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17 August 2017 05:42 (South Africa)
Opinionista Dirk de Vos

Groucho Marx and the Nuclear Energy Sector – a response to Ivo Vegter

  • 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.

Nuclear has to be large and while it shares the characteristics of other megaprojects of being over budget, over-time, every time, nuclear has a particularly bad record. The main problem with this is that one cannot do a proper comparative analysis – we compare what the nuclear vendors say they will deliver (as opposed to what we see with our own eyes) against other options, say like renewables, that have a record of delivering exactly what they are contracted to deliver.

The oddest thing about the engagement with Ivo Vegter in the subject of nuclear energy is this: Ivo is a self-declared libertarian and an adherent of the Austrian School of Economics . While I think that some forms of libertarian thought and Austrian Economics provide worthwhile insights, especially about the role of free markets and changes at the margin, I am persuaded by the merits of the important role of an effective state in the economy. I am persuaded, for example, that Keynesians are right in some important respects.

While there are differences of opinion amongst libertarians Vegter’s views on most topics he tackles are consistent with a libertarian perspective of opposition to government. On nuclear energy however, we appear to swap our ideological points of view. On nuclear, Vegter takes the position of a died-in the-wool big government statist, and I find myself arguing for markets, free enterprise and paring back the role of the state. It is rather confusing, and on reading Vegter’s latest contribution I find myself rubbing my eyes in disbelief.

On the same day as Vegter’s article appears, Ismail Lagardien, of a “Political Economy” persuasion and a contributor to the National Development Plan (libertarians loath those sorts of things) makes a number of telling points about the need for extreme caution about moving forward with nuclear energy, expressing deep skepticism about the role of the state in the whole thing.

Vegter then proceeds to give an analysis which says that economic growth requires energy, and that we don’t have enough of it so we can’t grow and that accounts for our poor economic performance. This is not entirely true. Eskom, one of the last remaining large electricity utilities in the world with a complete monopoly of generation and transmission, has sold electricity at below cost price since about 1991, something which abruptly stopped by 2008. In doing so, it has eroded its capital base which is principally why it is in its present parlous state. Had our government carried out its own 1998 policy on reforming the electricity sector by introducing competition and markets, we would be in a different position now. We might not have had all that cheap electricity (until now) but we would have had a far more viable electricity sector within a more balanced economy.

While it is true that loadshedding contributed to our weakening economy, loadshedding is itself a consequence of a monopoly provider aware of political signals instead of market-generated price signals. Selling electricity at below cost is not sustainable for any type of industrial policy. It is hard to calculate the damage caused by our electricity supply side shocks. Of critical importance is the following: Demand for electricity is a function of the price of its supply, not just the amount than can theoretically be supplied. Look, for example, at Eskom’s most recent application to NERSA for clawbacks through future tariff increase beyond those already granted. On one estimate, half of the Eskom’s requirement is due to fall off in demand due to the price increases, not lack of supply. Building capacity at a price that cannot be absorbed by the wider economy simply results in stranded assets.

Let us consider how the problem of load-shedding has gone away. Eskom ascribes this to an improved maintenance management regime, but if you believe that, you’ll believe anything. Although Eskom plant availability has increased somewhat, it is a small increase and is still well below what it should be. The main reason for a lack of loadshedding is that large chunks of demand have evaporated and this is due to the price of the supply. That should be more worrying than loadshedding itself. Less demand means whatever is supplied is borne by those who remain in the market which creates a cycle of having to increase the price further to support a particular cost base which, in turn, reduces demand further and so on.

The merits and demerits of different sources of energy, their intermittency, environmental impact and so on is a continuing debate and goes on and on and each has their firm disciples who are convinced about the merits of each source. Of course, there is a core of truth on each of the different claims but adherents, being what they are, inevitably over-state their positions. I am for much more renewable energy. Of course, I understand that these are largely intermittent (ie not hydro or Concentrated Solar with storage) but in most jurisdictions, it only becomes a problem when peak intermittent sources get to more than 20% of total generating capacity in inflexible grids and perhaps double that in flexible ones. Can renewables be a complete 100% solution today? No. But are we anywhere close to the 20-25% renewable contribution level yet? Not even close. For the present, intermittency of renewables is a theoretical problem. Renewables are starting to compete on the only measure that means anything, the kWh. By the time we hit the practical limits of integrating renewables, electricity storage, grid-scale and elsewhere, is very likely to be in a position provide the balancing and dispatchability requirements to allow for further penetration of increasingly cheap intermittent sources of generation.

Nuclear is different. Even if one goes along with Vegter’s acceptance of the nuclear industry’s assurances on safety, the nuclear industry has to build its assets housed in buildings that can withstand the impact of an airliner crashing into them. Despite a supposed nuclear renaissance already 15 years in, the nuclear sector is going nowhere and in places where it once dominated, like France, it is creating awful headaches as reactors reach their decommissioning phase. When I state that “Those parts of the world that procure electricity using democratic, transparent and market-based methods don’t build new reactors”, I understand that it appears to be an over-generalisation, but it is absolutely true. To counter that Vegter uses the projections of the World Nuclear Organisation about its own sector. Really? As Peter Bradford, a former US Nuclear Regulatory Commission member, wrote, this is reminiscent of Groucho Marx leaping from a paramour’s bed to confront a disbelieving husband with: “Who are you going to believe, me or your eyes?”. Site approvals or anticipated new builds mean almost nothing – as we have seen.

Nuclear has to be large and while it shares the characteristics of other megaprojects of being over budget, over-time, every time, nuclear has a particularly bad record. The main problem with this is that one cannot do a proper comparative analysis. Using Groucho Marx again, we compare what the nuclear vendors say they will deliver (as opposed to what we see with our own eyes) against other options, say like renewables, that have a record of delivering exactly what they are contracted to deliver. Part of why renewables deliver, on budget, on time, all the time, is that they are smaller projects by definition but also they are funded or invested in by private capital. When (as they always do) nuclear or other centralized and state funded projects go over budget, they waive off the problem and simply dump the additional costs onto the taxpayer. This is what has happened with Medupi, Kusile and Ingula. If renewable power plants are delayed or over-budget, it is their investors who bear the full risk of cost over-runs, delays or not meeting the required project outcome. Against the rapid advance of renewables, nuclear just does not stand a chance. Perhaps, designs still in R&D might provide promise of a real renaissance but only if they can fit into an electricity utility model appropriate for the 21st century that will be different from the centralised model of the 20th century upon which the existing nuclear energy relies. This model will be flexible, distributed and market orientated. For those in favour of free markets, what is there not to like?

As Ismail Lagardien predicts, we are likely to see a concerted effort by advocates of nuclear energy, but I am more sanguine about its threat. While some are concerned about the pre-Christmas Section 36 Determination published in the Government Gazette, I take the view that it takes the prospect of an actual nuclear build backwards, not forwards. The nuclear energy sector reminds me a bit of schoolboy rugby in the lower teams. You see a boy on the other team that is so large that you can’t believe he is in the same age group (or an A team player). It is only after the nervous 5 minutes that you realise that he hasn’t got any ability or puff and he disappears further into the background the further one gets into the game. The real threat nuclear poses for us is not that a new nuclear reactor will ever be commissioned (it won’t) but rather that it distracts us from the critical things that need to be done to haul our country’s electricity system deeper into the 21st century. DM

  • 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.

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