The word “nuclear” evokes a wide range of emotion and thought dependent on the person. If Family Feud had a question that stated, “Name something that starts with the word ‘nuclear’”, the top 10 answers, in no particular order, might be as follows: nuclear – waste, fission, bomb, physicist, fallout, family, meltdown, war, fusion, energy. The most glaring observation of this group is the polarization of emotions associated with those words. In general, the negative words in conjunction with ‘nuclear’ are severely negative versus the positive words which are much closer to a neutral connotation. This lopsided spectrum is a good summation of the mood towards nuclear energy and its journey from concept to present day.
The origins of nuclear energy for the purpose of generating electricity comes from the Manhattan Project during the early 1940’s where physicists were developing the atomic bomb. The scientists involved quickly realized that energy generated from nuclear fission, or the splitting of atoms, could be harnessed and used for generating electricity. From this project, scientists began toying with potential designs of nuclear reactors which spawned the version commonly known today – Light Water Reactors (LWRs). Fast forward to 1951, when electricity was generated for the first time by a nuclear reactor, launching a wave of excitement for the new technology. President Dwight Eisenhower gave his “Atoms for Peace” speech in 1953 where he strongly encouraged the use of nuclear energy for a peaceful use of fission technology.
Through the 1950’s most major nations began developing in some capacity, nuclear energy capabilities, spawning reactors across the globe. As the development of nuclear energy grew, so did the public disdain for the technology and the reactors that inhabited local communities. Pop culture and media highlighted the pitfalls of nuclear reactors through science fiction exaggeration and conspiracy. From the mid 1970’s through the 2010’s, nuclear energy maintained a poor public image with the Chernobyl disaster in 1986 and the Fukushima meltdown in 2011. Any positive traction gained between each catastrophe was erased in the wake of the events. For decades, messages extolling the benefits and necessity of nuclear energy, fell on deaf ears. This may have been the perpetual fate of nuclear energy if it weren’t for the recent events in Ukraine which sparked enthusiasm for a fresh look at the technology.
For decades, messages extolling the benefits and necessity of nuclear energy, fell on deaf ears.
The reason nuclear energy has a newfound appreciation is because the war in Ukraine has gleaned light on two paradigms major countries around the world must face:
- Relying on an unstable government for any large portion of energy needs poses significant threats to the safety and wellbeing of a country. If a country wishes to be truly energy independent, a combination of reliable energy sources must be established.
- If individual nations and the world as a whole hope to reach climate goals, being realistic about the capabilities of green energy tech is a must. If governments are pragmatic regarding green energy, then nuclear energy must be included as a solution to waning off fossil fuels.
While both paradigms and their respective issues seem mutually exclusive at first, a deeper look reveals they share an underlying commonality – nuclear energy as a potential solution. Regarding the first issue, countries have woken up to the reality that importing energy from an unstable nation like communist Russia, presents major problems when the source sours. Germany was a prime example of the negative impacts associated with such a reliance. They depended on Russia for roughly a third of its oil, around half its coal, and more than half its natural gas. As the war in Ukraine unfolded, and geopolitical relationships frayed, Germany was forced to decouple their imports from Russia and devise a path forward that allowed them to be more self-reliant. Due to the fact their backs were up against the wall, Germany had to reconsider their previously negative stance on nuclear energy. In turn they recognized the clean energy source would be crucial to their energy stability moving forward.
In turn they recognized the clean energy source would be crucial to their energy stability moving forward.
A similar realization is occurring in the climate change activist community. Prior attempts to persuade green energy activists about the benefits and necessity of nuclear energy for the cause of a greener planet, were met with hostility. Many preconceived notions of nuclear energy were predominantly negative. This veil of ignorance prevented climate activists from seeing the true potential of nuclear technology and accept the positive safety profile of nuclear power plants. However, the world is beginning to wake up with many well-respected figures voicing their support for nuclear energy. Bill Gates is one of those figures who plays a major role in climate activism. He was quoted saying, “if we’re serious about solving climate change, and quite frankly we have to be, the first thing we should do is keep safe reactors operating. … even then, just maintaining that status quo is not enough. We need more nuclear power to zero out emissions in America and to prevent a climate disaster.”
The reason Bill Gates and the climate change community is starting to give nuclear energy a second look is the unreliable nature of green energy alternatives as they currently exist. Wind and solar are the two most viable and accepted options for alternative energy. The problem with both sources is they depend on external factors to generate power. If the wind doesn’t blow or the sun doesn’t shine, both render no use. The solution to this would be to store excess energy and utilize the reserve when there is little sun or wind. Unfortunately, cheap and efficient battery storage is not up to the standard required for commercialization. With this reality, an additional alternative energy source is required so there can be a consistent, reliable, and safe means of generating power. That source is nuclear as it generates electricity at a constant rate with no variability due to external factors.
The headwind nuclear energy currently faces is multifaceted. The biggest headwind is the public’s perception regarding safety of the technology and its reactors. The second is the hazardous waste produced by the reactors and how to dispose of it. The third is the cost/time profile of building new reactors. Unfortunately, the first issue is the least valid but the hardest to change as public perception can remain irrational despite evidence to the contrary. The fact is nuclear energy is one of the safest sources of power when compared to traditional energy sources. Only solar and wind can claim they are safer but only by a thin margin. The graphic below shows divergence of safety profiles between traditional energy sources and cleaner alternatives. It is clear the impact nuclear energy has on safety is stellar compared to that of fossil fuels.
