Understanding Eskom’s nuclear ambitions

David Nicholls, Eskom’s chief nuclear officer. Picture: EE Publishers

David Nicholls, Eskom’s chief nuclear officer. Picture: EE Publishers

Published Jan 20, 2017

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In an exclusive interview, Chris

Yelland, investigative editor at EE Publishers, posed ten questions to David

Nicholls, Eskom’s chief nuclear officer, to explore issues surrounding Eskom’s

proposed new nuclear procurement programme for South Africa, and to try and

understand Eskom’s thinking. These are his responses, published below in

slightly edited form for compactness.

Please note that questions around

financing of the proposed nuclear new-build in SA were specifically excluded

from this interview, as this will form part of a subsequent article.

Q1:

Please comment on suggestions that the nuclear procurement process followed to

date by the Department of Energy (DoE) is secretive, illegal and flawed, and

that transparency will worsen under Eskom? 

Over the last few years, the information

discovery and analysis process has been handled by the DoE, in parallel with

Eskom in a supporting role. Yes, some people do believe that the nuclear

new-build is a done deal, that terms have been agreed to, and that we are now

catching up with the paperwork to make it look legal. But Eskom is now handling

the procurement, and we are not aware of any such agreement. Contrary to

worsening transparency under Eskom, we will at all times do what we can to

avoid being secretive, and publish information publicly. As for being illegal

and flawed, I can’t really comment on the claimed illegality, but if no

agreement has been made, I can’t see how such “agreement” can be illegal. As

there are only four or five potential vendors competent to supply this kind of

technology and likely to submit bids, and these vendors are known to Eskom, we

could have opted for a closed bid process. However, Eskom will almost certainly

go out to open tender, with the request for proposals (RFP) document published

on the Eskom and National Treasury websites, just as we did with the request

for information (RFI) issued in December 2016, to ensure that we are seen to be

transparent.

Q2:

The DoE and Eskom indicated it intended to issue a substantial request for

proposals (RFP) for new nuclear by mid-2016 and then by end-2016, but at the

last minute this was changed to a brief request for information (RFI) issued in

December 2016. Why was this?

I can’t comment on earlier DoE

announcements as to when the RFP would be issued, or on the reasons for their

delays. What I can say is that on 14 December 2016 a Section 34 determination

was gazetted, which designated Eskom as the procuring agent for the nuclear

new-build, in place of the DoE. That was when our procurement process really

started, although we had been thinking earlier about what we could do. We are

well aware of National Treasury’s guidelines, and the Public Finance Management

Act (PFMA) requirements, which require certain interactions with National Treasury.

Although we had asked for meetings with National Treasury, these had not taken

place before 14 December 2016. Eskom picked up the task as a clean sheet in the

middle of December 2016, and took a view that we should issue an RFI to confirm

some of the assumptions, insofar as we can. This was the reason the RFI was

issued in December 2016. We are approaching National Treasury now to discuss

various exemptions and waivers we require, as is conventional for any large

project of this nature.

Q3:

Could an RFP have been issued without knowing if, how much and when nuclear

power was required in SA in terms of an updated IRP, and without specific

authorisation by Treasury?

Whilst there is a pre-existing, gazetted

Integrated Resource Plan for Electricity, IRP 2010-2030, and a gazetted Section

34 determination, Eskom still needed certain authorisations from National

Treasury in order to commence with the commercial process through issuing an

RFP. These include, for example, the criteria for bid selection. On the matter

of cost and affordability, although we have a pretty good idea about what

nuclear power stations cost based on our surveys of export deals and their

scope in the last ten years or so, there is no nuclear power plant price list

out there. The RFI may provide indicative prices based on previous projects,

but will not provide estimates for new projects. So the only time you really

know the price is when you have a formal bid in front of you, and the fine

details have been negotiated. And if you can’t start the process before you

know the outcome, you will never start.

