Pro-nuclear lobby still fired up on deal despite court’s refusal

This opinion piece appeared in the Business Day on 3 May 2017. It can be seen here.

The government is determined to build power plants driven by reactors, but unaffordable agreements and huge costs loom if Russia’s Rosatom wins bid

Last week’s ruling by the High Court in Cape Town that set the procurement of 9.6GW of nuclear right back to square one apparently did little to damp the enthusiasm of the small pro-nuclear lobby.

Only a few days after the ruling, all the usual suspects — President Jacob Zuma, Eskom, Rosatom and the South African Nuclear Energy Corporation — said the procurement would continue. This would presumably take after following a successful appeal against the court’s findings or through the issuing of a new “legal” determination by the energy minister.

Big potential financial pitfalls await SA should the deal proceed in a new form.

The Westinghouse Electric Company, crippled by a $10bn debt, filed for bankruptcy in March, threatening the survival of its parent company Toshiba, which is now trying to sell its profit-making chip manufacturing holdings to cover the debt.

Westinghouse’s debt is largely the result of delays and cost overruns in the construction of two new nuclear power stations in the US. The construction of Waynesboro plant in Georgia is four years behind schedule and $3bn over budget and the plant in Jenkinsville, South Carolina. is two years behind schedule and $5.2bn over budget. The future of both is in jeopardy. What this confirms is that the construction of nuclear power stations only happens with the support of massive state subsidies.

In France, Areva and its parent EDF would also be filing for bankruptcy were it not for the generosity of the French and British treasuries and their reluctant bill-paying citizens.

EDF has a debt of $39bn (and future decommissioning and waste storage liabilities of about $50bn), despite a recent $9bn injection from the French government, which has made it clear that it wants to reduce its financial commitment to EDF.

EDF’s problems stem from the delays and cost overruns of its new nuclear power plants in France, China and Finland. In France, Flamanville 3 was supposed to be operational by 2012 at a cost of $3.5bn. It is now scheduled to operate in late 2018 at a cost of $11bn.

The Olkiluoto power station in Finland was to be operational in 2010 at a cost of $3.2bn. The earliest it is likely to be completed is now 2020 at an estimated cost of $9.1bn. In China, the Taishan Nuclear Power Plant was supposed to be operational by 2013, but has now been put back to at least the end of 2018 and is also billions over budget.

In the UK, things are slightly different. While construction costs of the long-delayed Hinkley Point C reactor have already risen from $18bn to $23bn, this should not be a problem for EDF as the British government agreed in 2016 to pay, for no less than 35 years, a guaranteed price for electricity that is more than twice the wholesale cost of electricity from other sources, especially renewables.

The National Audit Office in the UK estimated that this deal could cost British consumers up to $40bn in excess payments (in subsidies straight from the pockets of consumers and businesses, rather than via taxation).

Rosatom appears to be the preferred bidder in SA. Like all companies actually building nuclear power stations (there are very few), Rosatom is the beneficiary of massive state subsidies. Since its formation in 2007, it has received a lifeline of $45bn from the Russian government, but by 2020, this lifeline is to stop.

Rosatom director-general Alexey Likhachov said recently that the company needed to “learn how to earn money independently … we must learn how to make money in the world market … we do not need projects of zero or low profitability … we need profit”. But how will Rosatom do so?

It claims to have orders for dozens of new reactors in excess of $135bn but, according to Vladimir Slivyak from Russia’s Ecodefence, such claims should be taken with a “pinch of salt”.

The figure of $135bn largely comes from vague general agreements, such as the one Rosatom is said to have signed with SA, or the one that was signed with Vietnam but then cancelled. Nuclear consultant Steve Kidd from East Cliff Consulting describes Rosatom’s $135bn claims as “bits of paper”.

Critics note that if Rosatom’s claims were true, it does not have the production capacity to simultaneously build 27 new reactors. The company did not start construction of any new reactors in 2015 or in 2016.

Rosatom could potentially make money through loans to cover the construction of new nuclear plants. In 2016, it signed a controversial $11.4bn loan agreement with Bangladesh for a new nuclear power station in Rooppur. The deal commits the government of Bangladesh to repay the loan over 30 years. Analysts claim that this deal could result in Bangladesh having to repay Rosatom $8bn in interest on a $11.4bn loan.

In Hungary, the PAKS 2 reactor being built by Rosatom is financed with an equally controversial $11bn loan from Rosatom to the Hungarian government. It is also spread over 30 years and payment on the loan’s principal must start even if the power station is not completed on time. In May 2016, Rosatom was said to have signed a $25bn loan with Egypt to pay for a new nuclear power station in Dabaa. The loan is over 35 years and according to the Middle Eastern Economic Survey newspaper, could result in a repayment in nominal terms of $71bn.

However, Rosatom’s ability to extend such loans into the future, including to SA, is highly questionable without Russian state subsidies. If the Russian state is to withdraw all funding by 2020, Rosatom will have to raise funds externally, not something it will find easy or cost effective given its “junk” status. The other option for Rosatom is to make money from what it calls its BOO model, where it builds, owns and operates (and sometimes eventually transfers) new reactors in recipient countries.

This model has been implemented in Turkey at the $20bn Akkuyu plant being paid for by Rosatom.

As South African analyst Dirk de Vos has demonstrated, this sort of deal only works if “must-buy” electricity deals are signed between the vendor and the recipient country, what Rosatom calls “investment recoverability guarantees”. As in the case of Hinkley Point C in the UK, the costs at Akkuyu are well above current electricity costs and are set for 15 years.

What then can SA expect from Rosatom?

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