27 April 2019

 

CFO Talks

Des Muller – Managing Director: NuEnergy Developments

Nuclear power – cost effective in the long term

‘You’re not going to get a single technology that’s going to be a silver bullet for all our energy requirements.’

CIARAN RYAN: This is CFO Talks, today we are delighted to welcome Des Muller, managing director for NuEnergy Developments, a consultancy structured around the development and industrialisation of a balanced and sustainable energy mix for Southern Africa. Des is involved in the refit of the Koeberg Nuclear Power Station in Cape Town, which is still ongoing. Energy has become one of the key risks facing South Africa and the availability of power at a reasonable cost will determine whether or not South Africa will be able to break out of its low-growth trap. So we asked Des to come along and talk about all things energy. Welcome, Des.

DES MULLER: Thank you very much for inviting me to the studio.

CIARAN RYAN: You’re welcome. Des, give us a brief rundown about your career and your credentials as an energy specialist and how did you get started on this path?

DES MULLER: Energy became part of my life as a student, I worked for one of the biggest power plant companies at the time and it got me onto the coal builds, Eskom’s coal expansion programme in the twentieth century, it sounds a long time ago [laughing]. I spent 20 years on those build programmes, learning the technologies from a construction point of view, an engineering point of view, commissioning and also optimising those units and also getting them through their capability tests. So I got to really understand the processes of power generation at the time. As we went away from the big build programme of the twentieth century I started following innovative trends in the energy sector in the global markets, where we found independent and private sector coming into the industry and also new technologies like gas turbines and renewable energies coming into the market. I certainly came back to South Africa with those concepts and started working on developing new innovative technologies for South Africa. At the time it was a breath of fresh air to see a coal-dominated industry starting to move closer towards cleaner technologies and that was certainly an approach from government at the time. Once we worked through a number of projects, I worked with some of the big construction companies, the companies that had the capacity for investments and concessions, and we developed quite a lot of projects as one of the earlier developers of private sector energy projects in renewables, as well as gas, and we got to build a few of those projects as well, which was great to get that experience. The next frontier for me was nuclear energy, once that was underway South Africa was considering a nuclear build programme at the time – I’m going back to 2007 – and I established a nuclear capability in the construction sector. In fact, we had three major construction companies that had a very good nuclear construction capability and getting ready for the nuclear build programme. With that having gone through a few hiccups like Fukushima, for example, it stored the programme and fortunately we had Koeberg that was going through a refit programme halfway through its life and that created a lot of opportunity for the skills that we had developed to get into those projects. As one of the founders of NuEnergy Developments, which is really an advisory company in the energy sector, where we advise on project developments, as well as industry readiness. Industry readiness is really around aligning the local industry for more complex projects like nuclear or some of the oil and gas industries or even some of the coal projects, where we tend to fail in execution. 

 

Power outages predicted a decade ago

CIARAN RYAN: I just want to jump in and point out to anybody listening that you were one of the first people to predict with stunning accuracy that South Africa would be facing power outages and that was a decade ago. In fact, I wrote a story about it at the time after interviewing you and many people thought you were smoking something. It turned out exactly as you predicted it would. What is your prediction for energy now here in April in 2019?

DES MULLER: Energy planning is an exact science, I’m not too sure why the Department of Energy is having trouble with it, it’s something that you can predict. But economic development is another challenge that has got to be really woven into energy planning as well. What is known and has been proven over the last decade is that if one has sufficient energy, you have economic growth. If you don’t, you’ll have economic decline. So these are the things that one has got to look at and sometimes it’s a little bit of a crystal ball that you’ve got to look into but there are a lot of known parameters out there that you can predict these challenges going forward. In energy planning one needs to address energy security as an important point, access to affordable energy and environmental sustainability. Those are the three key parameters one has got to address. It’s a lot more complex today than it was in the twentieth century, we just built a lot of coal plants, you didn’t care about environmental sustainability. The problem and the confusion come in where certain technologies want to dominate all three, so you get coal, which is not really good for environmental sustainability, it cleans itself up, so you’ve got clean coal or you get renewable energy, which is very intermittent but they try and create a baseload form of energy out of renewables.

CIARAN RYAN: I think at this point just explain what we mean by baseload?