Chris Yelland, investigative editor at EE publishers. Image: Supplied

Q4:

What is the envisaged procurement time-line, and when will the RFP likely be

issued, evaluated, project approvals obtained, and orders placed for a nuclear

new-build in SA?

The RFI calls for information to be

available at the end of April 2017. Our target is then to get the RFP out by

mid-2017, with evaluation of the vendor proposals by the end of 2017. That

would be an ideal situation, and I am not going to pretend that it couldn’t be

later. We will then need to negotiate with the vendors, one at a time, to

select a preferred vendor, and then move into the localisation discussions. But

from the moment we’ve selected the preferred vendor, my belief is we will start

contracting the long lead items at risk. We will then start doing things like

submission of the licencing application for the chosen technology to the

nuclear safety authority. And it will probably take about a year, or longer,

from initial start to get the contract finalised. As for site work, this would

start with putting in some roads to get access to the site, physically clearing

the site, terracing, digging holes in the ground, and pouring of concrete. I

estimate this would primarily be constrained by the Environmental Impact Assessment

(EIA) process, and approval and issuing of the necessary permits. But this work

could conceivably commence in 2018, or if we are lucky, maybe even in 2017 for

early, off-site work, like roads.

Read also:  Eskom proposals for nuclear build in 2017

Q5:

There have been suggestions of a hostile working relationship between Eskom and

National Treasury since the public spat in 2016 surrounding coal contracts. Is

this delaying the RFP?

From Eskom’s vantage point, since being

designated the procurement agent, owner and operator of the nuclear new-build

in SA on 14 December 2016, there have been no delays due to National Treasury.

We have the RFP virtually ready to go, and there were clearly no delays by

National Treasury in Eskom’s issuing the RFI. We are now approaching National

Treasury to discuss the proposed RFP, and we don’t foresee any problems. But

neither I nor the Eskom nuclear procurement team have any previous working

relationship with National Treasury, and therefore we can’t comment further at

this stage. We assume there won’t be any delays by National Treasury because

this is a national project with cabinet blessing.

Q6:

Please can you advise Eskom’s estimated pre-tax real levelised cost of

electricity (LCOE) from an Eskom-driven nuclear new-build in SA, and the

assumptions on which this is based?

This is a difficult question, because

the assumptions themselves tend to be business driven activities, but Eskom has

a very straightforward view. We have issued ourselves an internal target that

for this project to make sense, the LCOE from the nuclear new-build must be

between R0.80 and R1 per kWh for the first two reactor units. This is based

upon the assumptions of Eskom’s standard discount rates, with export credit

financing at rates Eskom is currently getting, and overnight costs for the

plant that are inside the envelope we are seeing in the world market at the

moment. So as key assumptions, we are looking at an overnight capital cost for

the early machines in the range of $4500 per kW, a reactor construction time of

six years, plant economic life of 60 years, and fixed and variable operating

and maintenance costs of about R0.27 per kWh including fuel costs, which is

what we are currently achieving at Koeberg in today’s money. Regarding the

weighted average cost of capital (WACC) assumed, I don’t know. I think it’s the

Eskom standard one, but I am not able to give you an answer at this stage.

Q7:

Can you expand on the requirements and rationale in the RFI for Eskom to own

the global intellectual property (IP) rights for the technology deployed in the

nuclear new-build in SA?

The RFI is asking for information on

behalf of the South African industry to clarify and understand exactly what we

would be getting. Government policy is to use the construction of a nuclear

fleet to build and sustain a domestic industrial capacity. To do that there has

to be a market for it. So, we’re asking in the RFI – at design, overall plant

and component level – to maximise localisation, and that also links to the IP

rights. We would like to secure the rights to build the plant ourselves, and

ideally, in due course, to export locally manufactured nuclear components, or

even the entire plant at some stage. This was the route taken by the French,

the Chinese and the Koreans in technology transfers which they got from different

countries to build their own nuclear power industry capability. Ownership of IP

does not necessarily mean license-free ownership, and there might be a license

agreement for a portion of the project. So we’re not just saying: “Give it to

us”. We are asking potential vendors: “What are you prepared to consider?”

