Why nuclear power is on the comeback trail
By
Associate Editor
David Stevenson Dec 04, 2009
Print this article
Nuclear power was once the enfant terrible of the energy world, so why is it back on the agenda? David Stevenson and Jody Clarke find out.
"I believe the climate crisis is so great, we must do all we can to try to control it. Nuclear is part of the answer, and new nuclear power stations are also needed." The words of the boss of British Nuclear Fuels perhaps? Or a spokesman for the UK's Atomic Energy Authority?
Not at all. It's the view of a former head of Greenpeace UK. Stephen Tindale, now an energy and climate consultant, used to oppose atomic energy vehemently. In fact, he once led a group of activists into a British nuclear power plant to inscribe the word "danger" on its reactor casing, while explaining on national TV "why nuclear power was evil".
Tindale's change of heart earlier this year typifies a global shift in the perception of nuclear energy. "I began to realise we don't have the luxury anymore of excluding nuclear energy – it isn't zero carbon, but it is low carbon", says Tindale. "It's a question about the greater evil – nuclear waste or climate change, but there's no contest. The climate crisis is now so great, we must do everything we can – whatever the economic cost – to try to control it. We need all the help we can get".
Indeed, "nuclear power – long considered environmentally hazardous – is emerging as perhaps the world's most unlikely weapon against climate change", says Anthony Faiola in the Washington Post.
Governments, under pressure to cut growth in emissions of greenhouse gases (of which carbon dioxide is the best known) are now turning to low-emission nuclear energy on an unprecedented scale. Right now, from China to Brazil, 53 nuclear plants are being built worldwide, twice the total of five years ago. Poland, the United Arab Emirates and Indonesia are seeking to build their first reactors.
What's more, so far at least, this 'new nuclear age' is developing with only limited opposition. We've seen nothing on the scale of the protests and power plant invasions that helped to characterise the green movement in America and Europe during the 1960s and 1970s.
There again, critics of nuclear power have far less ammunition these days. Nuclear technology has improved vastly since the partial meltdown of the reactor core at the US Three Mile Island power station in 1979 and the 1986 Chernobyl disaster in the ex-Soviet Union. Industrial accidents at the world's 436 nuclear plants have fallen by 80% since the late 1980s, says the World Association of Nuclear Operators.
Even in the US, where the most recent nuclear power plant opening was 13 years ago, times are changing. Leading environmental groups are backing climate change bills going through Congress that include new nuclear plants. President Obama and leading Democrats are considering federal tax incentives and loan guarantees to help fund a new wave of nuclear power stations across the States.
The American Clean Energy and Security Act (ACES) 2009, otherwise known as the Waxman-Markey Bill, will set a cap on the amount of carbon emissions allowed in the US in any given year. If ACES becomes law, the Environmental Protection Agency reckons that US nuclear energy generation will more than double by 2050. Already the US Nuclear Regulatory Commission is reviewing applications for 22 new nuclear plants from coast to coast.
Countries such as Sweden, Belgium and Italy, which once determined never to build another nuclear plant, have also changed tack. They are now prepared to deal with the problems of radioactive waste disposal if in return they can obtain near-zero emission energy generation.
So what about here in Britain? The UK was home to the world's first commercial nuclear power station, Calder Hall in Sellafield, which opened in 1956. Construction of nuclear plants was halted after the Chernobyl disaster – but now it's right back on the agenda.
Last month, UK Energy and Climate Change Secretary Ed Miliband told MPs that ten sites had been approved in Britain for extra British nuclear power stations. They will cost at least £5bn apiece to build, and will mainly be placed on the sites of old nuclear plants or those soon to be decommissioned. Each should be capable of churning out enough electricity to power a city the size of Manchester for 60 years.
What's more, Miliband has swept away previous planning rules that held up earlier building plans for up to six years. In the future the government hopes decisions will take no more than one year from proposal to getting the green light.
The move is partly aimed at helping Britain to meet its climate change targets. But "change is also needed for energy security", says Miliband. "In a world where our North Sea reserves are declining, a more diverse, low-carbon energy mix is a more secure energy mix, less vulnerable to fluctuations in the availability of any one fuel."
The aim is for the first new plant to be operational by 2018. That may be only just in time. With old plants coming to the end of their shelf life, Britain is set to run low on energy-generating capacity if we don't find new sources and open new plants. By 2017 we could be seeing power cuts, according to a government report released in July. So the aim is to get these plants built as rapidly as possible, so that by 2025 nuclear will generate a quarter of the country's energy – compared to 13% now.
