Clarity required on drivers of energy policy decision

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This strategy was recently reaffirmed by new energy minister, Tina Joematt-Peterson, who highlighted in her budget vote speech that "the nuclear expansion option is [now] a central feature in our future energy mix" - indicating that between R300 billion and R1 trillion will be allocated towards a nuclear build programme.

While it is undeniable that the construction of additional baseload generation capacity is required in order to address the country's issues of energy security, writes Tom Harris at Frost & Sullivan, one cannot help but raise the question: why is such a strong focus repeatedly being placed on nuclear, despite several energy analysts holding a contradictory view?

Is this focus being driven by the overall affordability of nuclear energy? The short answer: probably not. While comparing generation technologies is not as simple as it may seem, given that different technologies have different functional life spans, different operational costs, different environmental impacts and are employed for different functions- considering average capital costs does provide a starting point for comparing the pros and cons of generation alternatives.

Update to the IRP

The recent update to the Integrated Resource Plan (IRP) states that at an overnight capital cost above $6,500 per kilowatt (kW), no new nuclear capacity will be procured - with the capacity instead being allocated to concentrated solar power (CSP), wind and combined cycle gas turbines (CCGT). This is critical, as the most recent nuclear power contracts in Europe suggest such a favourable cost scenario is unlikely to occur.

The latest Russian (Rosatom) nuclear deal in Hungary for the Paks nuclear power plant cost $7,031 per kW, while the contract for Hinkley Point C in the United Kingdom with Électricité de France (EDF) was believed to be concluded at around $7,900 per kW. EDF has been guaranteed a price for the power the plant generates of $155.40 (£92.50) per MWh. This equates to R1.66 per kWh which is substantially more expensive than the average prices recently concluded in Round 3 of the Renewable Energy IPP (REIPP) Programme:

• Wind at an average price of R0.74 per kWh, with lowest bid at R0.66 per kWh.
  
• Solar PV at R0.99 per kWh, with the lowest bid at R0.86 per kWh.
  
• CSP at R1.64 per kWh.

The 2013 World Nuclear Industry Status Report estimates that the average capital cost for nuclear projects has risen from $1,000 per kW to approximately $7,000 per kW over the past decade, in line with escalating construction costs - highlighting that the European projects mentioned above are not out of line with current global averages.

Is this focus on nuclear being driven by the urgent shortage of generation capacity - and thus the need for implementation timelines which are as short as possible? In this regard too, there is again little evidence to support a case for nuclear generation capacity. Nuclear has exceptionally long build times and construction is often subject to lengthy delays. The World Nuclear Report highlighted that in 2013, of the 59 units under construction in the world, at least 18 were experiencing multi-year delays, while the remaining 41 projects had not yet reached projected start-up dates or had only been recently started, making it difficult to assess whether they are running on schedule. While nuclear plants can be completed in as little as 4-5 years, it took an average of 13.8 years to finish the reactors that were completed during 2011. Such delays have also been proven to result in developed countries with strong project management capabilities.

SA cannot afford delays

While EDF has insisted it can deliver the Hinkley Point C reactor on time and within budget, its current Flamanville reactor project in France has already experienced significant time and cost over-runs. This reactor was originally scheduled to start operating in 2012; EDF now hopes that the reactor may be operational by 2016. Originally priced at €3.3bn, the reactor is currently estimated at €8.5bn. Similarly, the Olkiluoto reactor in Finland was scheduled to go online in 2009, but completion is no longer expected prior to 2018.

South Africa cannot afford a repeat of the costly delays that have been experienced in the construction of Medupi and Kusile. These coal-fired behemoths have run considerably over budget, and are yet to be completed. Completion timelines have been continuously postponed and it is now expected that Medupi will not achieve commercial operability until mid-2015. Given the delays experienced in the implementation of these current mega-projects, can South Africa really afford to bank on the fact that its own nuclear programme will not encounter similar issues to those encountered by recent nuclear builds in Europe?

