A nuclear deal as clear as mud

South Africa is “going the nuclear route”, according to the Department of Energy’s acting director-general, Dr Wolsey Barnard. Given Eskom’s dire financial predicament, however, the government is opting, rather, for a ‘vendor-financed’ option.

We should celebrate and applaud the fact that Eskom, probably, will not be building South Africa’s next power station. The delays and cost overruns associated with Medupi and Kusile demonstrate that Eskom is not competent as a project manager for the building of such large plants. However, the decision to “go nuclear” has more to do with politics than economics. Nuclear is costly – given the dramatic fall in gas prices, a private enterprise would not build a nuclear plant in the current operating environment. Nuclear will take too long to deliver – South Africa needs power sooner rather than later.

Proponents of nuclear over other energy sources argue that it is cheaper. Indeed nuclear fuel costsarelow, as are variable running costs, but who can predict what the “relative cost” of suitable nuclear fuel will be in 10 to 20 years’ time, let alone 50 to 60 years? Compared to, say, gas or coal-fired plants, nuclear power plants are more expensive to build. Especially when the significant expenses involved with de-commissioning a nuclear plant are also factored into the overall cost.

Proponents of nuclear power may point out that government securing a vendor-financed agreement means, “build now, pay later”. Under such an arrangement, Eskom is likely enter into a power purchase agreement with the owner of the nuclear plant and be committed to purchasing power at a pre-determined tariff. The country would be financially crippled if locked into a financial commitment of this kind for decades to come. Such a financing model will continue to cost us all substantially more as long as we are prevented from procuring the required services in an open competitive market.

Going the nuclear route using a vendor-financing option will also be a huge set-back for independent power producers (IPPs). There will be less capacity allocated to the private sector at a time when private power is proving the more affordable option for the country.

When given the opportunity to supply electricity, the private sector has demonstrated that it is able to produce it at prices lower than Eskom. Through the government’s Renewable Energy Independent Power Producers (REIPP) programme, IPPs that have been permitted to supply electricity generated from renewable sources have been steadily reducing the cost of electricity. For example, in Round 1, the average wind energy price was 114c/kWh. In Round 2, the average price was 89 cents/kWh with prices as low as 79 cents/kWh. All indications are that prices will be lower in Round 3 despite significant adverse movement in the interest rate, exchange rate, and rising inflation. Increased competition amongst IPPs producing electricity from solar power has also seen significant price decreases from one round to the next.

Professor Anton Eberhard says, “Risks can be minimised through investments in a diverse portfolio of modular, less capital-intensive technologies, such as gas and renewables, that can be deployed rapidly and flexibly to meet changing demand patterns.” This is exactly the solution we need to deal with this crisis. Government should not be determining the “appropriate energy mix” – this should be left to the market. Meeting South Africa’s power shortage should be put out to tender so that private companies can bid to build, own and operate the power stations. Private companies that use their own money instead of that of taxpayers to build the power plants, will be more adept at enforcing tight controls over the contractors employed in the build process. Any cost overruns would be borne by the private owners and not by taxpaying South Africans. All that government needs to concern itself with is to get the best price and conserve scarce taxpayer resources. What the source of energy is, should be left to the market to decide.

Future policies should enable the development of gas solutions. With the strong possibly that there is gas in the Karoo, competing companies should be allowed to explore ways to extract it. As Professor Philip Lloyd summed up the situation, “we should not be dithering”. But this should not be a political decision. The role of government is to regulate to ensure that the companies adhere to the rules for safe operation.

South Africa’s outdated power model, where one single entity is responsible for all of the generation, transmission and a large part of the distribution, has been abandoned in every commercially competitive country worldwide. IPPs are eagerly awaiting the opportunity to build, own and operate power stations. They will not start supplying electricity to customers, though, if Eskom retains the power to be both referee and player in the market. The South African government should create a policy environment that provides the right economic incentives to attract companies to utilise and develop resources. It needs to establish an independent transmission system and market operator so that energy companies can have unconstrained access to the grid. With the right economic environment a multitude of IPPs will compete to deliver sufficient and affordable energy to our growing economy.

Author Jasson Urbach is an Economist and director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

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