The media has made hay out of China’s decision to suspend new nuclear project approvals in the wake of Japan’s nuclear crisis. China has ambitious plans to boost its nuclear power generating capacity, and is one of the global industry’s growth drivers. The news of a nuclear power suspension in China seemed to foreshadow tough times for the global nuclear power industry.
But if you look beyond the headlines, the real situation isn’t as bleak. Our information suggests that China’s government has requested to inspect all of the country’s nuclear facilities and review existing nuclear management and operating procedures in order to “identify and eliminate all hidden risks.”
China has requested a stringent safety assessment of nuclear plants under construction. The government also plans to draft a nuclear safety framework that will enhance nuclear development in the medium to long term. Given the nuclear disaster in Japan, China’s cautious approach hardly seems unreasonable.
China’s commitment to nuclear power will remain strong. The government has pledged to reduce emissions significantly, and nuclear power is an important piece of that goal. What has changed is that China’s nuclear power build-out will come at a higher cost as the government implements strict safety standards. This doesn’t strike us as a negative development.
My colleagues Elliott Gue, David Dittman and I spent two years researching the role that large states and state-backed sovereign wealth funds play in global finance and the global economy. We poured our findings into a book, The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, which explores how these momentous geopolitical shifts affect the individual investor.
In our book, we identify the broad investment trends in a post-recession world and highlight specific stocks that are well-positioned to profit from these developments. As one might expect, energy is one of the central investment themes of the new geopolitical order. What follows is an executive summary and a brief excerpt from chapter nine, written by Elliott Gue.
The Other Energy
Nuclear accounts for about 13 percent of global electricity generation and close to 22 percent of generation in the developed world. In the US and much of the EU, nuclear is also the most important source of emissions-free power generation. Projections for growth in nuclear power vary widely. The EIA projects total world nuclear power generation to increase by 39.2 percent by 2030, equivalent to growth of about 1.7 percent annualized. Meanwhile, energy giant Exxon Mobil projects nuclear power to grow at a 2.3 percent annualized pace between 2005 and 2030, considerably faster growth than for coal, oil, or natural gas, albeit from a lower base level. The wide variation has to do with assumptions about the future cost and availability of fossil fuels. The cost of nuclear power mainly stems from capital costs and ongoing fixed maintenance expenses, including the huge up-front costs of building a new nuclear facility as well as the costs associated with monitoring and maintaining the plant safely over time. But the fuel costs are extraordinarily low.
In contrast, natural gas plants are more sensitive to commodity prices because fuel is far and away the most important determinant of the cost of gas-fired power. Although coal-fired power costs are less sensitive to commodity prices than gas, the price of coal can be an extremely important cost factor in countries that must import a large percentage of their coal needs.
We expect natural gas to remain more plentiful than oil in coming years, and this will help make it a much cheaper source of energy, particularly in countries such as the US with large domestic supplies. However, rising demand for gas will ultimately push up prices for liquefied natural gas (LNG); higher commodity prices will tend to decrease demand for fossil fuels and increase demand for nuclear.
Carbon regulation is another major issue. Although controversial, many countries around the world have imposed or are discussing the use of a so-called carbon cap-and-trade system to reduce emissions of greenhouse gases (GHG). Under a cap-and-trade system, the government sets absolute caps on the total amount of emissions and then allows emitters to trade allowances among themselves; each emissions credit would be worth 1 metric ton of carbon dioxide equivalent. If one utility emits too much carbon in a given year, it could buy emissions credits from a firm that emits less than allowed. This effectively puts a price on carbon emissions, encouraging firms that emit too much carbon to cut back and directly rewarding those companies that emit less than allowed. Over time, as the government reduces the allowed cap, emissions credits would become scarcer and more expensive.
With no cost for carbon emissions, coal is the cheapest source of power in the US, followed closely by natural gas. If CO2 costs USD30 per ton, gas overtakes coal to become the cheapest source of power and nuclear plants become cost-competitive or potentially cheaper than coal. Finally, at USD60 per ton, nuclear becomes more cost effective than natural gas. As a carbon-free source of energy the higher the assumed cost of CO2, the more attractive nuclear power.