DES MULLER: Baseload means it is providing energy for most of the year and consistently and reliably and that deals with energy security.

CIARAN RYAN: Right, so when we’re talking about solar and wind…solar is only producing power when the sun is out, wind is only producing power when there’s wind.

DES MULLER: Yes.

CIARAN RYAN: So that doesn’t really make a big contribution to baseload, is that correct?

DES MULLER: Not at all, it’s nice to have that but it’s not something that you can rely on or build an industry on. So renewables tries to bridge that gap with a lot of things like storage systems and so on, and installing enough of it to get the quantum there. But it always boils down to the cost of these energy systems. Nuclear energy on its own can provide all three, energy security, access to affordable energy and environmental sustainability. Now, you might say, well, surely nuclear is too expensive, we’ve all heard that it’s too expensive…

CIARAN RYAN: The US$1 trillion figure.

DES MULLER: Yes, I would love to get paid $1 trillion for a nuclear build programme but not in my lifetime. The thing is one looks at evidence, Koeberg is the cheapest provider of electricity on the continent by far, by a longshot, it has been for the last 20 years and it will be for the next 35 years. So the likes of nuclear can actually provide very good energy planning, it’s not necessarily saying that we’re going to go and build the whole country on nuclear energy, one has got to have a balanced energy mix, which is one of the things that I do support is using the best of technologies where they fit well. On prediction of what’s going forward, looking into the future, I have a very low confidence on our ability to rectify the situation that we are in at the moment, we’re seeing early days of load shedding, we are about to start the decommissioning of 12.5 gigawatts of coal-fired power plants on the grid and with nothing really planned that’s going to replace that. You replace baseload with baseload, reliable energy with reliable energy…

CIARAN RYAN: Let’s just clarify that, when we’re talking about replacing baseload with baseload you cannot replace this coal-fired power with solar energy or wind energy, is that what you are saying?

DES MULLER: It will be extremely difficult and very expensive to do it and time consuming. You’d rather want to replace it with cleaner coal, especially on the sites that you are decommissioning because there are a lot of facilities available in those places or you want to look at nuclear, small modular reactors and these types of things can fit into those replacements or hydro, where we can get hydro from our neighbouring countries or from South Africa. It’s a bit closer to baseload than some of the intermittent technologies. The problem is that we don’t really have a plan if you look at the integrated resource plan, we don’t really have a plan to replace this coal cliff that is about to happen, as we built steadily in the ‘70s and ‘80s we are going to be decommissioning at a steady rate in the near future and, really, what we are seeing by the time 2030 comes we are going to have quite a serious shortfall of energy. At the moment I am not seeing the solutions in the pipeline and, therefore, my confidence is pretty low.

 

Life without Eskom

CIARAN RYAN: It seems that a lot of businesses in South Africa are now starting to confront life without Eskom, in other words they are starting to put in plans to go off grid. Sibanye-Stillwater, the mining company, is in the process of building I think it’s a solar plant. It’s the same with Anglo Platinum, they are also building an off-grid plant to supply their own power. Quite recently there was an article in City Press by Andrew Kenny arguing very strongly against renewable energy, he points out that solar and wind energy is being brought in my Eskom for about 220 cents/kilowatt hour, which is way above Eskom’s selling price of 89 cents/kilowatt hour. So he says the people pushing renewable energy are suggesting that the cost of renewable energy will come down, yet Kenny points out that the experience from elsewhere in the world is just the opposite. We heard about blackouts in Denmark and South Australia, which are two areas which have been very, very strong on renewable energy and the grid just fell over when it was put under a certain amount of stress. What’s your take on this, how is this going to play out?