Q8:

Can you share Eskom’s preferred business model for the construction, ownership

and operation of the proposed nuclear new-build in SA?

First of all, any business model is also

dependent on what options are proposed to us by the bidders. But clearly, the

Section 34 determination has designated Eskom, or an Eskom subsidiary, as the

owner-operator of the nuclear plant. For ownership, we see a similar model to

Koeberg. Eskom will own it, Eskom will operate it. At Koeberg, operation has

been predominantly a South African run activity since it started up, but if we

need operational help, we will contract it. Regarding construction, as with

Medupi, Kusile and Ingula, Eskom will contract somebody else to build the power

plants for us. Therefore, in a real sense, to begin with we expect a turn-key

contract, as it was with Koeberg. This is the way most of the recent successful

export deals in the world have been done. We want to benefit from the expertise

and experience of the vendor. We want to buy a machine that the vendor is

already building for somebody else, a generic machine that will not be unique

to SA. To begin with, like Koeberg, the vendor would play a major construction

role, and then hopefully, it will become more of a South African activity as

time goes on.

Q9:

Would the engineering, procurement and construction (EPC) main contractor for

the nuclear new-build be required to be a South African company in which the

nuclear vendor, Eskom, South African contractors, BEE partners, etc., are

shareholders?

Inevitably there are several key

contractors involved, such as the reactor plant vendor, turbine plant vendor,

civil works contractor, and others. These are all integral parts of the turnkey

offer. What we expect is for the successful bidder to form a company to be the

EPC main contractor, with the key contractors as shareholders or joint venture

(JV) partners. Classically, performance guarantees to the customer (Eskom in

this case) are provided by the JV company, and also jointly and severely from

the different principle parties. We would like the principle vendors to create

a proper EPC contracting company, which is staffed and does the physical work

in South Africa as the local contracting agent. And we’d like the ownership of

the EPC company to be split between Eskom, and the vendors.

Initially the vendors would hold the

majority of the shares in the EPC company, say 74%, with Eskom (or another

South African entity under government control) holding 26%. This is also key to

the IP discussed earlier, which would be transferred to this company by the

vendors at the beginning of the process. Thus, the EPC company would control

the IP, and Eskom, as a minority shareholder, would have access to it. However,

Eskom would want the right to take on more shares in the EPC company as more

reactors are ordered, with the goal to move ownership and control of the IP

progressively from the vendors to Eskom.

This is a view we have at Eskom as one

way of doing things. It’s a possible way – we certainly do not think it’s the

only way – and we ask the vendors to indicate if they are happy with this.

Q10:

Is a nuclear new-build in SA a flexible, least-cost decision of least regret in

an uncertain world, where electricity demand is unpredictable, and where

disruptive technologies abound?

Eskom has the view that nuclear power is

the only credible option for new baseload generation in SA. Eskom currently has

some 34 000 MW of existing coal fleet, ranging from middle-aged to pretty old.

In the next 20 to 30 years we need to expand our baseload capacity, and also

replace a large portion of the aging plant. For despatchable baseload capacity,

there are four options on the table in the world today: coal, gas, hydro and

nuclear. Within SA we have no gas and no short-term gas prospects – any gas we

import is going to be at a cost. While technically gas can certainly work, the

economic issues and low job-creation prospects are too significant. There are

no significant new hydro opportunities within SA, and while there are some pump

storage schemes we can still build, essentially hydro power would be imported,

with issues surrounding foreign exchange, security of supply and low

job-creation. So that leaves coal and nuclear. Our view is that coal is going

to be increasingly challenged by environmental requirements, while nuclear

power has an exceptionally good track record locally and internationally on

both safety and economic grounds.

This

article was first published by EE Publishers.

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