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Is nuclear a viable clean energy investment, or will myriad risks create financial headaches down the road?
Germany’s shuttering of its last nuclear power plant this spring is just one factor that has investors wondering if a reassessment of the asset is necessary.
Whilst the ever-controversial power source may remain a solid investment opportunity for insurers looking to engage with markets to meet transition goals and make a tangible impact, major issues have not magically disappeared.
On 15 April, Germany pulled ahead of the pack, shutting down Emsland, Isar 2, and Neckarwestheim 60 years after the country’s first plant began operating.
Some proponents of 100% clean energy and complete divestment say that all fossil fuels need to be eliminated as soon as possible including many in the investment industry. This group – which includes independent environmental network Greenpeace and media non-profit Bulletin of the Atomic Scientists, amongst others – sees the move as a major hitch to climate action, as, in the absence of nuclear, coal power is still prevalent, providing a large swath of the country’s electricity.
In the UK, however, Chancellor Jeremy Hunt recently came out as a supporter for nuclear power in his Spring 2023 Budget, which sought to reclassify the historically-fraught energy as “environmentally sustainable”. The goal was for nuclear power to provide up to 25% of the nation’s electricity needs by 2050, its target for carbon neutrality.
For investment teams at insurance organisations, this means that fossil fuel allocation won’t miraculously disappear, and those that try to divest immediately could be losing out on significant return opportunities, at least in the short term.
Indeed, Germany’s nuclear phase out means there could be a potential over-reliance on – or retrenchment in – oil and gas investments. However, others see nuclear as a necessary part of the net-zero picture, an adequate transition investment, and potential growth opportunity for the renewables industry.
According to Lloyd’s of London, nuclear energy is the second largest source of low-carbon energy, now providing around 10% of global electricity supply, generated from 440 power reactors across 31 countries.
However, it can be a volatile investment, with potential losses infrequent but potentially highly severe. Technology has evolved in recent years to mitigate some of the risks associated with nuclear energy, and more investors are looking into taking on the risks and support sector expansion.
Not everything is rosy, though.
A recent report from Aviva on “The pivot to green energy” said that whilst nuclear is often “perceived as a low-carbon option” in the UK, there are major complications.
“We have sites where they are proposing underwater storage,
[but that] will have potential risks to groundwater reserves as well.”
For one, there are no current sustainable solutions for dealing with its waste. “We just call it ‘spent fuel’ and deposit it underwater in storage tanks for 50 years. That’s a big issue,” the analysis said. “We have sites where they are proposing underwater storage, [but that] will have potential risks to groundwater reserves as well.”
These issues present significant concerns for savvy investors, who must consider the future operational and reputational baggage associated with their portfolios – not just return potential. Nuclear energy could create unnecessary headaches down the road, ultimately posing a threat to portfolios if issues such as waste management remain.
Nuclear disasters and weapons proliferation are also concerns. Loss of life aside, for investment teams, the possibility of needing sudden inflows of cash to resolve these issues – should the catastrophic occur – cannot be overlooked.
There’s also the climate angle.
The Aviva report noted that “around a quarter” of the world’s proposed waste sites are at high risk from sea-level rise. Not to mention that cooling processes, which require tonnes of water, remain inefficient. A recent example is the situation in France, where nuclear fleets were forced to shut down due to water temperatures rising too extremely to cool reactors.
However, nuclear is still desirable for many investors.
“By far the cleanest source of power, nuclear produces less CO2
on a like-for-like basis than even solar or wind.”
This is because it is scalable, easy to dispatch, and produces near-zero carbon energy. A 2017 analysis from LGIM reported that nuclear was “by far the cleanest source of power”, adding that “nuclear produces less CO2 on a like-for-like basis than even solar or wind.”
The report said it saw a “clear opportunity” to reduce nuclear operating costs through standardisation.
A key example in the UK is Hinkley Point C – one of the most expensive nuclear power stations globally. “A long-term price guarantee of £92 per megawatt-hour pan nuclear compares poorly with offshore wind projects struck at a headline level of £57 per megawatt-hour. Nuclear can be built much more cheaply than this,” it added.
For insurance investment teams, these tenuous opportunities in nuclear energy enhancement and optimisation will require long-term commitment to ensure useful returns. Private-public partnerships (PPPs) could also become more prevalent to achieve the necessary nuclear improvements.