DES MULLER: I’m familiar with that article and, as I said earlier, all technologies have benefits and some of them have challenges as well. You’re not going to get a single technology that’s going to be a silver bullet for all our energy requirements. It’s the proper planning and implementation of those technologies that is important. Coming back to what Andrew Kenny was saying in that report, renewables were initially high when they came into South Africa and that was there to attract foreign investment or the private sector into the energy sector but these prices are coming down. What people don’t understand is that the selling price from the renewable energy developer to Eskom is one price but the cost to Eskom to manage the intermittency on the grid, these are the hidden costs, which means that when the sun is shining you’ve got to back off a coal-fired power plant or shut it down completely, so you’re running a coal-fired plant at 50% load, which is not efficient. So the cost of running Eskom’s system starts becoming a burden to Eskom. These are the hidden costs that one never sees and that’s where that figure of R2.20 and things like that is quite realistic, we don’t necessarily see it but you’re going to see it passed through to the end user. But at the moment it’s sitting on Eskom’s balance sheet, which is one of the challenges that they are going through. Yes, we hear about the cost of renewable energy coming down, there’s been a tenfold reduction over the last 20 years. It’s unlikely that we’re going to see that type of reduction in the future going forward, those reduction curves on the cost of renewable energy has flattened out, I think we’ve reached its peak on where we can go. We keep on hearing about disruptive technologies coming through. As an engineer, I am certainly not seeing that in the industry. Yes, there are some very smart integrated microgrids and battery solutions, storage solutions that are coming through, very smart, very fancy, it does help, it does make quite a big difference but it all eventually comes down to what the cost of that electricity is going to be. It’s great to have these systems but are you happy to pay the price. It is certainly true that where there is intensive penetration of renewables globally the cost of electricity does go up. A case in point in Europe…

CIARAN RYAN: Goes up or goes down?

DES MULLER: Goes up. Case in point in Europe, Germany and Denmark have some of the most expensive electricity in Europe because of their high penetration of renewables. France, next door to Germany, running mostly on nuclear energy, has the cheapest electricity in Europe. South Australia, as you mentioned earlier on, has the most expensive electricity in the world because of the high penetration of wind energy that they’ve worked. I take my hat off to them, they have been one of the world leaders in seeing whether we can do this, there have been a lot of thought experiments that have been rolled out and thank goodness they have been rolled out by some of these developed countries that can actually afford this.

CIARAN RYAN: So the big expensive mistakes are being made elsewhere and not here.

DES MULLER: Ja but we’re trying to make those same mistakes here from what we’re seeing and we need to learn from the experiences in these countries and, as you’ve mentioned, some of these countries have experienced blackouts as well.

 

Koeberg provides cheapest power

CIARAN RYAN: What about nuclear power, you are involved in the Koeberg refit, Koeberg is the cheapest power that we have, you said, on the continent. What is the price of that and how does it compare with some of these renewables and why are people so afraid of nuclear?

DES MULLER: Just to come back to the cost of nuclear, there’s a number that’s floating around of about 25 cents/kilowatt hour for Koeberg’s electricity…

CIARAN RYAN: Sorry, just to interrupt you there, that’s compared to 220 cents that Andrew Kenny says we are paying for renewable energy.

DES MULLER: Yes.

CIARAN RYAN: Nearly one-tenth of the price from nuclear.

DES MULLER: Yes that is the situation. Koeberg has been one of the cheapest forms of electricity in South Africa and certainly in Africa for the longest time, as I said, for probably the past 20 years. Why nuclear is fairly cheap is because it has a high upfront cost. You certainly don’t want cheap nuclear, you want very good quality, reliable and safe nuclear power plants, so a lot of those safety systems do go into the actual capital cost of these projects but once the cost has been paid off and amortised all you have are the operating and maintenance costs, and because nuclear power plants use precious little fuel, the operating costs are extremely low and that’s why Koeberg can produce electricity for the likes of 25 cents/kilowatt hour and will do for probably the next 30 to 40 years because they have a long life expectancy of 60 to 80 years and you get the benefits over the long term with those plants. Why people are scared about nuclear I think is really just an education issue and they are certainly not wrong, one should have a healthy respect for the likes of nuclear radiation, it’s an innate fear that we have, one can’t sense it but it can kill you and that resonates with a lot of superstition that we have on this continent. The precursor to nuclear energy is the atomic bomb and one can easily associate the two. They are in completely different areas. But when one understands the safety and protection systems that goes into constructing a nuclear power plant and all the barriers of safety between the actual radioactive fuel inside the core to you outside and in the environment, when one understands that you start feeling a lot better about it. Stats SA, funnily enough, they did a survey in South Africa on people’s considerations and fears for nuclear energy and those least concerned about nuclear energy or scared of it or worried about it are the people in the Western Cape, the people who fear nuclear energy the most are those who live furthest away from Koeberg Power Station, so it deals with those issues. Nuclear energy is a useful source of energy, it is reliable, as I said earlier on, it is cheap, it is safe and it creates a lot of jobs during its construction and operations phases. The power plants that are built on the coast are great for desalinating water, it’s a very cheap form of desalinating large volumes of water.

