How will SA’s new nuclear power stations be paid for?

March 6th, 2015, Published in Articles: EE Publishers, Articles: Energize, Featured: Energize


Roger Lilley

Roger Lilley

The South African government has committed itself, by means of its Nuclear Energy Policy and Integrated Resource Plan, to an energy mix consisting of coal, gas, hydro, nuclear, solar and wind. Yet, if the government is so determined to pursue nuclear power stations, why was no mention of the financing for this included in the minister of finance’s budget speech? One would expect that since government wants to use nuclear power to address the shortage of electricity in South Africa, and in the light of high-level delegations which have signed inter-governmental agreements regarding nuclear power, that this expenditure would have been a focus in the energy portion of this year’s budget speech.

This was, however, not the case. Instead, the public was told that the electricity levy will be increased by a whopping 57% from 3,5 to 5,5 c/kWh, and that Eskom would receive additional equity to the tune of R23-billion in three tranches. The public was also told that although the extra 2 c/kWh levy would be removed in time, a carbon tax can be expected soon. The fact that the R23-billion would be in the form of additional equity means that Eskom will not have to repay the money. This additional backing is meant to prop up the power utility’s balance sheet which should make it easier for the utility to borrow money on the open market.

Economists have pointed out however, that it will be impossible for Eskom to borrow money to build a fleet of nuclear power stations because of the vast amount of money needed. The capital cost of a nuclear power station is extremely high.

So who will fund these nuclear power plants? It has been suggested that the country which builds the stations will fund it, so-called vendor funding, and that South Africa would repay the debt over time as it sells the electricity generated by the plants over a lengthy period. But surely that will make electricity very expensive because of the large debt and the interest incurred.

Electricity from nuclear power stations is expensive because, despite these power stations being cheap to operate, they are very extremely expensive to build. The International Energy Agency estimated in 2010 that a pressurised water reactor (PWR) type of nuclear power station would cost approximately US$4800/kW to build. In 2013; the South African government’s estimate was $6500/kW; and recent reports show that a Hungarian nuclear power station, built by the Russians, cost $7000/kW, while the French-built nuclear power station at Hinckley Point, UK, cost $7900/kW. The figures quoted are for the new-build costs alone and do not include operating costs or interest.

Despite the high cost of nuclear power stations, and the obvious fact that South Africa cannot afford such an enormous outlay, the departments of energy, public enterprises, and trade and industry all appear to be in favour of this form of generation.

How much electricity does South Africa the country actually need? Eskom’s website shows an existing total generation capacity of 42 000 MW excluding the additional power from IPPs. The renewable energy independent power producers (REIPPs) have already added 1500 MW to the grid, and an additional 2500 MW is expected soon. Eskom’s Sere Wind farm will provide a further 100 MW, and a new privately owned 2400 MW coal-fired power station is on the cards under a so-called “coal IPP”.

Eskom is currently running its open cycle gas turbines (OCGTs) very hard to keep the lights on. These generate 2426 MW and will probably be used less frequently once the additional capacity comes on stream.

In his recent State of the Nation address, President Zuma said that 2600 MW will be supplied from hydroelectric schemes in the SADC countries, and that a further 15 000 MW will be available to the country from the Grand Inga hydroelectric project. He said that 9600 MW from the country’s nuclear new-build programme, as approved in the Integrated Resource Plan 2010-2030, would start to come online by 2023, just in time for Eskom to retire part of its aging power plants.

This means that South Africa may have more power capacity than it needs at exorbitant cost to the country’s economy. Expensive electricity will result in the country’s manufacturing sector losing its competitive advantage which will mitigate against growth and job creation.

At the same time the drive towards energy efficiency, which, according to the budget speech will be rewarded by an energy-efficiency savings incentive, set to increase by 111% to 95 c/kWh, will surely motivate people to use less electricity.

Perhaps it would be better for the country to continue to drive energy efficiency programmes and to support more IPP projects locally which will create the benefits of more job creation and additional power generation than to rely on foreign governments to build nuclear stations which we cannot afford, or to be reliant on foreign power from the Grand Inga project which is so far away.

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