Eskom’s financial collapse "indefinitely postpones" construction of a pilot plant

The much ballyhooed Pebble Bed Reactor project is on the rocks. Speaking at the World Nuclear Association (WNA) on Sept 11th, PBMR CEO Jaco Kriek said construction of a prototype plant has been "indefinitely postponed" due to financial constraints.

The reason is that Eskom, the primary customer for at least eight of the 165 MWe reactor, has reported record losses and has no money for its aggressive expansion program that also included at least two 1,200 MW light water reactors (LWR). Eskom postponed a contract award for the LWR units last December.

Kriek told the WNA conference PBMR is now looking at a new business model and a smaller reactor design. PBMR is seeking investors from industries that want a carbon emission free source of process heat. Examples include coal gasification, salt water desalinization, and oil extraction from tar sands. To meet these needs, PBMR will down-size the Pebble Bed reactor design from 165 MW to half that capability or 80 MW.

PBMR had originally projected a hot start-up for the 165 MW demonstration plant, said to cost $3,500/Kw, or $577 million, at 2018. He now estimates the new smaller unit will have a start-up date sometime beyond 2018.

"We are in the design and licensing phase, and until we have a funding model for the reactor we won't be in a position to do anything. We have been slowed down by the world economic crisis."

He added that international funding would be needed to restart concrete progress towards building a demonstration plant. 

PBMR’s latest setback comes as the Pebble Bed fuel, enriched to 9.6%, was sent to two research centers for a two-year tour of burnup and reliability testing.

Latest setback predicted

The action by PBMR to bring capital construction of a new plant to a screeching halt comes as no surprise to observers of the world of smaller reactors and especially conditions in South Africa. The bad news starts with Eskom, South Africa's state-owned utility which reported a record annual loss in 2009. While supplying 95% of South Africa's electricity, the firm lost $1.25 billion for the year ending in March 2009. It lost just $27 million in 2008.

Bobby Godsell, Eskom's chairman, stated the obvious in late August saying that "financial sustainability is the utility's biggest challenge."

"The scale of losses is clearly unsustainable."

Eskom estimates it needs $50 billion to fund its dual-path strategy of LWRs for base load electricity and PBMRs for process heat applications. The country is in desperate need of new electricity generating capacity. In January 2008 the inability of Eskom to meet customer needs shut down heavy industry, including key mining and mineral smelting operations in South Africa, with crippling blackouts that also tumbled the grids in Botswana and Zimbabwe.

The country's economic recovery is at risk because Eskom has not been able to raise funds to build new power plants. Economic growth in South Africa declined from 6.3% a year to just 3% based on electricity problems. Business groups in South Africa are irate over the utility's inability to get its financial house in order.

Bloomberg wire service reported Aug 25th that Iraj Abedian, CEO of Johannesburg-nased Pan-African Capital Holdings said, "Any delay of Eskom's capital expenditure is ill-conceived."

"Eskom should be learning from it past mistakes and not procrastinate. We paid a price for it."

Rate increases not enough

The utility sought and got approval for a rate increase of 31% in 2009. However, analysts believe that if Eskom is to fund its expansion solely from cash flow, it will have to raise rates by 90%.

Goolam Ballim, chief economist of Standard Bank Group, Africa's largest lender, told Bloomberg wire service, "We remain in the risk area."

The growth rate in electricity consumption could very well exceed growth in GDP because of demand that comes from energy-intensive users. They will recover from the economic crisis more quickly than the general economy."

Electricity contracts to miners lock in low rates

The critical rate issue for Eskom is in the industrial sector of the South African economy.  After expanding in the 1970s and 1980s, Eskom had excess capacity and the South African state-owned utility offered metal producers contracts  linked to commodity prices.  Eskom CEO Maroga says that now needs to change as Eskom grapples a “tight balance" between supply and demand, 

“We need to review this so all the players can deal with the risks associated with” commodity-linked pricing, Eskom Chief Executive Officer Jacob Maroga said in a speech in Johannesburg. 

For instance, Eskom’s earnings supplying electricity to aluminum miners and smelters depend on metals prices and exchange rates.

Maroga complained contracts linked to metal prices are a “huge issue” for Eskom. The price of aluminum for delivery in 90-days has dropped by 50% on the London Metal Exchange as global recession cut demand for metals.

Some of Eskom's contracts linked to metal prices have 15 to 20 years left to run, Maroga said. “We are going to have to do something with our customers to remove exposure."

Maroga did not say what options he had for “limiting or removing” this type of contract.

“In times of high aluminum prices, BHP Billiton pays significantly higher than standard tariffs to Eskom, but in times of low aluminum prices, the price of power is lower than the standard tariff,” the company said in an e-mailed response to Bloomberg Wire service on Aug 27th,

For its part, Eskom says the past 12 months have been about keeping the lights on. Maroga told business groups the firm has spend $7 billion on capital construction since 2005 and $4 billion of it in the past year. Much of the utility's new capacity is fueled by coal.

Domestic nuclear industry no longer in the cards

Another outcome of the financial crisis is that South Africa's grand plans for development of a domestic nuclear industry through "localization" have hit the rocks. Barbara Hogan, South African government Minister of Public Enterprises has been "gung ho" about it. She told Reuters on July 30th . . .

"We as a country cannot afford to be importing a product that we could be producing in this country. We need exports and PBMR is ideally suited to support them."

South Africa’s two tenders for LWR reactors, now on hold, include requirements for much of the manufacturing of components for new reactors to take place in country.  Also, the bid documents included requirements to train and hire an entire new generation of South African nuclear engineers and skilled trades.  Areva and Westinghouse, the two primary bidders, committed to these actions are part of their proposals.  Now none of it is likely to occur.

Status of other Pebble Bed projects

While PBMR's prospects were sinking, China has gone ahead with its commercial development of the Pebble Bed technology .  In October 2008 it launched a commercial project at Shandong. It expects to have the first 165 MW plant ready for hot start in 2013. However, China's plans are for use of the small reactor in domestic service. There are no reports it plans to license the technology for export.

Efforts to develop and build a high temperature gas cooled reactor at the Idaho National Laboratory (INL) remain a distant objective. Lab R&D managers have complained to nuclear industry trade publications the Next Generation Nuclear Plant (NGNP) program is underfunded and that the earliest work would begin is 2016.

Observers of the Department of Energy, which funds the lab, have suggested that the plant will never actually be built in Idaho. Instead, the lab will evolve its role of developing fuel, materials, and related technology, but that it will be up to a private sector firm to decide whether and where to build a demonstration plant.

With record deficits likely to plague the federal government for years to come, the outlook is dim for a $1 billion demonstration reactor being funded for construction on the Arco desert.

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