Project Update

• design, licence, construct and commission the DPP at Koeberg for its client, Eskom;
  
• design, licence, construct and commission the PBMR Fuel Plant (PFP) at Pelindaba with its partner, Necsa; and
  
• develop the process heat market.

“The entire nuclear business is different and still changing and no one underestimates the difficulty in successfully engaging it in the construction mode.”

Indeed, the construction and demonstration of a first-of-a-kind technology, such as the PBMR, faces many challenges. In the past, the nuclear industry was often characterised by extraordinary construction cost overruns, unpredictable regulatory review processes, uncertain investment return, and a poor public image regarding operational safety. These public perceptions also plague new technologies, which face the additional obstacle of economic competitiveness.

The PBMR technology is now at the beginning of the demonstration phase. The company has been building nuclear skills and capacity, improving processes and systems and is now aligned with national strategies to further develop the local nuclear and related industries. It also has the potential to play a major role in South Africa’s future energy supply and security.

• the simplification of the regulatory processes;
  
• design standardisation; and
  
• risk- and information-sharing.

• a robust strategy combining financial incentives and government subsidies to encourage and reward first movers into the market;
  
• refinements in the regulatory process for siting and licensing plants; and
  
• improvements by industry, including standardised reactor design, modular construction and improved safety features.

The successful demonstration of PBMR’s technology is not dependent on the Company alone. It is a national effort, not only through government funding and policies, but also through the support of all the roleplayers in the industry such as educators, suppliers, investors and regulators.

The PBMR project is one of national pride. Every South African citizen supporting the project would be part of making history for South Africa, in demonstrating this first-of-a-kind nuclear technology to the world.

Despite the challenges of the year under review, the Company managed to maintain its focus and is committed to delivering the project successfully.

In the past year, PBMR completed the following steps to prepare for construction:

• Necsa obtained the licence to hot commission the ACF for the PFP.
  
• PBMR successfully conducted testing of the structures, systems and components (SSC) for the DPP at five facilities across South Africa.
  
• PBMR completed and submitted the SAR to Eskom. This is a prerequisite for obtaining a nuclear licence.
  
• PBMR demonstrated an improved safety culture and aligned its procurement processes with those of the Eskom Client Office.

PBMR is preparing for site access and is progressing its engineering design in accordance with the approved First Concrete Schedule. PBMR will also submit the SAR (revision 2) to Eskom timeously (the first version was submitted to Eskom in August 2007). Furthermore, the Company will actively support the finalisation of the EIA approval and provide support for the public participation process. The Environmental Impact Report (EIR) is in draft form. The current programme calls for the draft EIR to be distributed for public comment in 2008 and for public meetings to be held during the second half of the year. This will be followed by the submission of the EIR to the Department of Environmental Affairs and Tourism (DEAT).

Orders for some of the most critical long-lead items of the DPP have been placed. PBMR, however, as many of the other international nuclear companies, is faced with the challenges of a heavily congested supply chain.

Future challenges for the PBMR demonstration power plant project include:

• public hearings with a view to achieving a positive RoD on the EIA at the Koeberg site;
  
• receiving a licence for construction from the NNR;
  
• finalising the engineering design for this first-of-a-kind power plant;
  
• placing of all the procurement contracts in accordance with regulatory requirements;
  
• preparation for the pouring of the first concrete at the Koeberg in 2010; and
  
• construction and commissioning of the PBMR demonstration power plant.

• the continued Necsa/PBMR relationship building –Necsa has joined the programme as future licence and operator of the fuel plant;
  
• receiving an NNR licence to introduce enriched uranium into the fuel development laboratories;
  
• production of fuel spheres for long-term irradiation qualification testing;
  
• placing of procurement contracts for critical long-lead items;
  
• completion of the SAR for submission to the NNR via Necsa (as licence applicant);
  
• starting of leasehold improvements by Necsa;
  
• issuing of a licence for construction by the NNR;
  
• construction of the PFP;
  
• commissioning of the PFP;
  
• fuel produced by the PFP for irradiation qualification; and
  
• fuel produced for first fuel load by the PBMR Demonstration Power Plant in 2014.

The process heat opportunities represent 50% of the global market for PBMRs.

Planning for a process heat demonstration project should be completed by the end of 2008, as the driving force for obtaining nuclear licensing approvals and for planning prerequisite engineering, technology development and supply chain work. The planning will encompass the technical and business development work required to confirm the feasibility of a project with sufficient confidence to secure funding for a first project.

The objective thereafter is to develop a definitive business plan to convert the opportunities identified into commercial construction projects and fleet sales as soon as possible.

PHP business development activities have brought a number of application prospects for our intermediate temperature gas reactor close to realisation in 2008. A preproposal for a funded feasibility study for a steam-only or steam-based cogeneration application is already being considered by the oil sands industry in Canada. PBMR options, including near-term application of a similar steam and cogeneration application, are also being investigated by a local synthetics fuel manufacturer. Similar applications are stimulating interest in the petro-chemical and process industries in the USA.

More background on the PHP is explained in the Business Development chapter.

Economic competitiveness is one of the greatest barriers for new nuclear technology. Historically, the uncertainties associated with the final cost, the time to completion and the need for regulatory approval of the operation of new nuclear plants served to discourage new plant investment.

It is well known that nuclear plants are capital-intensive and require investments, both in time and money, before they realise returns. However, once in operation, electricity generated by nuclear power is competitive with coal and natural gas, and, in future, should prove to be more economical in view of the high carbon emissions from coal-generated electricity.

Although PBMR endeavours to control initial capital costs, studies by the United States DOE have concluded that the cost of construction for the first of the next generation of nuclear plants could vary by as much as 35%. “The variation in capital costs is reasonably anticipated given the ‘first of a kind’ technology that is involved, the limited relevant nuclear experience in the domestic engineering and construction industries, and the untested regulatory approval processes for the types of plants involved. And while it is reasonable to expect that some of the premium costs for the first plants will disappear as succeeding plants are undertaken, those types of economics historically have been difficult for the nuclear industry to achieve.

Nevertheless, the resurgence of the domestic nuclear power industry will depend significantly on establishment of early credibility in the control of capital costs and reduction in the time to market for the first of the next generation of plants,” reports the Journal of the American College of Construction Lawyers.

Studies have shown that critical elements for the successful demonstration of new nuclear technologies, such as the PBMR, include funding mainly from government. Government has set aside R6 billion for the project until 2009/10. These funds have been allocated for the financial years 2007/08 to 2009/10.

PBMR cumulative funding from investors

The cumulative funding as at year-end 2007/08 is depicted in the figure below, where PBMR’s current investors, Eskom, the Industrial Development Corporation of South Africa Limited (IDC), Westinghouse Electric Company LLC (WEC), and a founder investor, Exelon, contributed funds.

Various potential investors have indicated their interest in the PBMR project and the Company is anticipating that the Shareholders Subscription Agreement would be signed during the course of this financial year, which would ensure predictable funding from these investors and potential new investors in the future. PBMR is actively managing its funding strategy.