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Matt H

Avinash Gandhi

ChangeWave Research

A nuclear power plant, with standard cement containment vessel

(In fact, nuclear energy starts with Albert Einstein—his classic formula, E = mc^2 actually describes how much energy is released when an atom is split. It’s a lot. To put it in perspective, the energy contained in a pound of uranium used for nuclear fuel (i.e., enriched) is equal to roughly one million gallons of gasoline.)

However, when most people think of nuclear energy, they recall the 1979 Three Mile Island accident in Pennsylvania or the 1986 tragedy involving a Soviet era RBMK reactor at Chernobyl which resulted in an uncontrollable runaway reaction causing a steam break/explosion. Chernobyl became the worst nuclear power disaster ever to occur and has dramatically impacted the public's perception of nuclear power safety. In fact, fears of repeats of these accidents, safety concerns, disputes over storage of nuclear waste, and a web of government regulations has limited nuclear power plant developments over the past 25 years. The last new nuclear plant in the U.S. was commissioned in 1996.

Locations of nuclear power plants

Moreover, nuclear power has witnessed a recent renaissance, due to China's rising demand for energy, fears over greenhouse gas emissions, and rising prices for alternatives natural gas and coal. Nuclear energy is not based on fossil fuels, and therefore emits fewer greenhouse gases than competitors coal and natural gas, even accounting for its lifecycle emissions, which include the costs of constructing the plant, transporting the fuel, etc. Moreover, nuclear energy is not as exposed to price fluctuations in oil and natural gas, since uranium and plutonium are used to fuel nuclear plants. 50 new nuclear power plants are expected to come online by 2020, largely in China, India, Russia, and elsewhere.

Since oil prices have gone through the roof, nuclear has caught its second wind; there are 23 applications for 34 new nuclear plants pending before the Nuclear Regulatory Commission.^[1]

Economics of nuclear energy

Comparison of costs to produce electricity

The economics of nuclear energy are differentiated from its main competitors in electricity generation, natural gas and coal, by the fact that nuclear energy typically has high construction costs and low variable operating costs. As a result, the cost competitiveness of nuclear energy depends highly on initial construction costs and the cost of capital for nuclear power companies. Drivers of the initial construction costs include investment in new technologies, especially for increased safety, and government regulations and permitting requirements for grid connections, safety, and storage. Cost of capital can be driven by a wide variety of factors (including the state of interest rates around the world, but typically, governmental regulation of nuclear energy has heavily influenced the availability and pricing of capital for nuclear energy projects, including at one time heavy subsidies for nuclear power and more recently, strong restrictions on nuclear energy development. The first successful deployment of nuclear energy was actually conducted by the U.S. Navy, and nuclear energy still powers a vast number of submarines and navies around the world.

As a result of the economics above, input costs (i.e., fuels) constitute a lower share of final cost of energy production than do the input costs for natural gas and coal power plants— the Nuclear Energy Institute estimates this share to be 78-94% of final energy costs for fossil fuel plants, versus only 26% for nuclear power plants.

In the US, while the Coal and Gas Electricity industry is projected to be worth $85 billion by 2013, Nuclear Power generators are forecast to be worth $18 billion. In the longer term, growth is set to continue among nuclear and renewable energies. Change in any industry so infrastructure-heavy is time-consuming, but change is slowly coming. Despite this, Coal and Gas are expected to be viable industries for a long time yet, and are still projected to be the number one means of generating power in 2050. ^[4]

Regardless, nuclear has always been, and will likely continue to be, cost competitive with its main competitors, coal and natural gas. Exact estimates of costs vary, but the IEA suggests rough cost parity over the next 30 years, not including any potential carbon trading or tax system, which would hit both coal and natural gas harder than nuclear power. Because of growing energy demand in America, as well as concerns over greenhouse gas emissions, the industry is planning to build 34 new reactors over the next few years.^[5]

Drivers of nuclear power

Given that the economics of nuclear are relatively stable and have been clear for a number of years, nuclear power has been driven by a variety of other factors.

The Need for Investment

Since no new plant has been started since 1977, no one knows exactly how much a new one would cost, or how long it would take to build, so investors don't want to finance a venture that is so risky. Still, in the last few years, utilities have applied to build over 30 new nuclear power plants around the U.S.^[6] The cost of building these reactors, however, doubled since 2006, with Moody's estimating the cost at roughly $8 billion - twice the cost of a coal plant and three times the cost of a natural gas plant.^[7] While fuel costs for nuclear power are lower than for coal and natural gas, the high initial investment makes a nuclear plant less attractive to potential investors.

