Economic Impact Assessment Report on planned nukes outdated

By Dr Piet Human

Having read the report as a social scientist my conclusion is that the report is fundamentally flawed. It would be irresponsible to use the findings of the report as a decision-making basis for the construction of a nuclear power station at any of the three proposed sites. My reasons are:

The Report is outdated.

The report was completed by the end of 2008 with much of the desk research and fieldwork done during 2007 and 2008. The data used for the macro-economic modelling (the Social Accounting Matrices) was based on data from 2004. The statistical descriptions of the sites were based on data from 2006 and earlier. The estimates used for agriculture, tourism, retailing and trading and commercial fishing are based on data and interviews from 2007.

In recent years we have experienced accelerated change all over the world. The recession of 2008 has had major impacts on all countries in the world and South Africa has not escaped its affects. Despite numerous predictions that recession was just another ‘economic cycle’, it is now becoming accepted that we are experiencing a structural change in our economy. As an example from the Overberg district we have witnessed a loss of 13 550 jobs in the agricultural sector between 2000 and 2013[1]. In the same period 13 700 jobs were added in the service sector. The economy changed significantly. The Eastern Cape Province’s GDP growth was 5.2% in 2006. In 2014 its GDP growth was 0.4%[2]. One of the most significant changes that have happened over the last ten years world-wide and also in our own country is the energy transition. The proliferation of sources of energy (from coal and oil to gas, fracking, solar, biomass and wind) as well as the rapid advancements made in both generation and distribution technologies is changing this sector rapidly. The adoption rate of renewable energy and ‘smart grids’ is similar to other economic revolutions such the internet.

The authors also make assumptions about the demand for electricity that is outdated. “Electricity demand growth has been much lower than forecast; it is still below 2007 levels, and future growth is expected to be lower than projected in the IRP 2010 (base assumption)”[3].

The report is presented to us today as if our economy and especially the electricity sector has fossilised in 2008. It is patently clear that no sensible conclusions can be drawn from the report. One would expect that the report would aim to predict the future impact of a nuclear power station. To predict we need to have a valid description of the situation as it is today, not as it was seven to eleven years ago.

Scope of the study.

This is somewhat confusing. At first we are told that the study would focus on the economies within a 20km radius of the proposed sites. The descriptions of the sites remained half-heartedly focussed on the 20km radius. This is peculiar; firstly, no economy is a radius; it follows human settlement and economic activity. Secondly, it is just insensible to want to isolate an economy (a set of inter-related production and consumption activities) to such a small area; especially given the size of the project. A 20km radius may perhaps have been sensible if the project was the building of a new shopping centre in Gansbaai. The impact of building R800 billion to R 1.4 trillion nuclear power stations will surely impact on a much larger scale. As the authors of the report state: “The nuclear power station is such a large capital investment (equivalent to that of six times the capital investment in Gautrain) that the economic ripple effects will go far beyond its direct boundaries.”

The Cost Effectiveness Analysis (CEA) focuses on this 20km radius definition of the site economy. But more of this later.

However, when using the Social Accounting Matrices (SAM) modelling methodology, the macro-economic impacts of the proposed build of a nuclear power station is analysed for the particular province (Eastern and Western Cape). We are told what the annual impact on the provincial GDP, capital formation, employment and household income will be. The unit has now shifted to the province. This is done for the construction phase as well as the operational phase.

To recap, the authors attempt to illustrate the impact on a small and artificially defined economy (20km radius) and then on the provincial economy. Intermediate scales of economies such as districts, regions and the national and international economies are ignored. This does not make any useful contribution to our understanding of the economic impact of the proposed construction of such a mega-project.

The Cost Effectiveness Analysis.

This methodology is similar to Cost-Benefit Analysis where the costs and the benefits of two or more options are compared in order to determine the most cost effective option. Cost Effectiveness Analysis is widely used in other fields; in health economics it is used to compare the effectiveness of different health intervention in relation to health outcomes (life years, for example). In our case, however, the benefit is defined as the Present Value of Electricity in GWh. A number of costs were calculated; from buying land, site preparation, construction of reactor, construction of the village, access roads, labour costs and so on. The conclusion was that there is no significant difference between the three sites in terms of a Cost Effectiveness Analysis.

The costs of construction and operations were given to the consultants by Eskom. This is somewhat disturbing. Firstly, we have to keep in mind that these costs relate to costs determined seven to eight years ago and they have not been updated for the 2015 report. Secondly, the authors made no attempt to check that these costs are correct by, for example, looking at other recently built nuclear power stations elsewhere in the world.

It is not clear what the purpose of this analysis was. This is supposed to be an economic impact assessment and not a decision-making analysis about the most economical site for constructing a nuclear power station. Now that Eskom knows that there is no difference between the three sites (an analysis that they should have done), the question still remains what the impact will be?

Macro-Economic Analysis.

The Social Accounting Matrix method was used to do a macro analysis. “A SAM is a comprehensive, economy-wide database that contains information about the flow of resources that takes place between the different economic agents in an economy, i.e. business enterprises, households, government, etc., during a given period of time”. As mentioned before, the SAM data used is outdated (from 2004).

The reader is given no insight into how this modelling works. Only the outputs are given. It is said, for example, an additional R5.5million per annum will be added to the GDP of the Eastern Cape during the construction phase (assumed to be seven years); some 676 673 jobs can be sustained over the seven year period and an additional R2.7billion will added to household income over the nine (!) years (see p. 41 of the report) of construction. How did they get to these outcomes?

As expected: “The results of the macroeconomic impact analysis indicate that the construction and operation of Nuclear-1 will have a significant impact on the economies of both the Eastern and Western Cape provinces” (p.49).

What is the real economic impact of Nuclear-1 going to be?

The real economic impact of the proposed building of nuclear power stations in South Africa is the question as to who will pay for it and how much will it actually cost. We know from various experiences across the globe that many of these mega projects done by smaller societies can bankrupt those societies (the problems of Greece started with the huge debt it had to service after its Olympic Games). This report is silent on this most important economic question. What will be the costs to the consumer and tax payer? What will be the benefits? A useful Cost Effectiveness Analysis would have been to compare nuclear to other options such as renewable energy, gas and other options.

But then, we have to remind ourselves that the report was written in a different era where renewable energy, smart grids, the understanding of the management of base-load issues and the flattening of the demand for electricity did not exist. It was written at a time when renewable energy was still expensive and the spectre of rapidly falling prices not expected (as evident in our own bidding prices under the RE IPP programme). We also know that nuclear power prices are still rising and that no private investor will invest in nuclear power. The economics of energy is undergoing its own transformation and it is of grave concern that this report seems to be oblivious to it.

Dr Piet Human has a PhD in Sociology and was a professor at the Graduate School of Business, University of Cape Town until 1996.

[1] Daniels, Reza C. Et al. Rural Livelihoods in South Africa. SALDRU Working Paper 122 (2014). University of Cape Town.

[2] Statistics South Africa, 2014

[3] ERC Report, University of Cape Town, 2013