CIARAN RYAN: Are we doing that in Koeberg?

DES MULLER: Koeberg looks after its own water requirements, so it desalinates its own water, so it’s completely off Cape Town’s water grid and it’s been like that for the last 18 months. So it is self-sufficient on its own water supply and it uses a tremendous amount of water.

CIARAN RYAN: Cape Town had a water problem and still has a water problem, could it not be refitted for that purpose?

DES MULLER: Absolutely, you can refit Koeberg to provide desalinated water for the likes of Cape Town and that is something that needs to be done.

CIARAN RYAN: Are they looking at that?

DES MULLER: I’m sure they are.

CIARAN RYAN: In my previous discussion with you I was quite amazed when I asked you how do we store the spent nuclear rods at the Koeberg Power Station, you blew my mind when you said it’s in a swimming pool, is that it?

DES MULLER: Well, not quite a swimming pool as we know them but these are deep pools filled with borated water and the spent fuel that comes out of the nuclear power plant, once it’s been in the system for 18 months to three years, it depends on how long they run it for, it gets put into these pools of borated water and stored there until they have a plan to put it into long-term storage. All of Koeberg’s spent fuel is still on site at Koeberg in these pools, you can go and have a look at those pools and the fuel down there.

CIARAN RYAN: You can lean over and have a look at it?

DES MULLER: Yes.

CIARAN RYAN: And it’s safe?

DES MULLER: Yes, it’s all protected, the water contains the radiation and because nuclear uses a very small amount of fuel, all the waste fuel that Koeberg has produced up until now, since 1984, providing 50% of the Western Cape’s energy, will fit on about 40% the size of a tennis court.

CIARAN RYAN: Really?

DES MULLER: That’s how small it is.

CIARAN RYAN: But how long does it remain radioactive? I thought it was hundreds of thousands of years.

DES MULLER: It decays quite rapidly, so the real nasty radiation decays and falls off very quickly from days, minutes, weeks, months, years, tens of years and so on but the lower dosage of radiation, which is still very harmful, takes many years, 10 000 years, 100 000 years and that’s what one has got to manage to make sure that that never gets exposed to the environment or to people. Once the fuel rods have cooled down, radioactively cooled down sufficiently enough in the pools at Koeberg, they will be put into a dry storage cask, which will be taken up to Vaalputs in the Northern Cape for long-term storage. We are about to start that process now.

CIARAN RYAN: This has never been done before?

DES MULLER: It’s been done worldwide very successfully but not in South Africa.

CIARAN RYAN: So all the fuel that’s been used at Koeberg from 1984 until now is still sitting in those pools?

DES MULLER: Still in those pools, yes. We now need to move it out into dry storage casks and then move it over to the likes of Vaalputs for long-term storage.

CIARAN RYAN: Is that buried in the ground at that point?

DES MULLER: Eventually but you can put it on the surface in the dry storage cask. You can go and sit on top of it if you want to. But these things get put into an area that is seismically safe, there is no major risk of these things and obviously the security that goes around these things is going to be exceptionally high. We can also reprocess this waste, which is done globally, and that will reduce the physical size of the waste down to 10% and that 10% is what you are going to have to look at for the long-term storage. Waste fuel is extremely valuable, especially for new generation power plants that are coming up in the future.

CIARAN RYAN: So it can be sold?

DES MULLER: Absolutely, there is definitely a market for it but there is also a lot of waste around the world that is being managed. Some of it is being reprocessed and some of it is being stored for the long term.

CIARAN RYAN: I remember talking to Dr Kelvin Kemm, the former chairman of the Nuclear Energy Corporation of South Africa, and I asked how long would it take us to remanufacture the nuclear bomb? He said four to six months, which also blew my mind because we have the Safari nuclear reactor in Pelindaba, all we have to do is enrich the uranium to a certain level and it would take only months.

DES MULLER: Fortunately we’ve decommissioned that capability.

 

Nuclear weapons

CIARAN RYAN: Don’t you think we should have the nuclear bomb again?

