Going Nuclear

Editor’s Note: As emerging economies remain the main growth driver for energy, I have asked Elliott H. Gue, editor of the The Energy Strategist, to give us an update on nuclear power’s potential as the green energy of the future.

Nuclear power generation will play a vital role in meeting rising global demand. That nuclear power is a carbon-free source is only one factor in its rising profile; the operating economics are also highly competitive.

Total global generation from nuclear sources is projected to grow close to 40 percent by 2030, with developing world countries such as China and India driving much of that growth. These two countries alone boast a combined population of more than 2.5 billion; as personal incomes rise and urbanization continues, power demand will rise exponentially.

Accounting for about 12 percent of global power generation, nuclear is the world’s most important source of carbon-free and, for that matter, pollution-free electricity generation. Producing electricity in nuclear power plants emits nothing but steam; there are no direct emissions of any pollutant.

By increasing reliance on nuclear, nations can grow power output while reducing carbon intensity. There are obviously many factors at work in determining how much carbon dioxide a country emits, including geographic size, dependence on heavy manufacturing, and energy prices. But research suggests that there is some positive relationship between a country’s reliance on nuclear power and its total carbon emissions.

France is among the best nations in terms of carbon intensity, partly because the country relies on nuclear to generate more than 80 percent of its electric power. This is also why France remains the largest exporter of electric power in the EU; the country’s huge fleet of nuclear plants and decades of operating experience means it often has surplus power available for sale to neighboring nations. And France also has one of the lowest retail power costs of any EU nation.

Australia sits at the other end of the spectrum. The nation is rich in domestic natural resources, including coal; Australia gets 80 percent of its electricity from coal-fired plants. For political reasons, the country has never pursued nuclear power–though Australia is blessed with arguably the world’s largest reserves of uranium and is a major exporter of the nuclear fuel. Heavy reliance on coal and the lack of a domestic nuclear power industry make Australia one of the most carbon-intensive economies on the planet.

But the recasting of nuclear power as a carbon-free alternative has rehabilitated its profile. During the 2007 Climate Change Conference in Bali, the director of the International Energy Agency, Nobuo Tanaka, stated that the world needs to build as many as 30 new nuclear reactors per year to stem climate change.

China’s first nuclear power plant went into operation in the early 1990s, but the country’s nuclear industry has grown rapidly; eleven plants are currently in operation,with six more under construction and slated to go into service in the near term. China also has several additional nuclear facilities in various stages of planning, engineering and siting.

The country has aggressively pursued nuclear power in recent years and has a goal of constructing at least 30 new reactors by 2020 to more than double nuclear’s share of its electric grid to about 6 percent.
In China, such growth is well within the realm of possibility; operators don’t have to deal with the same political and siting issues as they do in the West. That said, these reactors are being constructed by Western firms such as France’s Areva (France: CEI, OTC: ARVCF) and Westinghouse, a US-based affiliate of Japan-based Toshiba (OTC: TOSBF).

India’s nuclear power industry has received a big boost from recent agreements on nuclear technology with the US and international organizations. The country had been barred from participating in the international uranium markets because it hasn’t signed the Nuclear Non-Proliferation Treaty (NPT).

As a result, India has been forced to rely on low-quality, high-cost domestic reserves of uranium to power its existing plants. In recent years the capacity factor for Indian nuclear power plants has been hovering around 50 percent due to these inefficiencies.

Under new deals, however, India should be able to quickly increase that capacity factor to ramp up power output. And the government has plans to boost nuclear generating capacity more than ten-fold over the next few decades. In the EIA’s forecast, published in September of 2008, the agency forecasts India will increase its nuclear capacity from four gigawatts to about 20 gigawatts in 2030. This projection was made before the Indian nuclear agreement was actually reached; projections will almost certainly rise markedly in coming reports.

Finally, there’s Russia. Russia’s motivation for rapidly expanding its nuclear program is a bit different from that of other nations. Specifically, Russia is seeking to use nuclear to replace domestic natural gas consumption. This would increase the total amount of natural gas the nation has available for export where realized prices are many times the subsidized Russian levels.

All told, Russia’s nuclear capacity is set to at least double by 2020. Given the rising importance of its natural gas exports, growth could end up occuring even more rapidly.

The Play

Uranium is the key fuel for nuclear power plants. Amid nuclear capacity growth in the developed and developing world, the key question is whether existing global uranium supplies are sufficient to meet growing demand.

Cameco (TSX: CCO, NYSE: CCJ) is the world’s largest pure-play uranium producer. The company taps what are the world’s richest and highest-grade uranium mines. To put this into perspective, some of Cameco’s mines have ore grades over 20 percent uranium oxide; some mines being mined globally and commercially have ore grades less than 0.5 percent.

Consequently, Cameco’s cash costs for uranium are among the lowest in the world at under $20 per pound. This is also why the company was among the only players to survive the long uranium bear market intact.

Cameco sells much of its production under long-term contracts. Therefore, during strong uranium markets, realized prices rise far more slowly than for producers selling mainly through spot markets. But in markets like this, Cameco is still rolling over legacy contracts signed four or five years ago and earning much higher rates.

Of course, the stock isn’t without risk. Further delays to its already troubled Cigar Lake project are inevitable in my view, but those issues are already priced into the stock and Cameco should see steady growth in production in coming years.