SA told to fight hard for nuclear deal affordability

Tim Yeo, chairperson of New Nuclear Watch Europe.
Tim Yeo, chairperson of New Nuclear Watch Europe.

Johannesburg – Negotiating a nuclear deal that doesn’t hit South Africa’s fiscus where it hurts will be key to a successful procurement deal, a former UK politician said on Wednesday.

“You’ve got to negotiate very toughly, because all these providers are out to make money,” Tim Yeo, chairperson of New Nuclear Watch Europe, told Fin24 at the Nuclear Africa conference.  

“They’re not going to give anything away,” said Yeo, a former UK Conservative MP and minister. “Be prepared to fight hard on localisation and also on the cost of capital, because nuclear is an odd industry. You put all your money up front and you get no money for six or seven years and then you start to make the profit."

UPDATE ON THIS STORY: Anti-nuclear group questions nuclear report

“I readily acknowledge it requires this very big upfront commitment, but then I would go back to the vendors and say, ‘look, we need help at the start. You want to sell your kit here? We’d like to buy it from you. What kind of financing deal are you prepared to offer?’

“When you go to buy a new car, the dealer is normally quite willing to negotiate the lending terms,” he said. “The vendors aren’t going to say, ‘ok, we’re going to give you a great big interest free loan’.

“But if you drill down a bit, you can negotiate something. It's build now, pay later,” he said. “Those are the kind of deals the negotiators should be asking for.”

“If you can reduce the cost of capital even by one percent a year, it has quite a material effect on the end price. Look for a technology that is already tried and tested.”

LISTEN: Interview with Tim Yeo

SA cannot afford not to go nuclear - Yeo

Rating agencies and many economists are against South Africa embarking on the 9 600 MW nuclear build programme due to the hefty upfront costs. With the country’s debt-to-GDP ratio beyond IMF levels of 40%, they argue Treasury cannot afford to go this route.

However, Yeo said South Africa cannot afford “not to go nuclear”.

“A country that wants to have a competitive economy in the 21st century needs a modern energy infrastructure,” he said. “It’s got to be able to supply a continuous supply of electricity as industry won’t be able to operate without that.

“The way the programme is rolled out could take account of the risk,” he said. “You don’t need all eight of these power stations. You might contract for two right away and you say the next two you start four years later. You could cancel the last two or four if it looks as though you don’t need them.

“If the very worst scenario comes about, … you’ve got to have an extraordinary shrinking of the economy not to need to replace ageing power stations.

“It would be a reckless assumption to think you can get away without it (the 9 600 MW of nuclear),” he said. “The key is to maintain investor confidence and that’s a very fragile commodity. Nuclear is not more expensive than other forms of energy.”

The Department of Energy is planning to release its Request for Proposals by the end of March after a gazette was published in December (on the same day Nhlanhla Nene was fired) clearing the way for the procurement process to continue.

Government’s plan is to test the market with the proposals to better understand what funding model could work. However, critics fear the process is unfolding without transparency and that, ultimately, the country will withdraw due to affordability issues, just as it did during nuclear 1 in 2008. “It is a fishing expedition,” EE Publishers MD Chris Yelland said.

Yeo released a report by Trusted Sources, an emerging markets research firm, which focuses on the economic benefits of the planned nuclear energy programme in South Africa.

The key insights were:

- Nuclear energy’s levelised cost of electricity compares favourably with the current cost of coal-fired generation (US$86.88/MWh in our base case vs the IEA’s estimate for coal of US$99.79/MWh at the same cost of capital).

- South Africa’s planned nuclear energy development would reduce carbon emissions compared to the business-as-usual baseline by 21%. That value would be around $5bn assuming a modest tax rate of $5/tonne that may seem suitable for a developing country, rising to about $22bn if South Africa were to introduce a carbon tax close to conservative forecasts of future European levels – around €20/tonne.

- The localisation of a portion of the investment in the envisaged nuclear power plant new builds would produce a positive shock for South African industry and economic growth. At the highest plausible localisation level of 45%, the multiplier effect of this industrial investment on GDP would be 3.4x, and the monetary value of the incremental value added in current US dollars would be over $77bn (about one quarter of the country’s current GDP).

DOWNLOAD PDF: The full report

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