An additional question to consider is: should concern be given to the potential risk of excess generation capacity? Given the current dampened state of national economic growth (with GDP growing at 1.9% in 2013 vs. government's long-term target of 4-5%) and industry's rising focus on energy efficiency, the future of electricity demand within the country is anything but certain. Already, lower than expected GDP growth and price-elastic demand behaviour have led to significant adjustments in consumer demand.

The IRP update wisely advocates that commitments to long range, large-scale investment decisions should be avoided in order to ensure decisions of least regret. If the construction of six new nuclear reactors is implemented (of 1,600MW each), and these projects take approximately 9-10 years to be completed (the current global industry average), it will do little to ease South Africa's near-term energy shortages.

Commissioning a white elephant

Instead, if significant investments are made in a nuclear build programme, but demand requirements fail to reach projected levels, while industry begins to devise alternative solutions that can be more quickly implemented, there is a risk that we could witness the commissioning of something of a white elephant in the energy sector in 2025, and be left sitting with a few thousand megawatts of excess baseload capacity.

Yes, given the drive to expand the regional distribution of electricity, there is the potential that if such excess capacity were to materialise, electricity could be exported and sold to members of the Southern African power pool. But initiatives such as the Grand Inga hydro power scheme also need to be considered by policy makers in planning scenarios.

This project, which is set to add 40,000MW of power to the sub-Saharan grid, has recently received grant approval by the World Bank. The power generated will be exported out of central Africa, and as such, could supply the demand needs of various countries -standing to limit South Africa's electricity export potential, as well as the need for extensive internal generation capacity additions. Therefore, energy policy-makers should realistically reflect on such national and regional risks, given that at some level of excess capacity, industry participants may struggle to achieve the required return on investment.

Eskom is struggling

Consideration should also be given to credit ratings and the cost of servicing debt. Eskom is already struggling to meet its costly debt obligations and should be looking to implement projects with the lowest possible risk profiles. The cost of debt is, to a large degree, determined by the riskiness of Eskom's asset, liability and earnings portfolio, which is assessed by the various credit rating agencies.

Over the past year, Eskom's credit rating has been downgraded to BBB+, BBB- and Baa3 by Fitch, Standard & Poor's, and Moody's respectively. In addition, the credit ratings on South Africa's government bonds have also recently been downgraded - to BBB, BBB- and Baa1 by the same respective credit rating agencies. The World Nuclear Industry Status Report states that rating agencies consider nuclear investment risky and the abandoning of nuclear projects explicitly 'credit positive', and reports that 67% of nuclear utilities assessed between 2008 and 2013 were downgraded.

However, these recent credit rating downgrades have most likely not yet factored in the risk of a confirmed nuclear build programme. Therefore, one can only but speculate if both Eskom and South Africa will not suffer further credit downgrades, potentially to 'junk status', if an Eskom-driven nuclear capacity-addition programme is implemented. Such downgrades would raise Eskom's debt servicing costs even higher and further deter investment away from South Africa's already struggling economy, which has already suffered one quarter of contraction in 2014.

Other technologies

Aren't there other less-risky, cost-competitive generation technologies that can be rolled out in substantially less time than nuclear projects - most notably, renewables and gas? There is a concern that certain renewable energy sources, such as wind and solar, are not reliable enough to be considered as a viable solutions to baseload power shortages. But, as energy storage technologies continue to advance and become more cost-efficient, they will begin to facilitate renewable generation that is more baseload compliant.

Already, the storage ability of CSP somewhat counteracts the argument that renewables are unable to serve a baseload function. Certain operational CSP projects have storage capabilities of up to 15 hours, while the aggregation of PV plants has been proven to substantially reduce the variability of the power generated to within an acceptable level of variability of around 5%. Solar technologies could also be combined with other renewables, such as wind, biogas and small-hydro, to form diverse portfolios of renewable solutions, which could help address baseload requirements.

While such renewables offer attractive, 'clean' energy solutions, one cannot ignore the generation potential of gas and coal. As the supply of natural gas has expanded rapidly, driven by significant gas discoveries and the rise of 'fracking', the global economy has witnessed falling gas prices and a rise in the affordability of gas-generated power. Industry experts have consequently identified that gas (which can be 40% more efficient and produce lower CO² emissions than coal) could become one of the key energy sources of the future within sub-Saharan Africa.