DES MULLER: [Laughing] Ja, it’s good that we move away from it. There’s quite an interesting story about nuclear weapons, we’ve got this megatons to megawatts programme, which has been going around the world for the last five years, where we are decommissioning nuclear weapons, remember there were about 20 000 nuclear weapons after the Cold War, those have been decommissioned and diluted from 93% enrichment down to 5% enrichment and run through our power stations all around the world. So those nuclear weapons have been lighting up out cities and industries for the last five years, which has depleted or deflated the price of uranium.

CIARAN RYAN: Is that the cause of it because of all these decommissioned weapons.

DES MULLER: There’s a glut of this lovely stuff and we’re probably down to about 2000 nuclear warheads from that time, so we’ve really reduced the nuclear arsenal around the world and there is a worldwide petition to eradicate the world from all nuclear weapons, which South Africa is a signatory to as well. We obviously just need the big superpowers to buy into that as well and then we could look at a fairly interesting nuclear weapons-free future.

CIARAN RYAN: It’s nice to put it there but it doesn’t look like it’s going to go that way. There are some crazy people in charge of the geopolitical…

DES MULLER: The world is thinking about it and it will take some time. We just need to put a lot more sanity into the world to get that right.

CIARAN RYAN: Reading the press these days there is nothing but bad news coming out of Eskom. It took way too long for Eskom to start building the Kusile and Medupi coal-fired power stations, and the cost of the overruns there were horrific, where did it all go wrong for Eskom?

DES MULLER: Eskom was certainly blocked by the Department of Energy at the time to build further new builds and they took over that responsibility. Unfortunately Eskom were given the go-ahead to start building plants when the lights started going off and when one rushes a big build like Kusile, Medupi and the Ingula hydro project into the market it becomes a challenge. The industry was certainly not ready, the designs were not complete, so this was a recipe for disaster. Also, remember, we had lost that capability, we stopped building in the late ‘90s, the big build programmes stopped around then, South Africa lost its industry, a lot of that left the country, we sold a lot of assets and we had to start from scratch again. We’ve now just completed a lovely big build and we’re doing it again, we don’t have anything to move forward into, the industry has now collapsed and we’re losing those capabilities again. Also, what happened is that Eskom opted for a package solution, which is typically what they’ve done in the past, in the twentieth century, where they offer 200 packages to different contractors and then they manage it beautifully and they were fantastic at it. Whereas they should have opted for an EPC capability…

CIARAN RYAN: What does that stand for?

DES MULLER: It means that you get a single contractor or a big company like General Electric or Alstom or Hitachi that will come in and provide you with the engineering, the full procurement of all the packages and the equipment and the construction of that plant, so they are fully responsible to provide you with a turnkey construction solution for the plant and guarantees on performance as well.

CIARAN RYAN: So EPC stands for what?

DES MULLER: Engineer, procure and construct. The nuclear plant, for example, would be an EPC solution built by an experienced EPC contractor. So a lot of those risks…and people say how the hell can Eskom build a nuclear plant if it hasn’t done well with the coal plant, and that’s really how one does solve it. As I said earlier on, Eskom had world class capabilities in managing these big contracts back then. They chose this time around to outsource it to big international companies, the management of those contracts, and that was also problematic and also pushed the cost up. Corrupt contracts shouldn’t be overlooked because that can escalate the price as well. I remember in the twentieth century builds it was a different experience completely, it was very tough working with Eskom, they were extremely professional but I can tell you we didn’t see the amount of company closures on these builds, we all walked away making good money.

CIARAN RYAN: Are you saying it’s different now?

DES MULLER: It’s different now, it’s very risky, people are losing a lot of money and a lot of companies have folded.

CIARAN RYAN: We also hear that the electricity grid should be stable for the next few years…

DES MULLER: Famous last words [laughing].

CIARAN RYAN: But part of the reason for that is declining demand for electricity and that’s because there’s been a process of deindustrialisation in South Africa. A lot of companies that maybe would have settled here and put up plants here go elsewhere because they don’t have stable electricity supply at a reasonable price. So in a perverse way Eskom has solved the problem for itself, is it not so?

