Energy Department wants Eskom to run nuclear plant

Eskom has learnt significant lessons from its current new build programme that it can put to good use in the nuclear programme, writes Matshela Koko.

The Department of Energy will recommend to the cabinet that Eskom be appointed as procurer, owner and operator of the new nuclear energy build programme as per the Nuclear Energy Policy of 2008. It will further propose that the SA Nuclear Energy Corporation (Necsa) be designated as the owner operator of the front-end side of the fuel cycle. The Energy Department will remain the nuclear policy co-ordinator for the build programme.

Eskom, the Treasury, the Department of Public Enterprises and the Department of Energy have been directed to collaborate and to present a funding plan for the nuclear build programme. This funding plan will be finalised after the final proposals from the vendors have been received. It is common practice for bids of this nature to include a funding option. The entities will also focus on developing a collaboration framework for the implementation of the nuclear programme.

The approved Integrated Resource Plan makes provision for an additional 9 600 megawatts of nuclear energy by 2030. The government has always indicated that the nuclear build programme will be rolled out at a scale and pace that the country can afford. This means a more phased approach to the nuclear build programme will be adopted compared with an upfront commitment of the full costs of the programme. The phased approach aligns to the improving financial and operating position of Eskom.

Timeline

Consistent with the phased approach, it is envisaged that the first two reactors will be built and commissioned by 2026, in order to mitigate against the projection of base load capacity running out between 2026 and 2028. The size of the first two reactors will be between 2 400MW and 3 200MW, depending on the vendor selected. The two reactors will be designed for 80 years operating life, with a targeted payback period of between 20 and 25 years.

To achieve the technology transfer and other long-term objectives, there will be a series of long-term agreements specifying at what stage and under what conditions the relevant technology transfers will occur. To encourage localisation, it is important that for certain key components, long-term supply contracts are put in place beyond the first two reactors to justify local manufacturing. This will enable sustainable job creation and address socio-economic factors.

Another key item to be agreed on with the initial contracts will be the basis on which Eskom will buy fuel from Necsa, thereby allowing Necsa to create a business case for the establishment of the full scope of the local fuel facilities.

In the past few years, the Renewable Energy Independent Power Producer (REIPP) programme - which outlines the collaboration between the government, the private sector and the regulator - has given Eskom additional confidence in the available spectrum of funding options for the nuclear build programme. Under the REIPP programme, the private sector contributed about R200 billion to infrastructure development. The government, therefore, has a contingent liability of between R200bn and about R900bn over a 20-year period.

This is secured via power purchase agreements with Eskom and a very robust and rigid regulatory framework that enables a full pass-through of independent power producer (IPP) related costs to the consumer. A significant amount of funding raised by the IPPs was provided with appropriate security in an efficient manner. We believe this formula can be replicated for the nuclear build programme.

Eskom has also been able to assess possible funding models that support the government’s mandate to own and operate the new nuclear plant. These include project financing options, export credit agency (ECA) financing, and part equity from original equipment manufacturers.

To ensure the viability of the project financing option and to manage the risk in this option, Eskom has to be the operator of the plant as it is the only entity in the country that has experience in running a nuclear power facility. It has owned and operated Koeberg power station successfully. Furthermore, Eskom has the ability to leverage its existing stream of cash flow and equity. This can be used as Eskom’s equity contribution in a potential project financing structure.

A large portion of build programmes utilise ECA agreements. Countries will export goods to South Africa as part of the build programme and will thus be willing to provide guarantees. The procurement of the nuclear programme will, therefore, rely less on sovereign guarantees. Eskom has had a great deal of exposure to ECA options during the last two years in funding its current build programme.

It is also common practice for the original equipment manufacturers to have an equity stake in a build programme of this nature to provide an alternative source of funding for the project. The equity stake by original equipment manufacturers if adopted, may ensure that cost overruns are tightly managed, schedule delays minimised and quality enhanced. These are key considerations in any build programme.

Eskom has learnt significant lessons from its current new build programme that it can put to good use in the nuclear programme and to reduce the risk of delays and cost overruns. It will also leverage its current relationships to ensure maximum delivery of socio-economic impacts of the nuclear build programme.

Eskom has successfully executed its turnaround strategy, which includes the operational turnaround of the generation fleet; new build delivery of projects; and financial stability, in particular the revised funding programme.

The suggestion by some political parties that the Department of Energy is recommending Eskom as the procurer, owner and operator to allow it free reign and to prevent proper parliamentary oversight is ridiculous. Eskom is accountable to Parliament and is expected to adhere to section 217 of the constitution and the Public Finance Management Act.

* Matshela Koko is Eskom’s group executive for generation.

* The views expressed here do not necessarily reflect those of Independent Media.

BUSINESS REPORT