Cablegate: Eskom Postpones New Nuclear Build Plans

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RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #2654/01 3411231
ZNR UUUUU ZZH
R 061231Z DEC 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 6659
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0889
RUEHBY/AMEMBASSY CANBERRA 0770
RUEHLO/AMEMBASSY LONDON 1646
RUEHMO/AMEMBASSY MOSCOW 0900
RUEHNE/AMEMBASSY NEW DELHI 0505
RUEHOT/AMEMBASSY OTTAWA 0731
RUEHFR/AMEMBASSY PARIS 1479
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 PRETORIA 002654

SENSITIVE
SIPDIS

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DEPT FOR AF/S, EEB/ESC AND CBA
DOE FOR SPERL, PERSON, SCOTT, AND BIENAWSKI
DOC FOR ITA/DIEMOND

E.O. 12958: N/A
TAGS: ENRG EPET EMIN EINV EIND ETRD SF
SUBJECT: ESKOM POSTPONES NEW NUCLEAR BUILD PLANS

REF: A. PRETORIA 2612
B. PRETORIA 2401 AND PREVIOUS

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Summary
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1. (SBU) Eskom announced its decision to postpone the
development of a second nuclear power plant. The local press
reports that a fleet of nuclear power stations, rather than a
single one, will probably be built in partnership with
suppliers, bringing down the total unit cost. A task team
will develop a nuclear energy strategy and work with state
power company Eskom to procure a nuclear technology partner
to support the build and associated industrialization
processes over the next 18 months. Westinghouse will convey
more about the government's plans for a nuclear program after
a meeting with the Minister of Public Enterprises in the U.S.
on December 11. End Summary.

--------------------------------------------- --
Nuclear Competition Ended for Financial Reasons
--------------------------------------------- --

2. (U) State power utility Eskom announced on December 5 its
decision not to proceed with procurement of a second nuclear
power station because of its inability to secure adequate
financing, given the worldwide financial crisis, and because
of the slowdown in the domestic economy, according to
multiple press sources. Eskom had been expected to make a
decision -- perhaps by the end of the year -- between three
1,140 MW reactors from Westinghouse or two 1,650 MW reactors
proposed by Areva of France (Reftel B). Eskom spokesperson
Fani Zulu said the cost of the proposed nuclear power station
was confidential, but its cost was not part of the USD 33.6
billion Eskom has estimated it will spend through 2013
increasing generating capacity to alleviate power shortages.
Eskom had previously announced plans double its capacity to
80,000 MW by 2026, of which 20,000 MW, or half of the
increase, was to be nuclear. South Africa's only existing
nuclear power plant is a 1,800 MW double reactor constructed
by Areva at Koeberg, near Cape Town.

3. (U) Westinghouse issued a press release on December 5
announcing that it had been advised that Eskom had decided
not to proceed with the proposed investment in the nuclear
power project. According to the statement, Regional Vice
President Rita Bowser said, "Westinghouse remains committed
to Eskom and South Africa. We believe the AP1000 is ideal
for South Africa as it combines proven power generation
systems and components with advanced, passive systems. We
will nevertheless continue our current nuclear business in
South Africa that includes our work at Koeberg and our
support for the development of the Pebble Bed Modular Reactor
technology."

4. (SBU) Bowser told Economic Counselor on December 5 that
South Africa was still interested in a nuclear program and
that the company would know more about the South African
government's (SAG) intentions after a meeting that was
requested by Minister of Public Enterprises Brigitte Mabandla
(Reftel A) and that will take place in the U.S. on December
11. She promised to provide a read-out of that meeting after
she returns to South Africa on December 15.
Qshe returns to South Africa on December 15.

