russia, creating no jobs in South Africa.

There’s a much bigger issue. The lower the world oil price, the more precarious Russia’s finances become, with insolvency looming in the next couple of years if low prices and sanctions persist. Already, Russia has gone in dollar terms from the world’s number six economy to number 15, just below Mexico; in 2015 alone, real wages fell 10 percent, and by May 2016, average monthly salaries were below China’s and only slightly above India’s. Domestic political pressures are building as ability to buy them off dwindles.

So is Russia a credible and reliable financial partner? Its National Wealth Fund, estimated at $72-billion, is under pressure; by early 2015 it was already overextended by $24-billion pledged to finance nuclear exports to four countries. (Those included the Hungarian Paks nuclear deal, whose low-interest loan commitment helped crash Russia’s foreign-trade bank needing an $18-billion bailout.) About another $64-billion would be needed to fulfil other offers already extended. And even that couldn’t go far if more than a handful of deals were like the proposed Bangladeshi Rooppur plant mentioned above – 90% financed ($12-billion) at 2.55 percent annual interest with a 10-year grace period, then an 18-year repayment.

Rosatom, the self-regulated state nuclear enterprise, is led by a former prime minister reporting to President Vladimir Putin and exempted from all normal state controls. Independent experts agree that Rosatom (or any other state entity) would be lucky to build half the 30 additional nuclear projects it’s trying to sell for $300-billion to a dozen more countries including South Africa. Russia’s interest rate in early 2016 was twice (and in an earlier spike, over three times) what any coal-competitive nuclear project would require. The Russian state’s capacity to absorb the spread is quickly vanishing. Russia’s domestic reactor starts halved in 2015; all state nuclear subsidies are to halt in 2016. Yet without those subsidies, “Rosatom wouldn’t complete a single project anywhere”.

Russia needs huge amounts of outside capital to finance its nuclear commitments. But Western capital is now blocked by sanctions for aggression in Ukraine. The low-interest bank financing that Russia promised South Africa does not exist, even in the state-owned Russian banks Rosatom could engage on paper. As nuclear-industry economist Steve Kidd notes: “Since vendors cannot bear the substantial costs of nuclear projects on their own, they are going to have to seek outside equity investors, many of whom are the same people who have repeatedly turned down nuclear in the past.” In mid-2016, he added: “Rosatom is pretty good at announcing 100-billion of orders in 25 countries, but not an awful lot of these are firm contracts, they are just bits of paper.”

Affordable capital from banks and private investors is especially unavailable in this case because Russia and its nuclear builder, Atomenergoprom, are junk-rated, judged even riskier than junk-rated Eskom, whose credit rating has fallen six notches since 2007. South Africa, in junk territory itself and likely to slip even further the longer markets think the government plans to proceed with a nuclear deal, has similar credit ratings to Turkey, whose Russian nuclear deal private investors have already rejected. This stands in striking contrast to foreign private investors’ proven eagerness to finance South Africa’s low-risk renewables.

Russia – its oil and gas exports cheapened and unwelcome, its prestige dented, Western partners fleeing, Ukraine adventure thwarted, Turkey sporadically alienated and its economy and $360-billion foreign reserves shrinking – now seeks nuclear deals less for doubtful economic advantage (especially on a risk-adjusted basis) than for domestic political reassurance and geopolitical leverage. The bear is hungry not cuddly.

Nuclear’s numerous cons

Kidd, one of the global nuclear industry’s most outspoken advocates, criticises the industry’s “myths that financing is a substantial barrier to nuclear build [and] that many developing countries are now set to develop active nuclear programmes”. Finance, he notes, “is not so much an input into a nuclear project as an output”. He adds that:

“…there is no unique financing mechanism that the relevant institutions can come up with to rescue a nuclear project that has questionable returns or too high a degree of risk for investors. This is the real problem: nuclear projects have largely become too expensive and risky to offer lenders the degree of assurance they require… Even with government incentives such as loan guarantees, fixed electricity prices and certain power off-take, nuclear projects today struggle to make economic sense, at least in the developed world. There are lots of different ways of generating electricity and the cost and schedule overruns at the latest projects are a warning to potential investors. They cannot be expected to put in either equity or loan finance if the prospective returns are inferior to those of other projects.… [O]n current trends very few of [the developing countries that have expressed a wish to establish nuclear power programmes] … are likely to do so and for the same reasons that nuclear power has stalled in …most of the rest of the world… The fundamental problem is that nuclear in these countries suffers from the same public acceptance and economic problems as elsewhere.”

As we have seen, that generic concern comes into sharp focus in this specific case. Not just Russian but any nuclear new-build is a poor choice for South Africa. It cannot compete with efficiency and renewables, by every relevant measure: cost, timeliness, financing, jobs, economic development, environmental and safety risk, independence, security, abundance of eternally free local energy sources, and the social good of “energy democracy”. These goals support and are advanced by the agenda of “an electricity sector that will deliver, transparently, competitively, reliably and sustainably, the electric services that will power economic growth and improve the welfare of all our people”.

It has come to this: ever more sales-starved nuclear vendors, seeking ever less solvent customers, now offer a risky project the seller can’t finance to a customer who can’t pay – a customer with no need, enchanted by the same nuclear devotees whose broken promises already cost the nation dearly, and with no apparent accountability.

South Africans deserve, and politics or markets will ultimately deliver, reliable and affordable electrical services – enough, for all, for ever. At issue is how much money, time and opportunity for national advancement will be lost before South Africa finally abandons the folly of procuring new nuclear power plants. DM

This was the final article in a four-part series.

Physicist Amory Lovins is a world-leading energy expert. A former Oxford don, honorary US architect, Swedish engineering academician, adviser to business and government leaders for 44 years in more than 65 countries including South Africa, he has won many of the world’s top energy and environment awards, received 12 honorary doctorates, taught at 10 universities and written 31 books and more than 625 papers. Time named him one of the world’s 100 most influential people; Foreign Policy, one of the 100 top global thinkers.

Anton Eberhard was inspired to undertake his PhD in the field of energy and development in 1979 after reading Lovins’s seminal publications on renewable energy and energy efficiency. He has recently been elected to the rank of emeritus professor and senior scholar at the University of Cape Town after 35 years of research, teaching and policy advocacy in energy and sustainable development in Africa.

Photo: Russian President Vladimir Putin (front) visits the Budker Institute of Nuclear Physics in Novosibirsk, Russia, 08 February 2018. Photo: EPA-EFE/ALEXEY NIKOLSKY / SPUTNIK / KREMLIN POOL MANDATORY CREDIT

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