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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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South Africa’s Huge Bet On Nuclear Energy

South Africa, the continent’s second largest economy, with the most organized business and financial sector in the region, has had its share of electricity related issues culminating in a spate of load shedding that upset its industrial customers of which there are quite a few. Eskom, the state owned utility, has gotten some of these problems behind it and has launched an ambitious generation building program that could add 9,500 megawatts to the presently installed electric generating capacity of 46,300 MWs. (Eskom supplies 95 percent of South Africa’s electricity needs, or about 45 percent of Africa’s entire electric generation., largely by burning coal. )

Despite this aggressive plan for multi-billion dollar power plant construction, that's not why Eskom is back in the headlines. In 2014 South Africa's President Jacob Zuma and Russia’s Vladimir Putin signed an agreement whereby Russia's state-owned Rosatom would supply the country with eight nuclear power stations with a capacity of 9,600 MW. The cost of the projects was estimated at $76 billion (or 1 trillion rand). To put the magnitude of this deal in perspective, Eskom’s assets now total about $52 billion. At present the country has one nuclear power station, the Areva-built Koeberg unit in Western Cape Province which is rated at 1,931 MWs.

This agreement quickly came under fire in the local press not least because the President's son Duduzane holds a substantial financial interest in the uranium mine likely to supply these nuclear facilities. In addition the mine itself seems to have been purchased at a fire sale price by the Gupta family, close political and business allies of the President. Related: Australian Government Just Shocked The Natural Gas Markets

Critics of this significant nuclear new build have claimed that given diminishing prospects for load growth the units are not necessary as well as representing an undue financial burden for a fiscally constrained South African economy. Bond rating agencies S&P and Fitch rate the senior obligations of the South African government as BB, non-investment grade. The additional strain of a $76 billion nuclear construction program would not improve this situation.

In addition, Predent Zuma recently removed Pravin Gordhan, his well respected finance minister, after the latter objected to the proposed nuclear deal with Russia. Gordhan's predecessor at the treasury, Nhlanhla Nene, was also sacked in 2015 apparently for the same reason. Gordhan's recently appointed successor, Malusi Gigaba, has stated publicly that this deal with Russia would proceed "at a pace and scale that the country can afford". Eskom has expressed a preference for nuclear over grid scale renewables on the grounds of superior reliability.

A few days ago Judge Lee Bozalek of the Western Cape High Court intervened to set aside a December 2016 finding by energy minister Tina Joemat-Pettersson supporting the Russian nuclear deal. The judge determined that parliamentary approval was necessary and that by itself Eskom lacked the statutory authority to sign a deal of this nature. The court also invalidated separate nuclear cooperation agreements previously signed with the US and Korea. The government can appeal this ruling. The lawsuit itself challenging the Russian nuclear deal was launched by two environmental groups.

Almost as an aside, the court alluded to the appearance of "special favors" in the Russian contract. The contract would indemnify the Russians in case of all future nuclear accidents as well as providing for favorable tax treatments.

Related: This Is Why Your Lithium Battery Doesn’t Age Well

Leaving aside the allegations of political corruption, (a feature we doubt is unique to this part of the world), this nuclear deal and its apparent failure raises a number of questions. The first is one of prudence. Why would South Africa, certainly not a rich country, be willing to take on the burden of such a large construction program with all the risks that this would inevitably entail? Could South Africa afford the potential (likely?) cost overruns and what would happen if the construction fell behind schedule? Could the country afford to indemnify Russia in case of accident? And in the case of a not uncommon commercial dispute, could South Africa realistically hope to enforce judgments in a Russian court against a state-owned company?

Perhaps this is a case of a powerful political leader willing to buck the tide of public opinion in order to resolve a significant issue, inadequate reserves of electric generating capacity. That President Zuma chooses to do so in a fashion that may be both risky and high cost is to us beside the point. Electricity as a public policy issue is extremely complicated and justifications for virtually any policy choice abound.

South Africa, along with the UK, may be one of the few nations still willing to place massive bets on new nuclear power plant construction. At least for the time being, it looks as if that bet is off or at least meaningfully delayed. However, Rosatom's two principal competitors are Westinghouse, which is currently in bankruptcy and EDF-Areva which also faces its own financial issues pertaining to delayed nuclear construction. As they say, it ain't over till it's over.

By Leonard Hyman and Bill Tilles for Oilprice.com

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