Gas exploration in Africa

South Africa poses significant gas extraction opportunities - with shale gas in the Karoo and sub-sea gas potential off our coastlines, with the first deep-water well currently being drilled off Mossel Bay's shores. But even if this potential fails to materialise, the country is well-positioned to take advantage of the burgeoning gas exploration and production apparent in East and West Africa.

Recent gas finds in Mozambique are expected to catapult the country to become one of the world's top ten gas-reserve nations. This is highly relevant, because as South Africa's neighbour, they are located relatively close to our industrial hub in the Northern Provinces and Gauteng, where a large amount of energy intensive users currently operate. In theory, this means that South Africa could soon have access to a new power resource to fuel the country's energy intensive industries.

However, accessing this gas potential will also require the facilitative infrastructure, and consequently, South Africa has avidly awaited the release of the DoE's Gas Utilisation Master Plan (GUMP), which will determine the evolution of the industry. This will be vital to energy capacity planning, as the potential of 'big gas' could mitigate the need to establish nuclear altogether - as outlined in the IRP.

Given the abundance of coal supply in South Africa, the continued development of coal generation capacity is another area that still poses significant potential benefits for the country. As a consequence, there have been rumours that construction of a third new coal-fired power station, Medupi and Kusile's belated cousin, will begin within the foreseeable future. While the two most recent coal projects proved both expensive and lengthy, it must be remembered that these factors were determined by technology choices and poor project management.

Coal-fired power stations

As long as cheap coal is available within the country, and project implementers can learn from the costly mistakes of these most recent power plant builds, coal-fired power stations are likely to pose a cheaper and more viable generation solution to address baseload needs than nuclear. The best option may be to consider a build-operate-transfer (BOT) methodology for such future projects, rather than allowing for another Eskom-facilitated build.

In line with the IRP - which outlines baseload allocations for coal, gas and hydro - the government is in the process of launching a series of new independent power producer (IPP) procurement programmes for baseload generation capacity. The first of these will be a 2,500MW coal IPP procurement programme, for which the government has already issued a request for qualification and will soon be issuing a request for proposal. This is anticipated to be swiftly followed by an 800MW co-generation IPP procurement programme.

Such developments will go a long way towards easing the country's electricity supply issues, improving efficiency and are in line with global trends - which indicate a movement towards the privatisation of energy industries across the globe. The development of multiple private projects (as facilitated by such IPP procurement programmes) offers the potential for a more diversified 'generation portfolio', which could reduce the overall risk within the industry relative to the implementation of only a few large-scale projects.

In contrast, the addition of nuclear capacity could direct the industry in a different direction. The World Nuclear Industry Status Report indicates that in a truly competitive electricity market, nuclear plants are likely to struggle to survive and find financing difficult and expensive to source, and highlights that "all the nuclear plants on which construction has started in the past decade are in monopoly systems, usually state-owned, or....protected by a long-term power purchase agreement". It is therefore likely that a South African nuclear build programme would need to be a public-supported project, which would consequently slow the transition towards a competitive and privatised energy industry.

Different scenarios

Given cost considerations, risk scenarios, global trends and the variety of options available to the industry in terms of addressing baseload power shortages, can government truly justify fast-tracking the installation a massive 9,600MW of new nuclear capacity? If the latest IRP were used as a guideline, the answer would seem to be: most probably not. In all of the most realistic scenarios outlined in the updated version of this policy document, the nuclear option is either discounted completely, suggested to be delayed, or allocated far less than the 9,600MW of capacity now suggested by our energy minister.

With rising environmental awareness, carbon emissions considerations are becoming increasingly important, and in this light one can partially understand why certain individuals advocate the addition of nuclear over coal and gas. But even the process of weighing-up the certainty of additional CO² emissions against the uncertain environmental cost of nuclear waste and the potential for nuclear disaster is a complex exercise, and must inherently involve subjective decision-making. Perhaps this is a situation where it is, as the saying goes, better the devil you know.