However, as we've noted, Britain is hardly the only country to have fallen back in love with nuclear. And the experience of others suggests that this big capacity expansion won't come easily. "A number of roadblocks may yet stall nuclear's comeback – in particular, its expense," says Faiola. "Two next-generation plants under construction in Finland and France are billions of dollars over budget and seriously behind schedule, raising longer-term questions about the feasibility of new plants without major government support. Costs may be so high that energy companies find financing hard to secure – even with government backing."
Technical problems at Finland's Olkiluoto plant are a concern, as this is the first 'third generation' evolutionary power reactor (EPR), which was supposedly safe, affordable, and made for mass production. It's being put together by French firm Areva. But 3,000 builders' mistakes have delayed the programme by three years. The Finnish nuclear regulator has also halted construction on at least a dozen occasions due to safety concerns.
So it's not encouraging that the first of Britain's new generation of reactors, at Hinkley Point in Somerset, will be a replica of the Finnish EPR. Small wonder that BBC's Newsnight recently suggested the government's plans to fill the energy gap by 2020 via nuclear power are "wildly optimistic", given the industry's track record. The UK atomic regulator, Nuclear Installations Inspectorate, said that no British nuclear power station had ever been built on time. In addition, they said they would be every bit as tough as their Finnish equivalent, and wouldn't hesitate to halt construction if problems emerged. Hinkley Point operator EDF and Areva have until June 2011 to produce a design which will satisfy the British regulators.
But while putting together a nuclear power station isn't plain sailing or without considerable risk for the firms involved, such hazards are hardly unique to nuclear power. Large infrastructure projects are never straightforward and there are bound to be hiccups. The vital thing for investors is that there's no doubt that a large number of new nuclear plants will be built worldwide – and that means there are some firms and sectors that will do very well out of it.
One attractive play, for example, is US-based construction business Shaw Group (NYSE: SHAW). Shaw is the lead contractor to build new reactors here in Britain, says Tim Webb in The Guardian. The company bought 20% of nuclear specialist Westinghouse from the government three years ago. It now looks set to cash in on its investment as the UK construction programme moves ahead.
Importantly, Shaw isn't dependent on the UK by any means. It already has sizeable nuclear business in the US and China. And within the past month the firm has picked up contracts at a Chinese oil refinery, and also from the US Department of Defence for naval base construction services. It also does efficiency retrofits – ie, to cut carbon emissions – on conventional coal power plants. As Toby Shute of Motley Fool says, the drive to 'green up' our energy supply means that "Shaw Group are going to be awfully busy, and making an awful lot of money".
Down from more than $75 per share two years ago to $29 now, Shaw has a market value of $2.4bn. But after record new business inflows of $14.4bn, it has an order backlog of almost $23bn. Yet the stock only stands on a current-year p/e of just over 13, which analysts forecast will drop to 10.8 for the year to August 2011. Maybe the strongest signal about the group's future is how the boss is backing it big – with his own cash. Last month, Shaw chief executive James M Bernhard bought 250,000 shares, a $7m personal investment. That's confidence in a nuclear future for you. We look below at other stocks set to profit.
Profit from the rebound in uranium prices
You've heard of peak oil. But what about peak uranium? Since hitting a high of $138 per pound in the summer of 2007, the uranium price has steadily slid after falling electricity demand turned investors off the 'other yellow metal'. But at today's price of around $43/lb, it is no longer economically feasible for miners to produce the metal. That means there's a shortage of readily available uranium on the market, at a time when countries are stepping up construction of nuclear power plants. With financing also tight for new projects, prices must go higher, say analysts. Salida Capital, a Canadian wealth management firm, reckons that miners need a minimum $60–$65/lb price to justify investment in a typical new project. Companies are signing deals at these prices, says Nik Stanojevic at Brewin Dolphin.
That's good news for existing producers. However, given the fundamentals, the price should move even higher. Taking only the new reactors being built or planned, Salida reckons the nuclear industry will have to source an extra 59 million pounds of uranium per year every year. That represents "a staggering 55% increase in mine output from today's levels".
