I hope you all have recovered from Friday’s euphoric mood in the uranium sector. With some time away from the markets, I hope you have had time to digest all of the impressions.
Sprott stole most of the headlines on Friday. They released a press statement saying they had filed an amended base shelf prospectus for their Physical Uranium Trust. The total is now for a $1.3B ATM financing to buy more uranium. This is up 1B from their 300M financing they already had in place. What many forgot about in the gif fueled excitement were the life extensions of the Illinois power plants. I think there are reasons why we should not ignore them.
First of all, saving Byron and Dresden is great for the climate. (One can get into a discussion about if subsidies are the right solution for this, but I am not going to get into that here. Nuclear has had enough headwinds and resistance the last 50 years). If you want to convince me you want to save the environment, you can not close down the most effective and most reliable power source there is. You can not run your country on 100% renewables. You need steady base load power.
The Byron and Dresden plants were set for closure, and therefore they do not have a lot of inventory on hand. With the extensions they now have to go looking for fuel, as soon as possible. Exelon, the owner of the plants, says they have ordered fuel to keep the Byron plant running past its 13. September deadline already. I will quote Harris Kupperman (also known as Kuppy) who wrote: “as a reactor that runs out of uranium is just an expensive paperweight”. Short term Exelon might want to source fuel from the spot market, but the mid and long term market is where they would want to go longer term. The demand of the power plants who got life extensions is about 3M lbs per year. This has to be updated in the supply and demand models of the research and analysis companies. A couple of more life extensions and the models have to be completely redone.
The last couple of years the utilities activities have been very low in terms of contracting. This might be the first step, helped by Sprott, to get more utilities into the contracting game. If the Sprott uranium trust is not there to buy the pounds, you risk the price going down again. (FYI, I do not expect Sprott to stop buying). Now we have at least one of the utility companies having to source more uranium. Our thesis has mainly been about utilities demand. I look at Sprott as the lighter fluid and the spark, with the utilities as the logs you put on the fire to keep it going all night. I might have to reassess my view and admit that Sprott is more important than I first thought. It is more like another energy source to both light and keep the fire burning, and not just the spark. Maybe I should compare Sprott to oil.
Up until now, the spot market for uranium has been a disaster. The lack of activity has made it impossible to get real price discovery. In short, it has been a broken market. Together with very low long-term contracting, it has created the whole investment opportunity for us. Being taught about the Efficient Market Hypothesis in business school, I should not have a chance to beat the general market. I have avoided this by investing in a non functioning market. Why would I go fishing where the competition is high? I would rather pick the far off, hard to climb mountain lake that no one wants to use.
Going forward my plan is simple: Do not do anything stupid! (Sell too early).
What to do if you get questions on why you support nuclear
I have seen a couple of people discussing nuclear power this week. This is a natural result of the interest in uranium going up on Twitter with the returns. Some people say that they can’t invest in uranium because of ethical reasons. This usually means that they think uranium mainly goes to nuclear weapons. They do not know that the uranium and nuclear market is heavily regulated. Every pound of uranium has to be accounted for through the whole supply chain before it reaches the end user. The main user for uranium is nuclear power plants.
We have the age-old: «What about Three Mile Island, Chernobyl, and Fukushima?» Nuclear is just too dangerous compared to the risks. We also can’t forget about: «What are we going to do with all the waste?» objection.
If you have had problems answering any of these questions or objections, I suggest you watch this video:
I hope you have a great week, and that we continue to see more positive developments for the sector.
In the uranium space we should always check our hypothesis and find out what is the bear case for uranium. Barring another accident, I don’t have that many bear case scenarios. This does not mean that the case for nuclear is obvious for everyone. Advocates for nuclear power are still a minority. I have therefore dug up another perspective on the sector.
The basis for this post is the podcast Redefining Energy and the episode “Nuclear Industry, the autopsy.” The hosts are Gerard Reid and Laurent Segalen. Laurent Segalen is the founder of Megawatt-X, a London-based platform for investing in Wind and Solar assets. Megawatt-X has listed 178 wind and solar projects, on three continents, amounting to 14GW. Their guest is Mycle Schneider, a nuclear energy consultant and anti-nuclear activist. This information might be useful before you listen to the episode.