In light of the current cost scenarios and the potential risks associated with nuclear energy, maybe national government and the DoE would be better served by focusing more wholly on continuing to foster the development of a diverse mix of coal, gas and renewable energy capacity, instead of attempting to initiate a large-scale nuclear build programme.

Side-step challenges

While many of the reasons outlined above indicate that nuclear may not be the most appropriate solution for South Africa's energy crisis, maybe the nuclear decision has pivoted on certain factors of which the public has not yet been made aware of. If this is the case, and the additions of nuclear capacity will proceed regardless, the government should consider following a more risk-averse, modular implementation process - which side-steps the challenges of large-scale projects. While typical nuclear reactors are currently built to be about 1,600MW in size, with the majority of utility-scale nuclear power plants hosting two reactors, small nuclear reactors (smaller than 300MW) are becoming increasingly attractive.

'Small' nuclear is less capital intensive, per unit, and can be constructed far more quickly than standard nuclear reactors; in addition, they do not require many of the safety provisions of larger projects and are suggested to be able to achieve economies of scale through the number of reactors constructed, rather than the size (World Nuclear Organisation, 2014).

The World Nuclear Organisation further suggests that large, baseload compliant nuclear plants can be built through the modular construction of 'small' nuclear reactors, and that as one module is finished and starts producing electricity, it will generate positive cash flow for the next module to be built. However, while this technology is becoming progressively more cost-efficient, it is again not yet cost competitive relative to the renewable and gas alternatives.

Controversial topic

Regardless of whether nuclear generation is the best answer to the country's current baseload requirements, clearly the topic of additional nuclear generation capacity is a controversial one - and consequently, government's support of a nuclear build programme has ruffled some feathers. The discontented ripples produced by this sudden and somewhat unanticipated supportive stance were clearly evident in NUMSA's public criticism of the government's pro-nuclear comments.

Subsequent to the SONA, Joemat-Petterson attempted to quell negative industry sentiment by highlighting that no final decision had yet been made with regards to the advancement of the nuclear industry. She did however also add that the debate around nuclear had been pending for too long, and that decisive action would be taken over the next few weeks to lead us to a firm decision on the nuclear build programme. Following this, less than a month later, Joemat-Petterson has now confirmed that government will be 'fast-tracking' a nuclear build programme, aiming to add 9,600MW within the next decade.

The apparent disjuncture between such recent statements by government officials, and the scenarios outlined in the most recent IRP update, may cause one to question: what truly is going on in terms of energy policy development in South Africa, and how are important decisions regarding the evolution of the energy landscape actually being made? While the development of the new 'energy brains trust', or Ministerial Advisory Council on Energy, indicates a step towards a more publicly-inclusive policy development process, one cannot be sure of the extent to which this 'energy brains trust' will be able to sway the imminent decision on a nuclear build programme, given that the decision-making power will still sit with the Cabinet.

Communicate factors clearly

If the government has truly decided that nuclear generation capacity is the best alternative to address South Africa's baseload electricity requirements, the responsible policy makers would do well to ensure that they clearly communicate the factors that led to this conclusion. This should involve identifying the key metrics and variables considered - highlighting how nuclear performed relative to gas, coal and renewable alternatives, along with the assumptions inherent in any such comparisons.

While various industry participants may still differ in opinion in terms of the weighting assigned to certain metrics in the decision-making process, this transparency would go a long way to improving investor sentiment. It would encourage industry that the government is following a more consistent, logical and considered policy development process - rather than one that is driven by the whims, fads and fancies of particular individuals.

Special credits: Gareth Blanckenberg, Industry Analyst, and Johan Muller, Programme Manager at Frost & Sullivan Africa

Sources:

• World Nuclear Association, World Nuclear Industry Status Report 2013
  
• World Nuclear Association, Small Nuclear Power Reactors
  
• Department of Energy, Integrated Resource Plan - 2013 Update
  
• Engineering News
  
• Frost & Sullivan Research