Electrical Generation by Source for 2008^[8]

Uranium Prices are Fluctuating

In 2007, uranium prices rose as high as $137 per pound, reflecting the scarcity of the resource and its high demand in parts of the globe where nuclear energy is more often used.^[9] Since the start of the 2008 Financial Crisis and ensuring recession, however, prices have followed other commodities prices and dropped as low as $42 per pound.^[10] Lower uranium prices make nuclear energy more economically feasible, though uranium costs are relatively low in comparison to other costs of nuclear, like installation and infrastructure.

The world's uranium sources are controlled by even fewer countries than control the world's oil sources.^[11]

Environmental concerns

Environmentalists have had a love/hate relationship with nuclear power plants, and vice versa. When nuclear energy was first deployed in the U.S., numerous concerns were raised about the environmental ramifications of nuclear power, especially where and how to store used nuclear fuel and the environmental impact of nuclear plants. More recently, some environmentalists have endorsed nuclear power as a clean alternative to coal and natural gas for electricity generation, comparable to other forms of renewable energy. In the U.S., there is a long-running debate over whether to store nuclear waste in the Yucca Mountains. As solutions emerge to the storage problem in particular, and environmental concerns more broadly, this will propel further adoption of nuclear energy. In addition, as the costs of carbon emissions increase, this will drive nuclear energy adoption as an alternative.

Safety concerns

While the Three Mile Island accident radiation never breached the containment building, Chernobyl was an unmitigated disaster, killing several and indirectly harming tens of thousands nearby residents. The hangover from these events has been long and painful. The safety debate around nuclear centers around two risks— (1) the risk of a major accident and (2) the risk of long-term exposure to nuclear radiation. In the case of the former, significant advances in plant design offer several alternatives to the faulty Soviet era RBMK design used at Chernobyl, nearly all of which feature “passive fail safe” designs, which means that in the event of system failure for whatever reason, the reactor shuts down automatically, containing the radiation from all nuclear reactions and safely dissipating any excess heat. Debate continues regarding long-term exposure to nuclear radiation, though the weight of scientific evidence seems to suggest that there are no deleterious effects of long-term proximity to nuclear power plants of modern design. To the extent these safety concerns are mitigated and/or resolved via public debate, this would be favorable to the nuclear power industry. In a post 9/11 world, many have also voiced concerns over the ability to protect nuclear power plants from terrorist attacks, hence, the need for passive fail safe designs.

Public Opinion Is Split Over Nuclear Power

The Not-In-My-Backyard (NIMBY) Effect explains the idea that people generally support the use of nuclear power, as long as the generator isn't near where they live. Public opinion is still split over whether nuclear is a safe and viable option:

• From 2005 to 2008, the number of people that support the use of nuclear energy in the EU increased from 37% to 44%, while the number of detractors fell from 55% to 45%.^[12]
• 80% of Americans believe nuclear power will be an important source of power in the future.^[13]
• Contradictorily, in 2007, 50% of Americans were in favor of expanding the use of nuclear energy, while 46% were against.^[14]

Cost of fossil fuels, especially coal and natural gas

Nuclear energy is similar to renewable energy in that its viability is driven largely by the cost of its competitors. The fortunes of nuclear are therefore inverse to the fortunes of coal and natural gas (though the increase in demand for energy around the world will likely lift all boats in the near term). A carbon tax of $25-$50 per ton, however, would make nuclear power competitive with coal.^[15]

Government regulations

Because of the concerns outlined above, nuclear energy, even more than its fossil fuel brethren, is subject to a web of government regulations, permits, and policies. As a result, the economic viability of nuclear, and the very feasibility of commissioning new plants, is heavily dependent on government regulations. Witness, for example, the back-and-forth in the UK regarding new nuclear power plants.

Since the 1979 accident at Three Mile Island, there have been ZERO new nuclear power plants built in the U.S. But now that folks have finally figured out there's an energy crisis, are nuclear power plants about to start popping up in our backyards? Not exactly, at least according to a recent ChangeWave survey of 473 energy industry professionals. The survey done in March 2008, showed that political resistance to Nuclear energy is one of the biggest barriers to Nuclear Energy

The Obama Administration is Showing Support for Nuclear

In June 2009, the Department of Energy announced $18.5 billion in loan guarantees for new nuclear power plants. They are expected to be received by Constellation Energy Group (CEG), NRG Energy (NRG), Scana (SCG), and Southern Company (SO). These loan guarantees should allow construction to start as soon as 2011, and mark the first serious step since the 70s to bring back nuclear power.^[16]

Companies who stand to benefit

Uranium prices over time

Exelon is the largest nuclear power plant operator in the U.S., and owns a portion of 17 plants around the country, concentrated in Pennsylvania and Illinois. It has benefited and will continue to benefit from a cost advantage in electricity generation as a result of the low cost of nuclear generation relative to generation from natural gas or coal at today’s market prices. The relative attractiveness of Electric utilities is often determined by the degree to which government regulators allow them to charge fair market prices for their electricity— for example, Exelon’s recent planned rate increase in Chicago was drastically reduced by the Illinois regulator.

