SA nuclear power procurement

A 2014 ERC research report: Procurement models applied to independent power producer programmes in South Africa found that the pending procurement of the 9600MW IRP2010 nuclear build allocation estimated to have a price tag of up to R1 trillion, was particularly vulnerable to insufficient transparency.

A few days ago (July 13th, 2015) the Department of Energy (DOE) speculated in a media update on the planned nuclear build programme that the price tag could now be estimated at R500 billion. This speculation is based on DOE’s ‘back of the envelope’ comparison of “similar build programmes in like countries”. But, as Business Day (July 14, 2015) put it: “The R500bn is an “overnight cost” — what it would cost to build in a day — and excludes financing costs. It also excludes critical dimensions of a nuclear power programme such as the costs of dealing with nuclear waste, decommissioning and insurance in the event of an accident, all of which are borne by governments rather than nuclear vendors.”

The ERC’s 2014 report pointed out that in SA, procurement is an aspect of governance, and improved governance is one of the five formal goals of SA energy policy, as outlined in the 1998 White Paper.

How is procurement in SA governed?

Procurement in SA is governed by the Constitution, the Public Finance Management Act (PFMA) and Treasury regulations and guidelines. Treasury regulations also provide minimum requirements for different stages of the procurement process, and Treasury oversees implementation of the policy via its own Supply Chain Management (SCM) office. The SCM office in turn provides a link between government, National Treasury and different sub-units in the organs of state. Treasury regulations also cover procurement via public private partnerships.

 

Procurement of energy supply generally takes place in this overall context, but also has specific provisions. For example, the DOE has set down regulations to govern procurement specifically for new electricity generation capacity (DOE 2011). These regulations fall under the Electricity Regulation Act of 2006, which was amended in 2007 (DME 2007).[1] The regulations consider procurement from Eskom, other government agencies or independent power producers (IPPs). Nuclear power however, has been explicitly excluded from these regulations.

Nuclear power: Procurement of a special type?

Though it is currently somewhat unclear whether nuclear new build may or may not be built by IPPs, in South Africa nuclear power is treated as a special case.

The 2012 National budget review (Treasury, 2012) under its major infrastructure investments for Energy noted that investment of R300 billion would potentially be needed over 17 years for the nuclear build programme. It indicated Eskom as implementing agent, though it was not clear whether this also indicated who would finance the investment. Incidentally, this estimate of investment is at the very low end predicted by experts, and there is no clarity where up to R1 trillion of investment would come from. In the 2014 budget review, reference can be found to an updated budget allocation. As far as formal country budgeting is concerned, the new Energy Minister has only indicated in her 2014 budget speech that R850 million has been ‘allocated to the Department and its relevant agencies in order to undertake further research and development, especially in regard to safety matters’.

So, as nuclear energy procurement is specifically excluded from the new generation regulations and its model of Ministerial determination, different rules appear to apply, but precisely what those rules are is not entirely clear.

A possible reason for this is that nuclear procurement is usually more politically determined.

A study of the national Integrated Energy Plan (IEP) conducted for the British High Commission, involving in-depth interviews with over 30 senior South African energy planning decision-makers within eight sectors, made a key finding that with big energy development decisions, politics may over-ride logic, or more fully:

“It is not clear to what extent big energy development decisions are actually entrusted to processes like IEP and IRP vs political principals and/or strategic international deal-making. It is hard to ascertain when politics may over-ride logic, and to what extent the IEP is an intellectual exercise, or even a distraction from the real business of deal-making. The case for new nuclear build is a case in point – it seems to feature in plans regardless of a cost-benefit proposition.” (Worthington & Martin, 2014)

Today, in spite of the proposed scale and price tag of the build programme, how the winning nuclear power suppliers might be determined and on what basis, remains a matter of speculation in the energy sector, since – if current trends continue – the procurement process is not likely to be transparent.

The proposed new nuclear build programme in South Africa can therefore be understood to be supported by a combination of three features: (1) the highest political decision-making; (2) significant financial commitments required, with likely long-term sovereign debt and/or tariff hikes and related economic effects; and (3) exclusion from transparent procurement process applied to other electricity-generating technologies.

By Brenda Martin

[1] A second amendment Bill was considered by Parliament, but no Act was passed.