Money issues key to new builds in Czech Republic and South Africa

Czech Republic to try again in 2016 for new nuclear units

prudent investorThe government’s on-again, off-again efforts to procure two or possibly even four new nuclear reactors for its power stations at Temelin and Dukovany appears to be on again.  However, as usual government ministers are divided over whether CEZ, the state-owned utility, should get rate guarantees for the plants. The lack of a regulated market for the plants could once again doom efforts to attract investors to finance them.

Jan Mladek, the Trade and Industry Minister, told WNN May 20 that he wants CEZ to build two new nuclear reactors at Temelin and two more at Dukovany.  He pointed out, somewhat obliquely, that the reactors are needed to supply electricity to the Czech nation and to reduce its carbon emissions. The reactors are also expected to supply power to Germany on the western border with an eye toward reducing the use of brown coal.

However, Andrej Babis, the Finance Minister, and Prime Minister Bohuslav Sobotka are opposed to rate guarantees for the new reactors calling the state subsidies that could negatively impact the country’s budget. More to the point, if characterized as subsidies, the arrangement of a state sponsored rate guarantee would set off a huge dispute with Austria.

That nation’s political leadership is so rabidly anti-nuclear that it has sought via the European Union to spike the UK rate arrangement for the Hinkley project. However, Austria has been low key in its response to a Russian deal to build two new reactors in nearby Hungary. Perhaps this is because Russia, not being part of the EU, doesn’t care what Austria thinks about the units.

Getting back to how the Temelin and Dukovany units be paid for, CEZ is 70% owned by the state and the utility has previously said that any project to build new reactors would be carried out by a subsidiary to contain the financial risk. It would also allow the utility to attract equity investors for up to 50% of the project. Previous bidders have included Areva, Rosatom, and Westinghouse. Of the three, Rosatom would be the most likely to offer very favorable financing terms and equity funding of up to 50% of the costs.

However, for political reasons, CEZ may prefer a western nation reactor vendor. That could also be a problem.  Areva is in no position, financially, to capitalize a new reactor project of up to four units. Westinghouse has plenty of work in China where the customer is paying its bills. It walked away from a sketchy project in Bulgaria in 2014 due to the uncertainty of government commitments to the deal.

A new prospect for CEZ as a vendor might be GE-Hitachi which has its 1500 MW ESBWR which just earned its safety certification from the US NRC.  While no units with this design have been built, two utilities in the US are now referencing it for future efforts.

Even if the question of a vendor providing equity financing can be addressed, without guarantees for future electricity prices, the new tender for the two power stations may wind up being shredded before the ink is dry.

South Africa plans nuclear procurement

After last year’s surprise announcement by President Jacob Zuma that he’d inked a deal with Russian Prime Minister Putin to build eight 1200 MW reactors in South Africa, the government’s energy and budget agencies scrambled to create a procurement process that may or may not ratify the agreement.

Critical to success is finding the money to pay for the South African share of the costs.  So far, it is unclear whether either the government, or the state owned utility, Eskom, could come up with the money.

The estimated cost of the eight 1200 MW units is pegged at $85 billion. Even if the selected vendors take a 50% equity stake in the plants, that still requires South Africa to come up with $42.5 billion. Who would buy its bonds and for that amount?

According to the Bloomberg wire service, S&P, Fitch Ratings and Moody’s Investors Service downgraded South Africa’s sovereign ratings over the past three years. The reasons include increased government debt along with labor strikes and electricity shortages which have curbed economic growth. S&P cut its rating in June 2014 to one level above junk with a stable outlook. Moody’s rates South African debt one level higher. Fitch lowered the outlook on its BBB rating to negative in June 2014. All three rating services say they think these conditions are likely to persist in 2015.

Blomberg also reported in March of this year that the government cut its growth forecast for 2015 to 2 percent from 2.5 percent as electricity shortages persist. Eskom, the state-owned power utility, implemented almost daily blackouts in February of this year.

Unless the government allows Eskom to raise its rates to pay for the construction of the plants while they are being built, it is almost a certainty that anyone who participates in a tender for components or reactors is just wasting their time.  That hasn’t stopped the government from talking to China, France, South Korea, the US, and, of course, Russia. A pay-as-you-go financing plan married to significant equity investment by the supplier, may be South Africa’s only path forward for the project.

If South Africa goes with an all Russian deal, it will include nuclear fuel, and retrograde of spent fuel, for the 60 year service lives of the eight reactors. However, South Africa has ambitions to redevelop its uranium enrichment, conversion, and fuel fabrication capabilities either as a 100% domestic effort or with global partners. That arrangement could push the all Russia all the time aspects of the deal to the side opening the door to a variety of vendors or consortiums to build the eight units. Rosatom does not have a track record of playing well with other reactor vendors especially for fuel services.

One way or another, e.g., more reliance on coal, South Africa has to get more electricity generating capacity online to eliminate planned and unplanned brownouts and other forms of load shedding that has crippled its economic growth.  Eskom hopes to bring on six new 800 MW coal fired plants to meet immediate needs. The first Medupi power station unit is expected to come online this year and all six are expected to be operating by 2021 with a service life of 50 years.

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