DES MULLER: Ja, we’re expected to lower our standards of living and this is what comes with lack of energy. But having lost our energy security, we certainly have lost our status as an ideal destination for international investors who need intensive energy. We’ve also seen the intensive energy users scale down quite significantly here in South Africa over the last decade and in many instances they’ve been paid by Eskom to shut down their operations and it doesn’t take long for you to look elsewhere like Indonesia or areas where they have energy security to invest your operations there. We’re tending to find, as you were saying earlier on, is that big energy users are looking trying to generate energy for their own use, domestic homeowners are also looking at it. It all comes down to the cost of that electricity, the licensing procedures to get that done and how do you actually distribute that power on your own grid or on the nation’s grid. Personally I think that those licensing and prohibitive requirements should be raised up to about ten megawatt, which will then bring in industry to help alleviate some of the energy shortages and secure their own power.

 

Soweto R17 billion arrears bill

CIARAN RYAN: I was looking at the financial results of Eskom quite recently and there’s this massive and unsustainable debt level of about R420 billion. At the same time we see this pattern of non-payment creeping in in places like Soweto, where the arrears bill is about R17 billion, what’s going on here?

DES MULLER: Look, the big smoking gun is the cost overruns on the three mega power builds that Eskom went through, Kusile, Medupi and the Ingula power plants, they built a couple of renewables in between as well. We’re also looking then at – we were talking earlier about the delta between the cost of renewables on the grid versus what Eskom can sell it for.

CIARAN RYAN: Sorry, let’s just talk about what a delta is.

DES MULLER: The difference, you’re talking about that R2.20 versus the 89 cents that Eskom can sell its power to, it’s going to eventually accumulate on Eskom’s balance sheet. Overheads in Eskom are quite high, again the corrupt contracts that moved in on these big mega build programmes and then political intervention has also been some of the challenges that Eskom has experienced. We also have a situation where some municipalities are not paying. We have, for example, Soweto out there that has accumulated quite a significant bill and there are a lot of municipalities that are following suit. So we could quite soon have 50% of our electricity generated by Eskom unpaid for.

CIARAN RYAN: 50%?

DES MULLER: In the future it could grow quite big.

CIARAN RYAN: Do we have a percentage of what it is at the moment?

DES MULLER: At the moment it’s pretty small but if we have a wave of this growing it could go quite high. I might be a little bit high on 50% but we could certainly see a significant portion of our energy going that way. It would be a humanitarian crisis to shut the likes of Soweto off that has a R17 billion bill until such time they got that resolved. So this is a headache that sits with Eskom and the government at the moment. If Eskom can’t recover its money, I don’t know how the private sector that wants to take over the energy industry in our country, how they are actually going to deal with this. It’s a big challenge but these problems are symptomatic to the state of our economy, this is the burden of poverty on government and on the taxpayers that we are having to pay. The only way that we can actually solve this thing is by putting South Africa back to work, people who are earning enough money will be quite happy to pay for services like electricity, it’s the only way we can deal with that.  

CIARAN RYAN: Are you optimistic about the future of South Africa, having said what you’ve just said?

DES MULLER: South Africa has amazing potential and great leaders but most of them are not being exploited at the moment, there are very smart people in this country. So I am cautiously optimistic in South Africa at the moment. What concerns me is that too much power is in the hands of those who are not equipped to make good judgements on the poor advice that they are given and consequently a lot of bad decisions are being made and especially in the energy sector that needs to be really on point and in time and the right decisions to avert the crises that we are seeing at the moment.

CIARAN RYAN: I go back to that Andrew Kenny article, it was a good one, I think a lot of our energy policy seems to be driven by very bad science and very bad financial modelling. I think it’s based on a report that came out of the CSIR some years ago suggesting that this country could be run on renewable energies and we’re now starting to see that that is just not the case and that the cost to the economy is just monstrous.

DES MULLER: Ja, it is a challenge and the consequences are always who deals with it. The academics who are advising our Department of Energy go silent when you go through a crisis like load shedding that we’re seeing at the moment at a massive cost to the industry and setting back the economic growth of this country and, again, raising unemployment in South Africa. Who is accountable for that? That needs to be dealt with.

CIARAN RYAN: Great, Des, we are going to have to leave it there, thanks very much for coming in.

DES MULLER: You’re welcome, thank you very much.