By Tom Harris
While it is undeniable that the construction of additional baseload generation capacity is required in order to address the country’s energy security issues, 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 affordability of a nuclear build programme? Probably not. The recent Update to the Integrated Resource Plan(IRP) states that at an overnight capital cost above US$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, implemented by the likes of Électricité de France (EDF) and Rosatum, suggest a favourable cost scenario is unlikely to occur, with capital costs exceeding US$7,000 per kW. The 2013 World Nuclear Industry Status Report aligns with this analysis, and estimates that the average capital cost for nuclear projects across the world has risen from $1,000 per kW to approximately $7,000 per kW over the past decade.
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 become renowned for long build times and construction is often subject to lengthy delays. Such delays have occured even in developed countries with strong project management capabilities. EDF’s current Flamanville reactor project in France, as an example, has 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. Similarly, the Olkiluoto reactor in Finland was scheduled to go online in 2009, but completion is no longer expected prior to 2018. Given the costly delays experienced in the construction of Medupi and Kusile, can South Africa really afford to bank on the fact that its own nuclear programme will not encounter similar issues to those experienced by recent nuclear builds in Europe?
An additional question to consider is: should one be concerned about the potential risk of excess generation capacity? Given the current dampened state of national economic growth 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. As advocated by the IRP Update, perhaps “commitments to long range, large-scale investment decisions should be avoided”, in order to ensure “decisions of least regret”? In this vein, one also needs to consider the growth of regional energy trade, and the impact that projects, such as the Grand Inga Hydro power scheme, will have – as this project alone will add 40,000 MW of power to the sub-Saharan grid. Therefore, energy policy-makers should realistically reflect on such national and regional risks, advises Frost & Sullivan, given that at some level of excess capacity, industry participants may struggle to achieve the required return on investment.
Eskom is already struggling to meet its debt obligations and should be looking to implement projects with the lowest possible risk profiles. Yet, 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 percent of nuclear utilities assessed between 2008 and 2013 were downgraded. 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.
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 percent. 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, the global economy has witnessed falling gas prices and a rise in the affordability of gas-generated power. South Africa poses significant gas extraction opportunities – with shale gas in the Karoo and subsea gas potential off our coastlines. But even if this potential fails to materialise, recent gas finds in Mozambique are expected to catapult the country to become one of the world’s top 10 gas-reserve nations. 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.
Although 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. 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.
The Department of Energy has indicated a front-footedness in aligning with the global trend towards the privatisation of the energy industry, through the implementation of multiple Independent Power Producer Procurement Programmes. In contrast, the addition of nuclear capacity could steer 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.
In all of the most realistic scenarios outlined in the updated version of the IRP, the nuclear option is either discounted completely, suggested to be delayed, or allocated far less than the 9,600 MW of capacity now suggested by the energy minister. Therefore, regardless of one’s stance on nuclear energy, the apparent disjuncture between the IRP and recent statements by government about the “fast-tracking” of a nuclear build programme begs the 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?
If the government has 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.
Tom Harris is a Research Analyst for Energy & Environment at growth consulting firm Frost & Sullivan Africa