Nuclear energy remains a divisive subject. To many, it still brings to mind memories of the disasters of Chernobyl in 1986 and Fukushima in 2011. However, for some ESG-focused investors, nuclear power provides a compelling alternative to fossil fuels, as it avoids carbon emissions – an important consideration as we aim for net zero.
In its most recent annual outlook, published in September 2021, the International Atomic Energy Agency (IAEA) estimated global nuclear generating capacity could double to 792GW by 2050, up from 393GW in 2020, in its high-case scenario. Such a level would represent around 12 percent of total global electricity production.
“The role of nuclear in the energy transition is principally a solution to the problems associated with most renewables: namely, reliability and intermittency”
At the time, IAEA director-general Rafael Mariano Grossi said nuclear power would “continue to play an indispensable role in low-carbon energy production”. He added that it would be vital in achieving net-zero emissions through new low-carbon technologies such as nuclear-powered hydrogen production or power generation in small and advanced reactors. Nuclear energy, the UN body noted, would also tackle issues such as electricity consumption growth, air quality concerns and the security of energy supply.
“The role of nuclear in the energy transition is principally a solution to the problems associated with most renewables: namely, reliability and intermittency,” says Eoin Murray, head of investment at the international business of asset manager Federated Hermes. “The fact the wind doesn’t constantly blow at the right speeds and it is not constantly sunny means there are many issues to deal with in renewables’ intermittency and reliability.”
That being said, Murray adds that nuclear faces three main challenges: it is the most expensive of all energy forms, has legacy safety concerns and has long construction times.
Energy security has also become a key issue since the Russian invasion of Ukraine, as it exposed many European nations’ reliance on Russian gas and oil resources. Many members of the EU bloc have struggled to find alternative suppliers, even as they condemn the Russian government and impose sanctions against it.
“In the short term, we expect energy security concerns to trump net-zero considerations,” says Derwin Jenkinson, energy and infrastructure partner at law firm Paul Hastings. “A reason nuclear appeals to governments in devising energy policy is that the two are not mutually exclusive.
“The EU Commission’s decision in February to approve the inclusion of nuclear within the EU taxonomy rules is an illustration of this.”
The inclusion of nuclear energy – under certain conditions – in the EU’s Green Taxonomy from 2023 could lead to greater investment in a sector renowned for high costs. But there are considerable differences in acceptance of nuclear power across Europe, says Jenkinson. For example, nuclear meets up to 70 percent of French energy requirement, compared with just 15 percent in the UK.
As part of its energy security strategy, the UK government has proposed building up to eight new nuclear power stations by 2030. This should help the sector generate up to 25 percent of the power consumed – some 24GW by 2050 – in Great Britain, and support 10,000 jobs at peak construction.
“It will remain challenging to implement and create the right conditions for private sector investment in such large projects, but it is achievable with the right revenue model, such as a utility-style, regulated asset base and support package from [the] UK government,” Jenkinson says.
Investing in nuclear
While increasing the role of nuclear energy will help some countries reduce carbon emissions and meet their net-zero targets, it is not a completely carbon-neutral option.
“The construction of a nuclear power station tends to be fairly heavy on cement, for example, and that is high emission and particularly hard to abate,” says Federated Hermes’ Murray. “We need to think about these things in a proper full lifecycle assessment way. And that means thinking about how you dispose of radioactive material and if the general populace is happy with how we do that.
“We are moving away from a world where we used to ship waste to any country that would take it, as long as it wasn’t in our backyard. Those options are now probably a bit more limited.”
“Recent events have reinforced our argument that ‘green’ and ‘brown’ are unhelpful labels [for nuclear]… It might not be seen as green as renewables, but it is not as brown as coal”
Patrick Wood Uribe
New nuclear power plants will come at a high cost, however. And in addition to new developments, the replacement of ageing reactors must also be tackled if nuclear is to retain at least its current share of the global energy sector. Around two-thirds of existing plants have been in operation for more than 30 years, according to the IAEA.
Murray says that a combination of public and private capital will likely be needed to finance the next generation of nuclear power plants. “My suspicion is that public capital – government money – would need to take the first-loss position to give the right incentive [to investors],” he says. “And I suspect it is probably pension fund money for the most part, because the long-term nature of these projects requires that capital be sticky.
“But there will also be opportunities to invest in public equity markets and debt markets if you want some exposure to nuclear.”
Green and brown labels
Ultimately, the unit cost of nuclear energy is likely to make it financially uncompetitive with oil and gas for some time to come. And while nuclear power does have a chequered past, that does not mean ESG investors should disregard the sector.
“Nuclear isn’t without its challenges, but that is true of all energy sources,” says Patrick Wood Uribe, chief executive of UK fintech Util. “Recent events have reinforced our argument that ‘green’ and ‘brown’ are unhelpful labels,” he adds.
“It might not be seen as green as renewables, but it is not as brown as coal. And, while renewables are generally considered green, the long journey from mine to blast furnace to ship to infrastructure development is not – even if it doesn’t factor into official EU emissions figures.”
Wood Uribe, whose firm helps investors measure the world’s listed companies’ progress towards meeting the UN’s 17 Sustainable Development Goals (SDGs), says nuclear energy may play a role in solving some other challenges for ESG-minded investors.
“Unlike other energy sources, nuclear straddles sustainable development from both environmental and socioeconomic perspectives,” he adds. “It is widely affordable, available and reliable, insulating countries – or liberal democratic unions – from energy shortages and insecurity. And, unlike oil and gas or renewables, nuclear doesn’t demand and deplete natural resources.”