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Eskom Decision Is Not One of the Worst Possible Outcomes
--------------------------------------------- -----------

5. (SBU) Bowser added that the Eskom decision was not one of
the two worst possible outcomes for Westinghouse, which would
have been to make the award to Areva or to cancel the
development of a second nuclear power plant indefinitely. An
award to Areva, in addition to the fact that South Africa's
only existing reactor was built by Areva, would have closed
the South African nuclear reactor market to Westinghouse, at

PRETORIA 00002654 002 OF 003

least for the foreseeable future. Nor was the Eskom decision
the best possible outcome, which would have been to make the
award to Westinghouse. Westinghouse now waits to see which
of remaining two outcomes will be chosen. The best of these
would be for the Eskom to say that that it had chosen
Westinghouse technology, but would have to build the second
nuclear power plant at a later date. The next best outcome
would be for Eskom to reopen the competition for Westinghouse
and Areva, and possibly other less-qualified suppliers like
South Korea and Russia, to build the same reactors at a later
date. This later option would require Westinghouse to commit
more resources (in addition to the estimated USD 10 million
already invested) to the bidding process without any
assurance that there would be contract at the end of what
will now be a much longer process.

--------------------------------------------- ----------------
A Nuclear Technology Partner to Be Chosen Over Next 18 Months
--------------------------------------------- ----------------

6. (U) The "Weekender" newspaper reported on December 6
that, according to SAG officials, a fleet of nuclear power
stations, rather than a single one, will probably be built in
partnership with suppliers, bringing down the total unit
cost. The same article added that Department of Minerals and
Energy (DME) Director General Neli Magubane and DME Head of
Nuclear Technology Tseliso Maqubela will head a task team
that will develop a nuclear energy strategy and work with
Eskom to implement a framework for procuring a nuclear
technology partner to support the build and associated
industrialization processes over the next 18 months. This
may involve the establishment of joint ventures of the
creation of a special-purpose vehicle. Maqubela is also
quoted as saying that that Eskom will search for a nuclear
technology partner instead of engaging in a renewed bidding
process, although, "How we will conduct that search...it is
too early to say. It is a strategy used in a number of other
countries." Maqubela said the chosen partner's willingness
to locate some of its manufacturing in South Africa would
count in its favor, since the construction of industrial
capacity to support the generation of nuclear energy would
help to reduce its costs over time. He also confirmed that
the SAG would stick with its preference for pressurized water
reactors (the type that is produced by Westinghouse and
Areva). Maqubela also said that a legislative framework
dealing with nuclear safety and the disposal of nuclear waste
would be created in the next 18 months.

7. (U) Department of Public Enterprises (DPE) Director
General Portia Molefe was quoted in the same article as
saying that cost is the biggest reason for not proceeding
with the nuclear power station at this time. According to
her, the project is "not affordable" as Eskom is also
involved in other multibillion-rand energy projects. Molefe
added that, "We must be vigilant to ensure that Eskom does
not overextend its balance sheet, and that our ability to
Qnot overextend its balance sheet, and that our ability to
provide the economy with competitively priced energy is not
jeopardized." She continued that strategic partnerships with
suppliers have become the prevailing method of building
nuclear power plants globally. She said the SAG would adopt
this trend, which is also favored by suppliers. Molefe also
indicated a change of focus for the Westinghouse-supported
Pebble Bed Modular Reactor program. Instead of electricity
generation, the emphasis will be on producing process heat
for industrial applications. The program will be
accelerated, according to Molefe. (Comment: The most likely
users of process heat would be the SASOL coal-to-liquids
plant in Sasolberg in Free State province and the proposed
PetraSA refinery in Eastern Cape province. There are also a
number of aluminum and ferroalloy smelters that could be
potential users. End Comment)

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Comment
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PRETORIA 00002654 003 OF 003

8. (SBU) The Eskom announcement is disappointing from both
the Westinghouse and South African energy mix diversification
perspectives, but it is too early to know what the final
outcome will be. Eskom's expressed desire to increase local
content works to Westinghouse's advantage, since the company
specializes in technology transfer and does not manufacture
major components in the U.S. But Eskom's search for a
strategic partner could also play into the hands of
state-owned French nuclear power company Areva. A decision
to go with Areva would not be without its price; Westinghouse
is unlikely to retain its 15-percent interest in the Pebble
Bed Modular Reactor program if Eskom establishes a strategic
partnership with its arch-competitor. The Embassy should
have a better idea of what all this means after Bowser
returns to South Africa on December 15.
BOST

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