Japan Disaster Towers Over Nuclear Power Industry
The crisis at the Fukushima Daiichi nuclear power plants in Japan last March put the brakes on the industry's revival, dimming prospects for the immediate future.
Since the March 11 disaster — the worst nuclear accident since Chernobyl — several countries including Germany, Switzerland, Italy and Austria have reduced or halted plans for nuclear power.
Germany, which gets about 25 percent of its power from nuclear sources, plans to decommission existing plants by 2022, according to the U.S. Energy Information Administration.
While the disaster has reignited safety concerns in some U.S. communities, notably near the Vermont Yankee plant in southeastern Vermont and Indian Point, near New York City, analysts generally don’t expect nuclear power to go away in the U.S.
“There’s a general consensus that utilities in the U.S. operate their plants safely,” says Travis Miller, an associate director at Morningstar. “They are very productive and very profitable, and we don’t see any change to that even following Fukushima.”
Still, the Fukushima tragedy continues to cast a shadow on some parts of the industry, if only because of nagging unknown.
Among the hardest-hit stocks are such small-cap uranium miners as Denison Mines and Uranium Resources, which have fallen more than 50 percent this year.
Daniel Rohr, a senior securities analyst at Morningstar who covers the Canadian uranium miner Cameco, which has also fallen more than 50 percent, said he reduced his fair value estimate of the stock after Fukushima because of the potential political fallout.
“There’s more uncertainty about nuclear’s future, so investors need to be adequately compensated for the incremental risk they’re taking post-Fukushima,” Rohr told CNBC.com.
Investors felt the impact of the Japanese disaster immediately. Exelonand Entergy, U.S. utilities with the largest exposure to nuclear energy, fell 11 percent and 7 percent respectively in the week after the earthquake and tsunami, according to John Kohli, portfolio manager of the Franklin Utilities Fund.
While utilities in the U.S. have largely recovered since the earthquake, the pain for the industry isn’t over. The Market Vectors Uranium+Nuclear Energy exchange traded fund, which provides the broadest exposure among ETFs to the entire cycle of nuclear energy generation, continues to suffer. The ETF is down more than 28 percent through Oct. 21, compared with a nearly 9 percent drop in the Standard & Poor’s 500.
In the U.S., the disaster has enabled anti-nuclear sentiment to gain traction. Notably, the Vermont legislature denied the 20-year license renewal of Entergy’s Vermont Yankee nuclear power plant, despite the Nuclear Regulatory Commission’s approval, says Miller at Morningstar. Entergy has sued the state to reverse the legislature’s ruling.
Nuclear power opponents are also opposing the re-licensing of two reactors at the Indian Point Power Plant, which is also owned by Entergy and is located about 30 miles north of Manhattan. The Natural Resources Defense Council concluded in an analysis that an accident at the plant “could cause a catastrophe far worse than the Fukushima disaster in Japan.”
Most people in the investment community, however, believe the Indian Point license will be renewed, says Miller, who nevertheless warns: “If it were to shut down, it would have a significant impact on [Entergy’s] stock price and the company’s profitability.”
Despite these licensing fights, Kohli at Franklin Utilities points out that in California there is no active movement to shut down two nuclear power plants near the Pacific Ocean “that potentially could face seismic activity similar to that faced in Japan.”
Resistance to nuclear power could be short-lived. For one thing, countries within the European Union have to cut greenhouse gas emissions by 20 percent from 1990 levels by 2020, according to the EIA. That’s a difficult goal to reach without nuclear power in the mix.
“While the Germans seem to be very serious about abandoning nuclear power, doing so will be incredibly difficult given [nuclear’s] significant share of total power generation in the country,” says Morningstar’s Rohr. “I seriously doubt solar and wind can make up the difference. Are they willing to turn to dirty coal or Russian-supplied natural gas?”
New China Syndrome
Another boost to the industry will come from China, which as Rohr points out, has no plans to desert nuclear power.
“They may slow their ramp-up in order to be extra careful about dotting their ‘i's and crossing their ‘t’s, but the magnitude of the build-out is still tremendous,” he says, noting China has 26 reactors under construction at the moment, more than Germany’s entire fleet.
“Additions in China and elsewhere should more than offset the loss of the German reactor fleet and potential retirements in other developed countries,” he adds.
Still, Rohr says, if the Chinese reduce the number of “planned” reactors from the current 50, “we could be looking at some serious volatility.”
In the U.S., Kohli notes nuclear power makes up 20 percent of all U.S. electricity generation, and that it’s difficult to invest in any electric utility without gaining some exposure to the nuclear industry. While the Fukushima disaster made regulatory and policy makers reassess the U.S. commitment to nuclear, Kohli’s view is the response has been positive.
The NRC had analyzed the risks to plants after the September 11 terrorist attacks in 2001, “and many of the worries regarding the safety of these plants after the quake were things that were addressed ten years ago,” he says.
This fall, the NRC released additional evaluations and safety recommendations for nuclear power plants that MFGlobal analyst Whitney Stanco says, will “impose limited costs” for existing reactors.
Cost, in fact, is what will boost nuclear’s prospects in the long run.
“Past energy price spikes have highlighted the benefits of a diversified source of energy, and when we see future volatility in energy resources such as natural gas, the spotlight will be enhanced on nuclear energy,” Kohli says.