One point that most forecasters do agree on is that much of the growth in nuclear will come from countries in the developing world. China, India, and Russia plan significant build-outs of nuclear capacity in coming years. As of the end of 2009, there were 435 commercial nuclear reactors operating globally with a combined capacity of 372 GW.
China and India currently get just 2.2 and 2 percent, respectively, of their power from nuclear but figure prominently in the outlook for future growth. And both countries have proved their stated commitments to expansion of the power source is far more than just words; China has 18 reactors in various stages of construction, India six. Although many developed countries haven’t put a new nuclear reactor into service in decades, China’s industry is relatively new: China’s first nuclear power plant went into operation in the early 1990s and has grown rapidly to 11 reactors in operation at the end of 2009.
In recent years China has steadily boosted its target for nuclear power generation. In March 2008, the State Energy Bureau (SEB) indicated that China should target 5 percent of its electricity from nuclear power by 2020, a target that would imply the need to have 50 GW of capacity in operation by then, up from 8.6 GW at the end of 2009. Since that pronouncement there have been reports that Chinese officials are targeting even more aggressive targets for 86 GW installed by 2020.
India’s nuclear power industry has received a big boost from agreements on nuclear technology with the US and international organizations. The country was previously barred from participating in the international uranium markets because it hasn’t signed the Nuclear Non-Proliferation Treaty (NPT). And since its nuclear weapons test in 1974, India has had no access to US civilian nuclear technology; US technology will dramatically lower India’s costs for fueling its reactors. As a result, India has been forced to rely on low quality, high-cost domestic reserves of uranium to power its existing plants. Prior to signing the deal, the capacity factor–the percent of total nuclear capacity actually being utilized–for Indian nuclear power plants has been hovering around 50 percent due to these inefficiencies. In addition to the catalyst of a nuclear deal with the US, India faces the same basic challenges China does in terms of attempting to meet its rapid growth in demand for electricity and simultaneously diversify its power supply from coal. Nuclear will be a big winner in this effort; India already has six reactors that will nearly double the size of its nuclear capacity under construction. Planned and proposed reactors would increase the country’s total capacity by a factor of 11.
Russia’s motivation for rapidly expanding its nuclear program is a bit different from that of other nations. Russia’s domestic natural gas consumption has ramped up significantly in recent years due to subsidized pricing and strong economic growth. In 2008 the country consumed 40.5 billion cubic feet per day (bcf/d) and produced 58.1 bcf/d. The country consumed nearly three-quarters of its massive gas production, leaving less available for export. Building nuclear plants will increase the total amount of natural gas the nation has available for export to the EU and Asia, where realized prices are many times higher than domestic Russian gas. All told, Russia already derives close to 17 percent of its power from its 31 nuclear plants and has nine new plants under construction.
Although most of the growth in nuclear capacity will be from the developing world, a nuclear Renaissance is also under way in developed countries. France generates more than three-quarters of its power from nuclear plants and has benefited enormously from its strong commitment to the technology over the years. France emits just 0.24 metric tons of CO2 per thousand US dollars of gross domestic product (GDP) compared to 0.38 tons in Germany, 0.31 in the UK, and an average of 0.36 tons for Europe as a whole. Thanks to its plentiful nuclear resources, France is Europe’s largest exporter of electric power and has among the lowest electricity prices in the EU. The average French household pays EUR0.0959 per kilowatt-hour (kWh) compared to an average of EUR0.1259 for the average consumer in the euro area. France has continued its commitment to nuclear, with one reactor under construction, one planned and one proposed.
In the US there are 104 operating plants generating about 20 percent of total electricity supply. Although no new plants have been put into service since the 1970s, one is already under construction, and another 11 are in advanced stages of planning. To aid the restart of the industry, the US Congress is weighing USD18.5 billion in loan guarantees as part of the Energy Policy Act of 2005. In early 2010, the Obama administration proposed more than tripling that amount to USD56.5 billion as part of the 2011 budget. It’s likely that support for nuclear power and natural gas would have to feature prominently in any comprehensive energy bill in the US.
This is an excerpt from The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, published by FT Press, available at online and brick-and-mortar booksellers–you can even download an electronic version for your iPad or Kindle.