Entergy, based in New Orleans, is the second largest nuclear operator in the country. Entergy benefits from the same trends as Exelon, as well as the development capital flooding into the region as a result of Hurricane Katrina, though it remains exposed to another particularly vicious hurricane season.

Additional publicly listed nuclear power plant operators include Duke Energy Corporation (DUK), Dominion Resources, FPL Group, Constellation Energy Group, NRG Energy, Scana, and Southern Company. Four of these companies - NRG, Scana, Southern, and Constellation - are expected to be the beneficiaries of the Department of Energy's June 2009 announcement that it will offer $18.5 billion in loan guarantees on new nuclear projects.^[17]

Cameco, which controls 17% of the world market for uranium, the main fuel for nuclear energy, will benefit tremendously from a boom in nuclear energy. Recently, prices for uranium have taken off as investors have realized that nuclear energy can fill the “renewable energy gap” and that enriched uranium, especially from secure sites Canada and other developed nations, will be required to fuel that nuclear energy.

General Electric, the leading provider of nuclear reactors (currently owns ~20% of market worldwide), will benefit from a boom in nuclear energy, as it continues to supply, maintain, and retool nuclear reactors at newly commissioned or re-commissioned plant. Of course, as a massive conglomerate, the nuclear business comprises a small portion of GE’s total revenues and profits.

Toshiba placed a $5.4 billion bet on nuclear energy by purchasing a majority 51% stake in Westinghouse in early 2006. The acquisition allows the company to offer pressurized water nuclear reactors, a more advanced technology it did not previously have, to complement its legacy boiling water reactors. Westinghouse had been the main contractor for 60% of pressurized water reactor plants in North America and signs seem to point to the U.S. building approximately 200 new nuclear plants over the next 20 years.

Areva is a French public multinational industrial conglomerate that deals in energy, especially nuclear power. They are currently building their first EPR-reactor in Finland.

Companies who stand to lose

Suzlon - Though it’s unlikely in the near term, wind energy companies and suppliers, of which Suzlon is one of the largest, actually compete with nuclear power plants. Wind especially is a direct competitor to nuclear, as a result of the low carbon footprint and relatively high capital costs of both technologies. General Electric has hedged its bets here, offering both large-scale wind turbines and nuclear reactors.

Kinder Morgan - Another company that is at least indirectly competing with nuclear energy is Kinder Morgan, which controls vast natural gas pipeline assets throughout North America. These assets, custom built to transport natural gas cost effectively, would be in less demand, should nuclear energy significantly displace natural gas as a producer of electricity in the U.S.

References

1. ↑ SeekingAlpha: "New Enthusiasm for Nuclear Power"
2. ↑ Montana Environmental Information Center
3. ↑ Suzlon FY 07-08 Annual Report, Management Discussion and Analysis, p. 5
4. ↑ Nuclear Power Generation, US Industry Report" IBISWorld, August 2008
5. ↑ MarketWatch: "Aging nuclear plant fleet may get 34 new recruits"
6. ↑ SeekingAlpha: Nuclear Power Poised for a Turnaround
7. ↑ SeekingAlpha: Nuclear Power Poised for a Turnaround
8. ↑ SeekingAlpha: Electric Utilities: Coal vs. Renewables
9. ↑ SeekingAlpha: Nuclear Power Poised for a Turnaround
10. ↑ SeekingAlpha: Nuclear Power Poised for a Turnaround
11. ↑ SeekingAlpha: Profiting from Peaceful Uranium Use
12. ↑ The Economist: "The critical issue of safety"
13. ↑ The Economist: "The critical issue of safety"
14. ↑ The Economist: "The critical issue of safety"
15. ↑ WSJ: "The Case For and Against Nuclear Power"
16. ↑ Wall Street Journal: U.S. Chooses Four Utilities to Revive Nuclear Industry
17. ↑ Wall Street Journal: U.S. Chooses Four Utilities to Revive Nuclear Industry