We do not have to go further than the description of the episode before we find the first dig at nuclear vs renewables:
“In 2020, every two days, wind and solar added more net capacity to the world than nuclear in a year.” At first glance a staggering statistic, but let us go a step further. The key word they have used here is capacity. This does not mean actual production. Every time you hear about renewable energy, you have to listen carefully to whether they are discussing production capacity or power production. These two terms sound like they have the same meaning, but they don’t.
The difference between production capacity and power production
Germany is the perfect case study if we want to see what production capacity actually means. Their build out of solar and wind is probably on the biggest scale in all of Europe. They have increased their production capacity considerably, but actual production has hardly moved at all. The production capacity shows how much they can generate with 100% access to sun or wind. Like most people know the sun goes away at night, and the wind does not always blow. The capacity is not what you end up with.
Germany has increased its capacity by almost 80%, but their gross power generation has only increased by about 20%. (Let us not mention that they have also increased their dependency on coal power during the same time).
Capacity utilization in Germany has declined correspondingly in line with this investment in renewable energy. We are getting less and less in return with increasing investments. In economics we say that the marginal utility is going down. (We see the same case in Sweden and California).
Outside the US and Europe the story for nuclear power is completely different. Developing countries in Asian are planning to have nuclear power in the mix together with solar, wind, coal and gas. They need all the energy they can get. Advocates for nuclear are not against renewables. You just can not rely on them for 100% of your energy needs. If you follow the mainstream narrative, that is not what is being proposed. As advocates for nuclear we have to be happy that Germany has given us a case study for a country that tries to be 100% dependable on solar and wind.
A narrative about nuclear power not growing, but dying is actually irrelevant for the investment case. The Tobacco industry has been in decline for decades, but have offered great returns for investors. There is still a big demand for uranium in a sector like nuclear power, dying or not. (We go by the small 1,5-2% projected growth in the industry). With more proof of the realities of renewables gross power generation there might be a bigger push for nuclear power in the long term.
Getting into the actual podcast
Starting off the podcast they say that nuclear power is an incredible technology and has an incredible potential. Their problem is that the industry has had a big problem with execution and persuading the public and the governments that this industry has a future. (That many different groups are influencing this opinion is not mentioned. Please see the first minutes of this video for some of these influences).
We are told that one of the hosts of the show became anti-nuclear after Fukushima, something that is perfectly reasonable. The lack of capital discipline in the industry, and the lack of growth of the industry is used as proof that nuclear power is just a pipe dream. During the podcast I added up about 10 reasons why nuclear power is dead, or dying. The list is as follows:
Accidents like Three Mile Island, Chernobyl, and Fukushima
Nuclear power in not a growth industry like hydro, wind and solar
Focus on Covid-19 response in France
EDF is technically bankrupt
Nuclear Power does not work in harsh weather
Lack of build out
Only use case military use
Age of workforce
Small Modular reactors will not work
1. Accidents like Three Mile Island, Chernobyl, and Fukushima
No talk about nuclear power is complete without bringing the three nuclear accidents: Three Mile Island, Chernobyl and Fukushima. This is to show that the sector has a horrible safety track record. This is the most common complaint, and is also what has been given the most media coverage.
Starting with the Fukushima accident in 2011 we have after 10 years added up the numbers. We have been able to link one death directly to radiation, while over 2,000 died from the evacuation, and about 18,000 from the tsunami. There is no doubt about that there has been great psychological and economic loss for the area. People have had to move from their homes where they have been living for decades. The whole country of Japan has also switched to importing more natural- and petroleum gas as a substitute for the nuclear power they turned off. Nobody has tried to minimize the damage done with this natural disaster. The nuclear industry has taken responsibility for what happened at the plant and done everything to comply with new standards. Still, most people get the impression that there was a tsunami that made a plant blow up, and it was the plant that killed the people. Popcorn movies like Godzilla (2014) have helped perpetuate this.
