Nuclear Power Continues Comeback Post-Fukushima

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The Japanese engineering conglomerate Hitachi (NASDAQOTH: HTHIY) has decided to expand rapidly in the UK’s nuclear sector by investing $1.12 billion to purchase Horizon Nuclear Power from the German firms E.On and RWE NPower who are walking away from nuclear power following the German government’s policy to reduce nuclear energy operations after the Fukushima incident. The apparent irony here is thatHitachi, based in a country that was the epicenter of nuclear disaster, is replacing the German companies. The U.K. based engineering firms Babcock International and Rolls-Royce have subsequently planned to sign contracts with Hitachi. The country currently has 10 nuclear power stations, which operate 17 reactors that fulfill about 18% of Britain’s total electricity requirements.

Hitachi is expected to bring its advance boiling water reactor system to the UK, which is currently in operation in four Japanese nuclear plants. Globally, there are 84 such plants in countries such as the U.S, Japan, India and Netherlands but none in UK. The Fukushima plant was also boiling water based. A conventional boiling water system, on which Hitachi’s advance boiling water system is based. Hitachi’s version of the technology would first require the approval from British regulators, a tedious bureaucratic process that might take more than a year.

The deal has particularly pleased British Prime Minister David Cameron who is banking on the project to create tens of thousands of jobs, reduce carbon emissions,add 6GW to the national gridfrom six plants thereby averting a looming power shortage in the near future and see a  massive foreign investment inflow of ~$32 billion into the U.K.However, there are still regulatory hurdles to overcome and the British government is yet to announce the rate at which it will purchase power from the plants.

Despite the upbeat attitude of the government, if the price is too low, then Hitachi will walk away. But given the shutdown of nine nuclear power plants by 2023, the country’s spare capacity would diminish to just 4% by 2015 from the current 14% while U.K’s electricity and gas regulator, Ofgem, has warned that the country will have an energy shortage in the next four years.  This has put Hitachi is in a better bargaining position.

If anything, UK’s drive towards nuclear should have happened years ago. Even if Hitachi’s deal goes forward smoothly, the plants won’t start supplying power until mid 2020s. The U.K. is certainly heading towards a power crisis because along with the closure of their older nuclear power plants, almost a third of the conventional coal and oil powered energy facilities will also face shutdowns in the near future. This will create opportunities for international and British energy firms, but a broke government and poor investment environment make the task of getting these projects off the ground dim.  The government’s desperation can be gauged from their ignorance of the fact that Hitachi was one of the firms that was responsible for developing Fukushima. Authorities have been planning to construct several nuclear power plants and had earlier identified eight locations across Britain but so far, Hitachi has been the only company that has shown serious interest. Therefore, it is unlikely that Britain will let them leave.

This post-Fukushima period had witnessed increasing public pressure on governments to abandon nuclear power complete; most notably in Japan, where only two out of 54 reactors are currently operational. However, the world cannot fulfill its energy requirements without nuclear power without a breakthrough in energy production, which would also likely render oil and natural gas mostly redundant.  Therefore the focus has to be on the safety of the reactors. It is not impossible to make a reactor natural disaster proof. The Japanese Onagawa plant, that has 3 reactors,was closer to the earthquake’s epicenter and tsunami than Fukushima plant but its strong structural design, that included a 14.7 meter thick sea wall made sure that it not only survived the disaster but also provided relief to displaced people. In a more recent case, Hurricane Sandy failed to have any considerable impact on the American nuclear power plants and their reactors. However, the American Nuclear Regulatory Commission (NRC) is known to pass incomplete information to the general public therefore it would not be prudent to assume that all American nuclear sites are safe.

Nonetheless, the demand for nuclear power remains strong and is expected to multiply over the coming years. With 104 nuclear reactors accounting for 30% of the world’s nuclear electricity, the U.S stands as the largest producer.Approximately 4 to 6 new reactors will start adding electricity to the U.S’s national grid before the end of the decade while more than a dozen are in the pipeline. China has far more nuclear reactors in its pipeline than any other country of the world.

Number of Nuclear Reactors

 

Operable

Under Construction

Planned

U.S.A

104

1

13

Canada

20

0

2

China

15

26

51

France

58

1

1

Germany

17

0

0

India

20

7

18

Japan

50

3

10

Russia

33

10

24

U.K.

17

0

4

Total

334

48

123

Meanwhile, the prices of uranium have continued to fall and were $44.61 at the end of October, the lowest level in more than 2 years.  The commodity has so far failed to recover after the Fukushima disaster. The fall in demand has come from Japan and Germany’s closure of power plants that still have massive stockpiles of uranium but the commodities market is now looking towards China and its planned reactors to boost demand.

The Japanese and German firms operating in the nuclear power sector, including Hitachi and E.On, have significant representation in PowerShares Global Nuclear Energy Portfolio ETF (UNKNOWN: PKN.DL)while the iShares S&P Global Nuclear Energy ETF (NASDAQ: NUCL) tracks the top global firms, including the ones mentioned above, that are engaged in the global nuclear industry. Both ETF’s give more than 50% weightage to the U.S. and Japanese firms but NUCL is the safest option as it tracks only the leading firms. PKN is dominated by nuclear firms operating in the industrial sector (54.4%) while NUCL lays more emphasis on firms engaged in electricity or other utilities (53%). The third primary nuclear ETF, Market Vectors Nuclear Energy ETF (NYSEMKT: NLR) is different from the two mentioned above as its 32% holdings are engaged in the Uranium mining sector. This ETF also focuses heavily on U.S. and Japanese firms. Since the beginning of the second half of 2012, both NLR and PKN have remained fairly flat but NUCL has risen by 1.2%. 


 


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