And looking at China's plans for new reactors alone, it could even underestimate the growth in uranium demand. The world's second-largest power market, China had nuclear capacity of only nine gigawatts (GW) between 11 reactors at the end of 2008. However, it plans to raise this to between 70GW and 86GW by 2020. "Assuming 77GW of incremental Chinese reactor capacity (from today's levels) suggests initial demand of 154 million pounds of uranium for reactor start-up, followed by ongoing needs of 39 million pounds per year. These figures represent a staggering 135% and 34%, respectively, of 2008 global mine production of 114 million pounds."
That is the kind of apocalyptic figure that gets some analysts rolling their eyes. But looking at even the most conservative estimates, production has to rise significantly. Macquarie Bank estimates that the supply of uranium will have to rise by more than 30% over the next five years just to meet demand. That's a lot lower than the more drastic estimates, but to put it into context, it's still equivalent to two new producers the size of Cameco coming on line, says Stanojevic (Cameco is the £8bn Canadian firm that produces just under a sixth of the world's mined uranium supply).
That is good news for uranium producers such as Paladin Resources and Energy Resources of Australia (ERA), according to Royal Bank of Scotland. RBS reckons the price of uranium will double to a peak of $95 a pound in late 2011, from an average of about $47 a pound this year. When prices move higher, production will gear up again and exploration will restart, resulting in the discovery of new reserves that will eventually pull the price back down. For example, the World Nuclear Association reckons that if uranium prices double, recoverable reserves will rise tenfold.
But because of start-up problems at mines, principally to do with getting hold of financing, Stanojevic recommends sticking with large diversified miners that already have mines in production. These include Cameco, Paladin and ERA. Cameco Corp (NYSE: CCJ), which plans to double annual uranium output from its existing operations by 2018, is one of the best pure plays on the market. The Canadian giant produces 15% of the world's mined uranium, just behind Rio Tinto on 18%. It runs the Cigar Lake mine project in Saskatchewan, thought to be home to the world's largest undeveloped high-grade uranium deposit. However, it also has a significant stake in Kazakhstan's uranium industry. The country produces 20% of the world's uranium supply. In November, Cameco reported third-quarter earnings of C$172m, up C$37m on the same quarter last year. It trades on a forward p/e of 20.5. Salman Partners has a USD$38 price target for it from $30 now.
On a forward p/e of 53, Australian uranium miner Paladin Resources (ASX: PDN) is more expensive. But it has some significant projects coming on-stream, which should fuel growth, including the Langer Heinrich uranium mine in Namibia. It is on track to expand annual production capacity this year to 3.7 million pounds, from 2.6 million. This should expand to 5.2 million by the end of next year. The trouble is that the Namibian government is talking of pushing up the level of royalties it demands from the producer. So this is one to watch and buy on dips or bad news, but not now.
If you are interested in broader exposure, the WNA Global Nuclear Energy Fund (LSE: NUKE) is an exchange-traded fund (ETF) tracking the performance of 65 shares engaged in everything from reactor construction to fuel services. Its top holding is French group Areva (7.9%) but it has exposure to more diversified stocks too, such as science services group Thermo Fisher. The ETF is up 39% over 12 months against a 32% rise in the S&P 500. Its total expense ratio is 0.65%. A more concentrated alternative is the Market Vectors Nuclear Energy ETF (NYSE: NLR), which holds 25 stocks, 35% of them in mining. Power generation and equipment manufacturers make up the rest. Up 37%, its top holdings include EDF, Cameco, Uranium One and Paladin.
Another potentially profitable area is in the nuclear clean-up area. The Nuclear Decommissioning Authority (NDA) spends about £1bn a year cleaning up sites such as Sellafield. But a report in The Times this week suggests the government is planning big spending cuts at contaminated sites. This would hurt firms such as Areva and Washington Group (which won the £1.3bn budget to clean up Sellafield). A more diversified option is engineering group Babcock International (LSE: BAB). It recently bought UKAEA, the commercial arm of the UK Atomic Energy Authority, and has deals to oversee the closure of part of Dounreay in the north of Scotland as well as nuclear units at Harwell and Winfrith.
• This article was originally published in MoneyWeek magazine issue number 464 on 4 December 2009, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.
Published in
Commodities
| More
articles
by
David Stevenson
Related articles
-
May 17, 2012
-
May 10, 2012
-
By John Stepek, May 10, 2012
-
By Merryn Somerset Webb, May 02, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.