The second concern regarding hazardous waste is overblown as there are methods already in place that ensure the safe disposal of waste produced. Current processes ensure the waste is properly cooled at which point it is transferred to long-term storage at designated facilities. The third point is the most valid as it speaks directly to the viability of building out more reactors. With traditional methods, the time and capital required to build out new reactors is burdensome. The bigger issue is not the sticker price of a new reactor but rather the likelihood the build takes longer than expected and goes over budget. New LWR builds can go billions of dollars over budget and take years longer than originally planned. Due to this reality, the adoption of traditional reactors is a tough hill to climb. Thankfully, traditional large LWR reactors are becoming relics with the onset of a new breed of reactors, Small Modular Reactors, or SMRs.
Thankfully, traditional large LWR reactors are becoming relics with the onset of a new breed of reactors, Small Modular Reactors, or SMRs.
The Future of Nuclear
Understanding the current hurdles surrounding nuclear energy, companies have taken a newfound approach to building reactors. Due to the size and complexity of reactor sites, standardization traditionally lagged in the industry and specifically in the US. This is changing as modern designs usher in modern processes. Instead of building the entire reactor and its components on site, companies are scaling down the size of the overall reactor and producing the majority, if not all the build under one roof to create SMRs. This creates several major benefits which remedy the current viability issue. For one, the time it takes to build new reactors is drastically reducing. Rather than 10+ years, new builds take roughly half that time creating a shorter lead time for reactors to generate ROI. The second major advantage of SMRs is the cost advantage to build in a factory with standardization. Over time, economies of scale will drive down costs, generating a higher ROI, and in turn, an easier pitch to countries or companies considering the deployment of a reactor.
As with most new technologies, different approaches are being taken to address the same problem. Within SMRs, the major bifurcation of approaches relates to the scale of manufacturing and overall reactor size. One method involves creating the entire reactor, which is a fraction the size of conventional reactors, in a factory and delivering the final product to the site. The other method is manufacturing the majority of the reactor in a factory, then finishing the assembly on site where the final build will only be slightly smaller than traditional reactors. A leading company in the US taking on SMRs through the full buildout process, is NuScale (NYSE: SMR). Their design, which is intended to be subterranean, is a sliver the size of most nuclear reactors. Through innovation, they have been able to remove large components found in standard LWR reactors leading to reduced costs, time, and space required. Another company taking a slightly different angle at SMRs is Rolls Royce (OTC: RYCEY). While not a new company, their initiative in the nuclear energy space gives them a new area of potential growth. The approach they are taking is building what is known as a Jumbo SMR. Although their design contains almost all the same components of existing reactors, it is relatively smaller and builds the majority of the reactor in a factory. The major advantage of this approach is it utilizes the cost and time benefits associated with building in a factory, but also generates immense amounts of power due to its size. In comparison, Rolls Royce’s design generates more power than current nuclear plants and especially more than smaller SMRs, like the ones designed by NuScale. The argument for this strategy is the ROI will be significantly higher than smaller SMRs due to the elevated electricity production despite the higher costs.
Beyond the designs themselves, the other input for the future of nuclear power is uranium. The commodity has been used for nuclear purposes since the beginning of nuclear fission and is relatively cheap, but supply is projected to lag against the rising demand (see below). The Ukraine – Russia conflict created an opportunity for domestic suppliers to take advantage of this imbalance. If nuclear energy is going to experience a resurgence in popularity, then a reliable, safe supply of uranium is needed. Since a majority of the uranium supply comes from foreign nations, domestic supply must increase as the war in Ukraine showed the pitfalls of foreign energy reliance.
The largest US based uranium miner, based on the collection of permitted mining projects, is Uranium Energy Corp. (NYSE: UEC). With permits being one of the biggest hurdles as a miner, Uranium Energy would be a beneficiary of a wave of new nuclear plant builds. Another company which would benefit from a domestic buildout would be Canadian based miner, Cameco (NYSE: CCJ). Because Cameco is Canadian based and has the world’s largest high-grade uranium reserve, they check the box as a reliable source to the US. An estimate from TradeTech below shows the potential supply and demand imbalance within the uranium market over the coming years. Despite the potential upside in the uranium industry, we are mindful its demand is directly tied to the proliferation of new nuclear energy reactors.
While it is a little too early in the game to determine the outcome, the recent spike in nuclear energy interest is positive. Currently, nuclear energy only makes up roughly 1/5 of the total US energy supply. Other nations such as China however, see its potential and are drastically growing their nuclear fleet. A recent announcement in August from Japan, stated they will be building out next gen nuclear reactors despite the semi-recent Fukushima disaster. Even Saudi Arabia, known for their oil dependence and longstanding opposition towards alternative energy, has committed to building out nuclear capabilities. In the US recent progress can be seen in the Inflation Reduction Act passed in August which specify incentives for nuclear energy technology. With this and outspoken leaders backing the need for nuclear energy, some semblance of a nuclear expansion will likely emerge. Should this trend continue, it would be a win not only for investors but also for combating climate change as nuclear energy bridges the gap to the climate goals set by our world leaders. We will be keeping a close eye on the industry and a pulse check on the overall appetite for the technology. Should the current interest hold and expand, we would likely allocate capital towards the nuclear energy theme.