Despite identifying various issues, Michael Steingold, Director of Private Markets at $300 billion AUM asset manager Russell Investments, was still optimistic – especially for investors with various long-dated liabilities, like most insurers.
Whilst wind and solar are “critical starting points” due to their current availability, he said, there would likely be other production technologies in the mix eventually. These, such as nuclear, would “provide better baseload production”.
For insurance investment teams looking for renewables' opportunities, the opportunity/difficulty mix only highlights that the nuclear debate is not black-and-white.
Positives include better carbon metrics, but negatives include physical impact – not to mention the potential of nuclear disaster, which – while a very low chance of it happening looms large in the public conscious.
“You need to think about intergenerational equity,” said Aviva’s report, adding that there has never been a single, large-scale nuclear plant that has come in on time or budget. “Historically, taxpayers have been the ones picking up the tab.”
“[Nuclear energy] has become a black sheep, although it could
be a viable alternative to be explored.”
The lack of funding and prevalence of delayed timelines and operational hitches means investment teams will likely not see mass allocation to this are any time soon. However, it is unlikely they will rule it out completely.
Senior Research Analyst at Aviva, Derek Foster, wrote in the report that it was “a shame” nuclear energy investment was not considered more frequently. “It has become a black sheep, although it could be a viable alternative to be explored.”
Hesitation in this arena – to come down too harshly on either side of the debate – means that many investors are tentatively hopeful but not yet deploying capital.
Madeline Ruid, Research Analyst at ETF provider Global X, said that, in the EU, she sees the “increasingly positive policy environment” as a key tailwind for renewable energy in general, but nuclear was not the most promising or prominent option.
She felt that wind and solar power were increasingly the preferred ‘green’ energy systems for project developers, governments, and corporations – due to their scalability and competitive costs. They are becoming “technologies of choice”, she continued.
“The region is working to accelerate the clean energy transition to
further reduce reliance on fossil fuel imports from Russia.”
She added that sanctions against Russia were key here. “The region is working to accelerate the clean energy transition to further reduce reliance on fossil fuel imports from Russia, introducing initiatives such as the REPowerEU Plan,” she said.
More recently, the European Commission also proposed the Net Zero Industry Act which Ruid said, “should facilitate further renewable energy growth.”
For those looking for viable nuclear investment options, it will likely be a waiting game – and those with longer-dated liabilities could be the beneficiaries.
LGIM’s earlier report, published in 2017, touched on the viability of investment in nuclear energy – noting that whilst most mainstream forecasters modelling the energy transition had assumed that a substantial increase in the use of nuclear power would be necessary, it did not come without major issues.
“Nuclear faces two existential threats,” it said: one, public perception, and two, economic tenability.
Public perception has been strained, to put it lightly, since at least 1986 with the Chernobyl disaster. 2011’s Fukushima Daiichi explosion – the most severe nuclear accident since Chernobyl – only further battered the landscape.
“The disaster has had a dramatic impact on public perception. Opposition to nuclear power intensified both within Japan and in countries such as South Korea and Germany,” noted the LGIM report.
Economic tenability is also a concern.
Nuclear power stations need stable pricing over the long term to generate positive returns – and the volatility of electricity pricing has increased dramatically as more renewable sources are adopted.
“The biggest challenge is that the supply of projects is not
keeping pace with investor demand.”
Another key issue, said Steingold, was one of scale – or lack thereof.
“The biggest challenge is that the supply of projects is not keeping pace with investor demand,” he said. “There are long lead times today to getting the key ingredients to a working plant.” He added that, as a result of this imbalance, available returns to investors had fallen over time, which has meant less investment uptake than expected.
Steingold said he preferred ‘green’ hydrogen to ‘pink’ (nuclear) energy, which he saw as more attractive and sustainable for investors. “There is a wide range of strategies in this area with different durations, whether created by financial product structuring or by the nature of the strategy itself,” he continued.
However, for insurance investment teams dead set on nuclear energy, Steingold acknowledged potential benefits, advocating for a diversified mix of renewable assets – which be believed would enable maximum resilience over time.
Nuclear was a part of that picture, but no one seemed to be taking the plunge without extreme caution and due diligence.
