Why you will pay for the nuclear deal

Eskom will reportedly be the procurer for the nuclear build programme. However, there are concerns as to whether or not the state owned power entity will be able to fulfil its role. Chris Yelland, energy expert and managing director of EE Publishing notes that there are two aspects of the build that need to be considered.

“Firstly, I think it’s true to say that the Department of Energy has very serious resource constraints, and especially in a project this size, and of this complexity of a nuclear new build. I get the impression that the Minister of Energy is very happy to be relieved of this burden and to dump this burden onto Eskom. Not just to project manage it, and to handle all the so-called owner’s development costs, but also, she appears to have dumped the whole funding on Eskom’s shoulders as well. And Eskom’s saying they don’t need the Treasury,” says Yelland.

However, Yelland points out that the vital questions are: Can Eskom fulfil its role as the procurer for the project? Can the power utility fund the project on its own? Do they have the necessary resources? Can the build be completed on time?

The funding

While there are claims that Eskom will foot the entire bill, it is taxpayers and consumers that will be left paying for the project, according to Yelland.

However, Knox Msebenzi, the MD of the Nuclear Industry Association of South Africa, believes that funding should not be an issue. “From the pronouncements that were made, specific figures, which are verifiable in the Eskom financial statements, were mentioned. Why would anybody doubt that Eskom can fund these projects? Eskom’s finances are a matter of public record, so there should be no issue here.”

In contrast, Yelland argues: “In my opinion the people at Eskom say they can do it, but at the end of the day all they want is for the project to start, because once the project starts, it can’t go back. If you sign a contract, you’re handcuffed. And then who do you think pays? The taxpayer pays, because they don’t have external shareholders, and the taxpayer and the customers of electricity pay for it with increased prices and the taxpayer with equity injection. At the end of the day, people at Eskom, they can talk, but they are not held accountable for their talk. The public are accountable.”

For Eskom to say that they have the funds to cover the project expenses is hard to believe, as Yelland emphasises that even developed countries such as the United Kingdom (UK) are unable to a fund nuclear build on its own.

Yelland clarifies: “In the UK at the moment a project has just been signed off in that it is going to start construction. It’s called Hinkley Point C and it is for 3200 Megawatts (MW). It’s two reactors, each of them is 1600MW. It’s being constructed by Areva, which is a French nuclear company, which is owned by Électricité de France, a utility much bigger than Eskom, maybe double the size of Eskom. Now the British government can’t fund it on their own. The French government can’t fund it on their own. Électricité de France can’t fund it on their own, they are a shareholder in this. Areva, the people constructing it can’t fund it on their own, and they’ve had to bring in the Chinese who’ve got plenty of money to help fund it, but even the Chinese are not funding it on their own. They are funding it together with Areva, EDF, the French government and the British government, and that’s a 3200MW build.

“Now South Africa and Eskom seem to think it can fund a 9600MW build. That is three times the size, and Eskom says it can fund it on its own balance sheet without the input of Treasury (that is the South African government) they can do it on their own. Without government guarantees and without anything from Treasury.”

Finding the funding

There are several ways in which Eskom can get the money to fund the nuclear build project. One that consumers are familiar with is tariff increases. According to Yelland, tariff increases is “exactly how they are going to fund it.”

The taxpayers and the consumers are the ones who will shoulder the risk of the nuclear build. If there are cost overruns (which were experienced with both Medupi and Kusile) Eskom has just to approach the National Energy Regulator (NERSA), cap in hand, for a tariff increase. If the increase is denied, the next option implore shareholders for the funds, in this case the state. As Eskom is a state owned enterprise, the taxpayer is in essence the shareholder, and as such, it is taxpayer’s money that will be used to fund the build.

However, Yelland reveals that there is a limit as to how high the tariff can go. Unfortunately it is not a definite figure, but rather what the country can afford. “If you push your price up too high you will kill your economy. There’s a limit to affordability, not only by individuals, but by business and by industry. If the price of electricity goes too high certain businesses become uncompetitive and they go out of business.”

Msebenzi argues that it is a misconception that taxpayers will be funding the nuclear build. “Such projects are funded using money borrowed from international money, lending institutions whose interest rates are geared towards such projects, and the revenue accrued from the sale of electricity is used to pay back the loan. It is therefore paramount that funding is sourced from the right lending institution. There are many funding models used for such projects, ranging from Build Own Operate (BOO) to models that require Eskom to own the entire process. The appropriateness of the model depends on a number of factors. Given that our government wants to grow an already existing nuclear industry, it is more likely that the extreme BOO model will not be favoured. The important issue is that these projects will be embarked upon only if the electricity sold to the rate payers is competitive with other generation options. This is the pronouncement made by both government and Eskom.”

The project

Another concern according to Yelland, is that while the country has the expertise to run a nuclear power plant, it does not have the knowledge and experience required to build one. We will need to bring this expertise in from overseas.

While Eskom manages Koeberg nuclear power station, it was in fact built by the French. “South Africa has never built a nuclear power plant per say, and certainly even in the construction activity, this was done 30 years ago in a completely different environment. I don’t think that one can say that because we have Koeberg that we know how to construct a nuclear power plant, we certainly have got operating experience, Eskom operates it, but it’s very different on construction,” says Yelland.

However, Msebenzi disagrees stating that if there is any entity with the expertise to manage the nuclear build, it is Eskom.

“It is the only entity in the African continent to have built and run a nuclear power plant. This is one of the recommendations of the IAEA Integrated Nuclear Infrastructure Review Missions (INIR) conducted in South Africa, it is the appropriate entity to handle this task. Eskom also has the experience to handle huge infrastructure projects,” reveals Msebenzi.

Yet, Msebenzi points out that a relevant question is whether or not Eskom has the necessary resources and the ability to deploy them appropriately. “The question should be, “Does Eskom has the capacity to mobilise the people with the right experience, knowledge, people and resources?” and the answer is an unequivocal “Yes”. The experience Eskom has (both in terms what to do and what not to do) that it picked up from the recent new coal power plants (Medupi and Kusile) is going to be very handy for it.”

It appears that only time will tell how the nuclear build is funded, as opinions in the run-up to the build are divided on the matter.