A year ago, Eskom asked Parliament to write off a R60bn loan, says the writer, so how can it now finance nuclear energy? Picture: Henk Kruger
A year ago, Eskom asked Parliament to write off a R60bn loan, says the writer, so how can it now finance nuclear energy? Picture: Henk Kruger

Eskom's nuclear energy offer doesn't add up

By Sean Mfundza Muller Time of article published Nov 3, 2016

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The power utility's financial statements need scrutiny, writes Seán Mfundza Muller

South Africa’s cabinet is to consider a proposal that a mooted nuclear power deal for the country be financed through the state-owned power utility Eskom. This is the latest twist in South Africa’s controversial efforts to expand its nuclear power capability by commissioning up to 9.6GW of energy from six nuclear power stations.

The decision has been mired in controversy and still hangs in the balance and the offer by Eskom to foot the bill raises more questions than it provides answers. Recent claims by Eskom’s management fail to adequately address any of the fundamental criticisms of the proposed nuclear programme. Statements that Eskom can “finance nuclear on its own” don’t add up and are misleading.

Changes in Eskom’s rationale for justifying nuclear procurement over the past two years call into question the merits of these arguments.

Its claims about financing also raise serious questions about the arguments it presented to Parliament last year to justify a R23 billion cash injection and write off a R60bn loan.

The right decision would be for the cabinet to defer further consideration of the programme for at least two years. In addition, Eskom should account to Parliament on discrepancies in its statements about its financial situation.

The three main problems with the case for nuclear procurement are well established.

The actual power probably will not be needed. Trends in economic growth and electricity demand are much lower than the original forecasts on which the supposed need for nuclear power were based.

The programme is also likely to be very costly although there are still no credible, government cost estimates in the public domain. Many energy experts have argued that even if additional capacity was needed, other energy sources may be cheaper or more appropriate.

Finally, the combination of insufficient demand and costly supply means that nuclear poses a serious threat to the future stability of the country’s public finances and economic growth.

An indicator of problematic motives is the way in which the arguments made for it keep shifting. Last year Eskom chief executive Brian Molefe told Parliament that procurement of nuclear was “urgent” and feasible. Molefe argued that nuclear costs were lower than critics implied and financing concerns reflected a “pedestrian” attitude.

Subsequent to this, Eskom decided on a new line of attack: trying to limit procurement of power from independent renewable energy producers. In a letter to the minister of public enterprises, Eskom questioned the merits of renewable energy programmes that had been approved and were proceeding. It has subsequently become clear that Eskom is defying national policy decisions by not signing renewable energy agreements.

In doing so, it is trying to obstruct the procurement of other forms of energy to “create” a need for nuclear.

Eskom’s statements about “independent” financing are similarly misleading. Eskom has been, and continues to be, heavily reliant on state support. As of February, Eskom held R350bn of debt guarantees from the National Treasury, of which it had used R168bn.

Worse, in 2015, Parliament approved a R23bn cash transfer to Eskom and wrote off an eight-year-old R60bn loan. One estimate of the additional cost of foregone interest payments is a massive R82.6bn.

Eskom won the concessions because it claimed it needed support to stabilise its balance sheet. And its chief executive accepted a large bonus for the improvement in Eskom’s finances.

Yet Eskom now claims it will have an excess of R150bn in cash and can borrow to fund the nuclear programme. The appropriations committees of Parliament that approved the 2015 financing should demand an explanation for this apparent contradiction.

Even if Eskom was not receiving government support, procurement of nuclear would still be a threat to the economy and an indirect threat to public finances. As the medium-term budget showed, a decline in economic growth has a knock-on effect on state revenue.

The dynamics that would unfold have been experienced before after the introduction of e-tolls. The costs were passed on to motorists who refused to pay, requiring financial intervention by the government. The danger is that this could happen on a much larger scale.

Having financed the procurement of costly, unnecessary energy capacity, Eskom would have to pay for the energy even if consumers didn't need it. If tariffs are insufficient, Eskom’s balance sheet would be compromised and the government would have to step in. And it would, because Eskom is too big to fail.

Alternatively, if higher tariffs are approved by the regulator, these will negatively affect citizens’ welfare and economic growth.

At best this would reduce government revenue and compromise efforts to improve the lives of all citizens. At worst, it could lead to social instability and a refusal to pay exorbitantly high tariffs, leading to a collapse in Eskom’s finances and the government having to step in.

It should therefore be clear that the case for proceeding with the procurement of nuclear power is fundamentally flawed. The rational and responsible decision by cabinet would be to halt it.

If economic growth and energy demand increases significantly over the next few years, the matter could be revisited based on an appropriately updated Integrated Resource Plan that uses credible forecasts of future energy needs.


* Seán Mfundza Muller is a senior lecturer in economics at the University of Johannesburg

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