16 September 2014

Business Day Live (South Africa): A nuclear tale that sounds too good to be true

NEWS ANALYSIS: A nuclear tale that sounds too good to be true

by Carol Paton, 15 September 2014, 08:20

BUILD now, pay much later. That is the good news story about nuclear energy being told to SA’s decision-makers. In this model, a nuclear vendor and a financier — usually the government of the country of the vendor or a state-owned enterprise or bank — come as a package. The loan from the financier is repaid from the electricity tariff over the long term, 15 to 20 years, and repayments begin when electricity is produced.

This is the simple picture, which has given rise to the perhaps apocryphal story in which a very senior member of the executive told Treasury officials after meeting his Russian counterparts: “We don’t need to pay for it!”

The vendor-financed option has made the scary R1-trillion price tag, wielded by Department of Energy and Treasury officials as a warning to their political principals, disappear in a puff of smoke. The nuclear option appears even more attractive when vendors move onto the next part of the story: as operating costs for nuclear energy are low, and the expense lies in construction, once the loan is repaid, energy becomes a virtual “cash cow” for the operator, and any private investors, for up to 30 years.

When Deputy President Cyril Ramaphosa was recently asked by a journalist to reconcile the government’s stated intention to proceed with nuclear power with the caution recommended by the National Development Plan, Mr Ramaphosa replied with confidence that “a clever financing package” such as “vendor financing” could make all of SA’s energy ambitions affordable.

Several off-the-record interviews with government officials confirm that this is the model being explored by the Cabinet sub-committee on energy security, which is now responsible for all steps leading to the procurement of nuclear power plants.

The clear frontrunners in this are French company Areva and Russian state-owned enterprise Rosatom. Both offer technology and finance in one package, with some differences. At the heart of both is a power purchase agreement in which the operator of the grid, Eskom, would make an irrevocable commitment to purchase the electricity at an agreed tariff.

Areva, which is majority state-owned, partners with French electricity utility Electricite de France (EDF) to provide the finance, usually through export credit guarantees from the French government. Areva did not provide an interview for this article, but it is believed that the model it would favour in SA would be for a state-owned enterprise — Eskom or a new state-owned company — to own and run the nuclear programme. EDF would provide 85% of the finance through export credit agencies and a small proportion, perhaps 15%, could be equity held by a private investor.

In other examples, the private investor is usually EDF, which can sometimes own up to 49% of a nuclear power plant.

In the past, the Russian model has been a “build, operate transfer” in which the financing is provided by the Russian ministry of finance and the plant is eventually transferred to the government of the home country when all loans are repaid. In Turkey, Russia is now experimenting with “build, operate, own”, in which the power plant remains in Russian hands.

Rosatom spokesman Ivan Dybov says according to the agreement between the Russian Federation and Turkey, financing is provided by the project company, a special-purpose entity 100% owned by Russian shareholders. A minority share may be sold to foreign investors.

“The project company undertakes the obligations of financing, design, construction, maintenance, operation and decommissioning. The Turkish government does not participate in the financing of the project. There is no additional burden on the budget of the country with the pay-back guaranteed by an off-take power purchase agreement at a fixed price,” says Dr Dybov.

The agreed tariff should ensure the return of all capital costs in 15 years, says Rosatom.

Vendors argue that the costs of nuclear energy have been wildly exaggerated. Overnight construction costs, excluding financing, for SA’s nuclear build are more likely to be R400bn, they say.

But is it really as simple as all this? The World Nuclear Industry Status Report 2014, sponsored in part by the anti-nuclear Green Party in the European Parliament, contains dire warnings on accepting these undertakings at face value. The report shows that nuclear energy globally is in decline due in the most part to nuclear accidents, the scale of the finance required, and the enormous risk of cost and time overruns during construction. The world has 50 fewer nuclear plants today than in 2002, with an installed capacity less than two decades ago.

The high risk in the construction of nuclear plants means that the only way that nuclear power plants are built any more is when the vendors bring the financing.

“Commercial banks will not finance it; development banks won’t finance it. Not only are these very large loans, but nobody knows what the plant will cost in the end. The only options for financing are through government subsidies or when the vendor brings its own backing,” the report’s lead writer, energy analyst Mycle Schneider, said in an interview.