On Sunday night, one rand bought 5.09 Russian rubles, as opposed to 0.066 euros or 0.075 US dollars.
During a recent visit to Russia, as a guest of the Russian state nuclear energy corporation Rosatom, Moneyweb found that the Russians believe the exchange rate may strengthen their chances to win the multibillion rand contract to build nuclear power stations for the South African government.
The SA government has already concluded a framework agreement with Russia as a precursor to the actual procurement process. The Russians are widely considered as favourites to win the contract, partly as a result of their own “aggressive” press release late last year, that created the impression they’ve got it in the bag.
The Russians further believe they have made a very strong and detailed proposal to the South African government about their offering, especially with regard to localisation, which is a key requirement aimed at the development of a local nuclear industry.
Similar framework agreements were however concluded with China (ZAR1=0.48CNY), France (ZAR1= 0.066EUR), South Korea (ZAR1=88.24KRW) and the US. Negotiations aimed at similar agreements with Canada (ZAR1=CAD0.099) and Japan (ZAR1=8.98JPY) are underway, the Department of Energy said in July.
The Russians are prepared to commit to an agreement that is virtually 100% ruble-denominated, taking all the currency risk and depending on the needs of the client. If the South African government for example decides to use a Chinese turbine in combination with a Russian reactor, the deal can be structured that way, the Russians say.
See what a nuclear reactor looks like from the inside
Economist Mike Schüssler agrees that pegging the deal in rubles can serve to limit the cost, which is the big concern from parties inside and outside the South African government. That argument also holds for some of the other countries, he says.
Schüssler however says the exchange rate advantage has to be seen in the context of an inflation rate of 15.8% in Russia (August 2015) and weaker financial systems as well as the possible effect of sanctions on Russia. The US inflation rate stands at 0.2% and France had 0% inflation in August.
Bidders with close links to their respective governments, like Rosatom and the French nuclear agency Areva, may be better placed to withstand losses, should that occur, Schüssler says. The US bidder Westinghouse is a private company without State support, except for possible cooperation working with a US import/export bank, Schüssler says.
“I don’t think the Russians are technologically any weaker than any of the other bidders. The big question for South Africa will be where we get the best ‘bang for our buck,” he says.
Who is Rosatom?
Rosatom is a group of 360 companies employing 262 000 people, mostly in Russia. It undertakes research and development, manufactures nuclear components, develops nuclear power plants in Russia and other countries and currently operates ten such plants in Russia with a joint generation capacity of 26 200MW. (Eskom’s total own generation capacity is about 43 500MW).
It currently has 29 units under construction and an international order book of $101.4 billion.
The Russians say they are ready to deliver the full 9 600MW of nuclear power generation capacity envisaged by the South African government by 2030. That is eight units of 1 200MW each. While it is possible that the South African government may decide to contract with more than one vendor, Rosatom says it will be very expensive to buy only one unit from a specific vendor.
They realise that funding is key to the successful conclusion of the deal.
Depending on the needs of the client, the deal may be financed through Russian State export credit, as was done in the agreements with Hungary and Vietnam. China and Iran, however, wanted to use their own money and the deal with Rosatom was structured accordingly.
The project may be structured as a public private partnership (PPP) where Rosatom builds and owns the power plant with or without a partner. It is dependent on a guaranteed power purchase agreement (PPA) with a State utility like Eskom, at an attractive price. Up to 49% of the shares may later be sold to other investors.
This model is followed with the agreement between Russia and Turkey for the construction of four 1 200MW units of Rosatom’s VVER reactor in Akkuyu, supported by a 15-year PPA for large portions of the power produced.
The Finnish government in December 2014 gave the green light for an agreement with Rosatom to construct the 1 200MW Hanhikivi Nuclear Power Plant on the Hanhikivi peninsula. This deal is based on a fixed cost contract.
Rosatom owns 44% of the special purpose vehicle that will own the plant and 66% belongs to other shareholders. Once in operation, the power generated will be sold at cost to the shareholders according to their respective stakes, for own use or to sell on the open European market. The other shareholders are about 100 mid-size industrial companies trying to mitigate the problems they experience with power supply.
Rosatom says it will get margin from selling its share of the electricity generated.
While there seems to be a lot of flexibility, in South Africa the electricity generated will be fed into the grid, for Eskom to transmit and sell to customers. Customers will therefore not be exposed directly to the cost of electricity generated at the proposed nuclear power plant. While it may be mitigated by lower cost generation units in the same basket, it may have an impact on the average cost of generation.
Once the units have been paid off, the operational cost is however very low, as is the case with Koeberg, which is currently seen as a cash cow for Eskom.
The Russians are confident that they can meet the $6 500/kW benchmark for overnight cost in government’s Integrated Resource Plan and even the lower $4 200/kW quoted by the Department of Energy in July.
The targeted construction period is six years, including the design phase, permitted the typical design is being used.
Rosatom has done research about the potential for localisation and believes it can outsource a lot of the steel construction. About 200 local companies participated in a supplier conference the Russian group hosted two years ago.
A level of 30% localisation can be reached in the first units, increasing to up to 60% local content in the last of eight units, Rosatom says.
Learn more about the Atomenergomash (Atomash) factory in Volgadonsk, Russia, where the nuclear components may be manufactured, should the Russian State Nuclear Energy Corporation Rosatom get the contract to build nuclear power station for South Africa.
It does concede that extensive localisation will be dependent on local labour, with the associated risk of labour unrest and protracted strikes.
Whether the Russians will meet their match on this front, remains to be seen. They rely on their experience in managing nuclear construction in a variety of other countries and say they have certain “management solutions”.
Should a critical problem present itself, the Russians say they will be able to draw from their own experienced workers and equipment at home or in other countries. This will however be in a worst-case scenario and has not been necessary before.