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Investing in Nuclear Energy

Cashing in on Cap and Trade: A Nuclear Power Surge

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Whether you call it "cripple and rob" or by its real name, the "cap and trade" legislation currently being debated in Congress does have a certain inertia of inevitability about it.

Sure, a Bush veto of the bill is a given, but that will only live as long as he can hold onto the office. In his wake, is either a President McCain or a President Obama, both of whom support the measure in concept.

That makes the idea one that must be reckoned with as early as next spring.

Called the Climate Security Act, it may also just be what finally brings down all of the environmental objections to nuclear power. That makes now the time to consider investing in nuclear energy companies as part of your energy portfolio.

That's because without a huge increase in the number of nuclear power plants, the Climate Security Act is nothing but a fantasy. Solar, wind, and geothermal power are important pieces of puzzle, no doubt, but without a big boost in nuclear power the goals of bill can never be reached.

That makes the bill something of a test for the same environmentalists that have sworn off nuclear power for good. Either they want to save the planet or they don't.

And while that may sound a bit harsh, the numbers involved bear it out. According to an analysis of the plan by the Energy Information Agency (EIA), the U.S. would have to increase its nuclear capacity by 268 gigawatts by 2030 for the plan to achieve it goals.

Investing in the Nuclear Power Surge

That would require the building of approximately 200 new nuclear power plants over the next 25 years assuming the average new reactor will produce about 1.3 gigawatts of electric power. And while that number may seem a bit high to some, the lowest available estimate would even require 50 new nuclear plants at a minimum to protect us from a warm winter's day.

Of course the larger reality is that the United States has not ordered one new nuclear reactor since the 70's. So ramping up to produce anywhere from 50 to 200 of them in the next 25 years is going to be challenge in and of itself.

Fortunately, however, that is a process that has been started with an earlier act of Congress. That is because today's nuclear revival really began in earnest with the Energy Policy Act of 2005.

In it, the seeds of the industry's rebirth were sown. Specifically, the 2005 act provided the nuclear industry the following:

  • $3 billion in research subsidies
  • Over $3 billion in construction subsidies for new nuclear power plants
  • Nearly $6 billion in operating tax credits
  • Over $1 billion in subsidies to decommission old plants
  • A 20-year extension of liability caps for accidents at nuclear plants
  • Federal loan guarantees for the construction of new power plants

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Nuclear Power Investments

One company that stands to benefit from these subsidies and a move towards cap and trade is General Electric (NYSE:GE).

The company is the leader in all things nuclear. In fact, GE generates nearly $1.5 billion a year from this portion of its business, and expects its market to grow about 5% a year from the new surge in sales of equipment and services related to nuclear power generation.

According to the Nuclear Energy Institute (NEI), two of GE's advanced nuclear power plant designs have either received design certification by the Nuclear Regulatory Commission (NRC) or are in the process of being reviewed.

Joining GE in the design battle are two other names: Westinghouse, working in a consortium with another big nuclear player the Shaw Group (NYSE:SGR) and Areva (EPA: CIE), a nuclear power giant owned by the French government.

Westinghouse's AP1000 design, a 1,150 megawatt plant, received its NRC approval in 1997, while Areva's new design, the 1,600 megawatt Evolutionary Power Reactor (EPR), was submitted for U.S. approval in February.

These new plant designs represent a leap forward in technology that promise to be much safer and cleaner than the ones employed in the past. The newer reactors are designed with considerably fewer pipes, pumps and valves. That means that in the event of a problem, the safety of these reactors is largely passive and less reliant on workers.

Even so, building these new designs is a time-consuming endeavor. The process of licensing and building them is expected to take nine years. Four years of this are for the construction of the plant itself.

And while this process has been streamlined and improved over the years, the first new nuclear plants are not expected to come online until 2015.

In the near term, however, it is the existing nuclear power companies that promise to reap the rewards. Companies like Entergy (NYSE:ETR), Excelon (NYSE:EXC), and Dominion Resources (NYSE: D) are all major players in the industry and have been buying up existing nuclear plants at a discount in recent years.

 

Overcoming the Nuclear Energy Roadblock

The major roadblock to all of this projected renewal, however, is the thorny problem of what to do with the waste generated by both existing and proposed facilities. And that's where the Federal government again comes into play, since it is responsible for storage and disposal of this waste under the Nuclear Waste Act of 1982.

At present, the government is still battling to develop a facility at Yucca Mountain, Nevada. But political wrangling over the site has delayed its development, even though it was originally slated to begin receiving waste in 1998.

Since then, numerous attempts at reaching a solution to this impasse have come under attack. But even these disagreements now seem solvable, since new "closed nuclear fuel cycle" technologies will recycle as much of the used fuel as possible.

One obstacle to progress is Nevada Senator Harry Reid. Reid has long opposed the development of Yucca Mountain. But given the new political realities of the energy situation and the time involved in bringing new plants online, industry officials are now more hopeful that this issue can be resolved over time.

That would help put the U.S. back in line with the rest of world when it comes to nuclear power generation. After all, two of the fastest growing economies in the world are now headed quickly in that direction as the price of oil skyrockets.

In fact, according to the Department of Energy, Chinese and Indian power demand is expected to nearly triple between now and 2030. That has China working to triple its use of nuclear power while India has plans to open up as many as 15 plants over the next 20 years.

That gives nuclear power an inertia of inevitability all of its own—one that will only be furthered by cap and trade legislation.

Because as John McCain has said, "We are never going to really significantly reduce greenhouse gas emissions unless nuclear power is a major component of U.S. energy supply."

And while that might be a bit of a Hobbesian choice for environmentalist everywhere it is a development that will only boost nuclear energy investments.

Your investing-in-the-future analyst,

steve sig

Steve Christ

Chief Investment Analyst

The Wealth Advisory

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