Russia is likely to build SA’s nuclear plants but financing remains a mystery

Russia is seen as the frontrunner to win the right to build South African nuclear power plants that may be worth as much as $100 billion (R1.2 trillion). With a six-month deadline to award contracts, who’s going to pay for the country’s biggest project yet remains a mystery. Price-tag estimates for as many as eight reactors generating 9 600 megawatts, which the government wants to begin operating from 2023 and complete by 2029, range from $37bn to $100bn. Bids are due to start this quarter, with Russia’s Rosatom seen as a leader. Areva, EDF, Toshiba’s Westinghouse Electric, China Guangdong Nuclear Power Holding and Korea Electric Power have also shown interest. The planned investment comes as the government battles to fend off a junk-grade credit rating and the Treasury seeks to rein in the budget deficit.

Proceeding with the nuclear plants could result in a large increase in public debt, the International Monetary Fund warned in a June 24 report. “There appears to be a simple-minded assumption that countries like China or Russia will provide cheap plants and offer finance,” Steve Thomas, a professor of energy policy at the University of Greenwich in the UK, who has monitored South Africa’s nuclear plans since 1997, said in a June 24 phone interview. “That’s an illusion.” Rosatom may have a head-start in the bidding because of the close historical ties between the ANC and Russia, according to analysts, including IHS Country Risk’s Robert Besseling and Teneo Intelligence’s Anne Fruhauf. President Jacob Zuma has met his Russian counterpart Vladimir Putin several times over the past year and the two nations have signed a nuclear co-operation accord.

The agreement provided a “proper and solid platform for future extensive collaboration”, Energy Minister Tina Joemat-Pettersson said in a statement in September. South Africa has concluded similar pacts with China, France, the US, Japan and South Korea. Rosatom has agreed to fund construction of plants elsewhere. In 2013, Hungarian President Viktor Orban agreed on a e12bn (R164bn) expansion to a nuclear power plant with Rosatom, funded with a e10bn loan from Russia, payable over 30 years at below-market rates. Hungary’s parliament classified the deal for three decades. “We can’t comment on financial terms of our possible bid until South Africa starts the tender and clarifies the tender conditions,” Rosatom spokesman Sergey Novikov said by phone from Moscow last week.

State power-utility Eskom operates South Africa’s sole nuclear plant, the 1 800MW Koeberg facility near Cape Town, which has been in operation since 1984. Five years ago, the government shelved plans to additional conventional atomic stations because they were too expensive and difficult to finance. The government has revived its nuclear expansion plans as it seeks to address energy shortages that are already causing blackouts and to reduce its reliance on coal, which Eskom uses to generate about 80 percent of the nation’s electricity. While South Africa has had 80 days of scheduled power cuts this year, including 20 in June, there are none so far this month. The new reactors could cost as much as $100bn over 15 years, according to Des Muller, the head of building company Group Five’s nuclear construction division. That’s more than five times what Eskom is spending on two coal-fired plants that will generate a similar amount of power.

A study published in 2013 by the University of Cape Town’s energy research centre found nuclear plants were not needed and would not be cost-effective for 15 to 25 years, based on a projected cost of $7 000 per kilowatt installed. The Department of Energy’s 2013 master plan, which the government rejected, suggested deferring a decision on whether to build atomic power facilities until at least 2025, and scrapping the option if the cost exceeded $6 500 per kilowatt of capacity. Thomas estimates current costs at about $8 000 per kilowatt installed. The nuclear programme would benefit the country for the next 80 years and promote industrialisation, said Zizamele Mbambo, a deputy director-general at the Department of Energy. “The return on investment will far exceed the investment,” he said last week.

While the new plants will go ahead, the cost and funding arrangements still have to be worked out, according to the energy minister. “The true test of affordability for nuclear power will be in the price and financial offering provided by technology suppliers,” she said in a written reply to a parliamentary question on June 11. “It is crucial to start the actual nuclear procurement as soon as possible. The expected cost of the project will be announced once the procurement process has been finalised.” While Zuma and his deputy Cyril Ramaphosa back the nuclear programme, the Treasury is more circumspect. “Nuclear would be a substantial financial commitment and government can only make the final commitment after careful and thorough modelling and an affordability assessment,” it said in an e-mailed response to questions on June 29.

The Treasury’s three-year budget released February 25 provides for the budget deficit to be cut to 2.5 percent of gross domestic product by the year to March 2018, from 3.9 percent this financial year, and does not allocate any money for new nuclear plants. Moody’s Investors Service rates South African debt at Baa2, the second-lowest investment grade, while Standard & Poor’s has an assessment one level above junk. “I’ve always been sceptical of such an ambitious programme for a country like South Africa,” Chris Gadomski, a nuclear-power analyst at Bloomberg New Energy Finance, said on June 29. “You have gone through this exercise in 2007/8. What stopped it was the lack of finance. My thinking is that very little has changed in the country as far as the capacity to finance something like this.”

While the government may consider requesting companies to build, own and operate the nuclear plants subject to power- purchase agreements, developers don’t favour such deals because the projects are so capital-intensive, said Elchin Mammadov, an utilities analyst for Bloomberg Intelligence. Most reactors in developing countries other than China and India are likely to be financed with 15-to 20-year subsidised loans provided by the suppliers’ host nations, he said on June 29. The government would battle to finance the plants even if it gets cheap loans, and off-take agreements were the only viable nuclear option if power-tariff increases could be contained, said Nazmeera Moola, an economist at Investec Asset Management. “If the build costs a reasonable amount of money and it ends up being that the tariff required to fund it is viable, great,” she said. “It all depends on how much it costs.” Electricity prices in South Africa have almost quadrupled since 2007.

Detailed financial analysis should precede any decision to invest in additional nuclear capacity, said Harald Winkler, the Energy Research Centre’s director. “There are serious questions that need to be answered as to whether South Africa is able to finance this programme and how any investment would have to be repaid,” he said on June 26. “It’s very unclear.”