NEIL OVERY: SA government’s nuclear model is flawed and not economically viable

Ownership options are fantasies as neither Eskom nor the state have the ability to raise sufficient capital to build a power plant

21 November 2024 - 05:00

by?Neil Overy

Koeberg nuclear power station is shown in Cape Town. Picture: MISHA JORDAAN/GALLO IMAGES

How would you like to start paying for a nuclear power station years before it’s even been built? How about also paying for cost overruns incurred by the vendor building the plant?

Under the current ownership and funding options being proposed by government in its reckless pursuit of new nuclear power, both are a real possibility.?

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According to a presentation made by the department of mineral resources & energy to the portfolio committee on energy & electricity in late August, three ownership options are being considered for the new nuclear power station.

The first two options — that the plant would be completely, or majority, owned by Eskom — are fantasies because neither Eskom nor government has the ability to affordably raise sufficient capital for either option. Not that any private institutions would finance the power station anyway. This means the third option — a public-private partnership (PPP), with the government having a minority shareholding (likely to be tiny) — is the only realistic option.

The department’s proposed PPP (subject to vendor approval) is a build-own-transfer model, whereby the vendor will build and own the nuclear power station, which will be transferred to the state when the vendor has made what it considers to be a suitable return on investment. Under this arrangement Eskom would be the operator, despite not owning the asset. What this means in terms of insurance and liability is anyone’s guess.

This arrangement would mean the costs (financial risk) of the new plant appear on the vendor’s, as opposed to Eskom’s or government’s, balance sheet. According to the department, this financial risk for the vendor can in theory be mitigated. It provides three ways of doing so — a power purchase agreement (PPA), a contract for difference agreement, or via something called the regulated asset base (RAB) model.?

It has become common for nuclear vendors to fund nuclear power stations via a PPA signed between the vendor and an electricity offtaker (such as Eskom). A PPA fixes the price of electricity (inflation linked) at such a level (strike price) that assures the vendor can recover costs and make a return on investment even if the wholesale price of electricity falls in the respective electricity market.

Eskom’s unbundling is set to create such a market. For example, in Turkey in 2010 a 15-year PPA was signed between Rosatom and the Turkish Electricity Trade & Contract Corporation?for the construction of the Akkuyu nuclear power station.

A 35-year “contract for difference” was signed between the world’s largest nuclear operator, EDF, and the British government for the construction of Hinkley Point C in 2016. In terms of this contract if the wholesale price of electricity goes above the strike price the offtaker is refunded the difference. If the wholesale price is below the strike price it acts in the same way as a normal PPA.?

When it comes to nuclear power stations PPAs have proven to be bad news for consumers because strike prices are inflated by vendors in the expectation that it will guarantee their revenues and shift some of the construction risk to consumers. For example, it has been calculated that electricity consumers in Turkey will pay 275% more for their electricity over the 15-years of the PPA compared with the price of renewables. The British government’s public accounts committee has estimated that the deal signed between EDF and the government will cost customers an additional $40bn over 35 years, compared with the cost of renewable energy sources.

Shockingly, these sweetheart deals are proving unworkable for nuclear vendors because of the delays and cost overruns that have always plagued the construction of nuclear power stations. Even for hugely state subsidised companies, such as EDF, delays and cost overruns are making the cost of building nuclear power stations financially unsustainable. For example, initiated in 2016, EDF’s Hinkley Point C, which was supposed to cost $23bn and be completed in 2027, is now expected to cost at least $34bn (in 2016 prices) and be completed in 2030 at the earliest. Because of this colossal cost increase EDF has told the British government that it will only begin the construction of another nuclear power station, Sizewell C, if the RAB model is used.

The RAB model shifts even more of the enormous financial risk of building a nuclear power station onto the end consumer by allowing vendors such as EDF to charge consumers for electricity as soon as it starts building. In this way consumers pay construction costs, potentially for years, before they receive any electricity in return. In addition, RAB allows vendors to charge end consumers for cost overruns. In Britain, EDF has stated that it expects consumers to directly cough up 30% of any cost overruns it incurs. After that any cost overruns above 30% would be covered by the vendor up to a yet to be agreed “funding cap” (which could be any figure over 30%), after which the British government (taxpayers) become liable for cost overruns, or the government terminates the project. As critics in Britain have noted, this model essentially provides a blank cheque for vendors to do as they please.?

It’s not just EDF that is interested in RAB. Under the heading “Nuclear Needs Finance” Rosatom’s website lists the “advantages” of the model, while it appears as an example of how to fund nuclear power stations on the World Nuclear Association website.

That vendors are now having to resort to desperate measures such as the RAB model tells you all you need to know about nuclear power. It is not, and never has been, an economically viable way to generate electricity. It is even less so now because of the rapid expansion of renewables.

That the RAB model is being considered for nuclear power anywhere is a scandal given that research has demonstrated that 97% of nuclear power station projects (175 out of 180 projects) ran over budget by an average of 117%.

That such a model is even being considered in SA, where energy poverty is increasing year on year due to pre-existing enormous tariff increases, in unconscionable.

? Dr Overy, a freelance researcher, writer and photographer, is a research associate at Environmental Humanities South, University of Cape Town.