The biggest harm the natural disaster has done is the cancellation and postponement of nuclear projects. Nuclear power was in 2011 on a very good track with planned projects for the future. They got mothballed or cancelled overnight. Countries like China would probably have more than a dozen more operational nuclear plants if this accident had not happened. This could in turn have saved countless lives from smog related deaths.
Chernobyl was the only accident that caused real harm and deaths. This is something we hope never will happen again, and is still top of mind for most people. This disaster happened 35 years ago, but it has been a constant part of the discussion about nuclear power. This accident was partly a construction failure and part human error. This is such a discussed topic that I will link the article “What About Chernobyl?” Ranking World’s Deadliest Energy Accidents for people who want a more in debt dive on the topic.
To keep some perspective I will finish this point by pointing out some accidents that did not end up in most school curriculums for kids growing up.
2. Nuclear power is not a growth industry like hydro, wind and solar
For uranium investors this is not a point (with reference to the Tobacco industry). It has relevance if you invest in the nuclear sector, but here also there are differences from country to country. However, I would like to say that the podcast has mainly focused on the US and European markets and here you can agree with their conclusion. Capacity is going down. In the developing world the situation is very different.
China has maxed out its hydro capacity and are building out everything they can to cover their energy needs. They are increasing capacity in solar, wind, coal and nuclear power. They need it all. Their recently published 5-year plan says that will reach 70GW produced from nuclear power before 2025 from 51GW in 2020. By 2035 the number is even bigger.
It is with countries in the developing world you end up with 1,5-2% growth per year, even if all the planned closures in Europe and the US goes after plan.
3. Focus on Covid-19 response in France
Not a single reactor has been shut down as an effect of Covid-19. However, at the same time EDF reduced their nuclear staff by two thirds to reduce risk of infection. There was a big focus on the fact that maintenance has been postponed, and the possibility that the plants are not run safely.
By the number of actual accidents, nuclear power already has the utmost strict rules to follow. EDF reduced staffing and decided to only keep those in charge of safety and security. Everything is a trade off. You can keep 100% of the workforce on site, but you will risk more infections.
4. EDF is technically bankrupt
There has been a drop in energy consumption during the early phase of Covid-19. This has led to a reduction in income for the utility companies. Standard & Poor’s downgraded EDF to BBB+ rating for their debt.
Going further they believe EDF is technically bankrupt because they have not set aside enough money for the decommissioning of plants. (This interview came out in December 2020, before the announcement that the decommissioning that was planned for 2025 has been postponed to 2035). The plants become more profitable with longer life, and the decommission costs can be moved back 10 years. It does not fix the problem, but it helps a lot.
If EDF goes bankrupt I would still expect there to be a buyer for the nuclear plants (at the right price). There should be very low incentives for France to try to copy countries like Germany with removing perfectly operational nuclear plants.
A lot of industries are facing the same challenges. Without subsidies and government contracts you would have very little solar or wind power generation. The profitability numbers for renewables does take all costs into consideration in most instances. If you are dependent on subsidies to work. You are in no position to talk down on other sectors.
Compared to France, Germans have an electricity bill that is 79% higher than France’s (Source: Eurostat). In a low margin industry one would think it would be possible to raise the margins a bit for the low carbon alternatives, or increase fees on the carbon intensive alternatives. That is what has been done in many countries.
5. Nuclear Power does not work in harsh weather
This must be maybe the funniest point that was made. In harsh conditions nuclear plants sometimes have to be turned off. We are talking about severe storms, hurricanes and tsunamis here. There are also certain locations that are not suited for nuclear power plants. Nuclear is not perfect, but you can’t make this a point on its own. Renewables like wind and solar also have problems during extreme weather. Windmills can’t operate in hurricanes and solar has problems with snow. Certain parts of the Northern hemisphere get very little sun during the winter months. There are also countries that get very little wind.
For extreme weather look no further than Texas, Japan or Germany this winter.
6. Lack of build out
How do you look at the future? There were four start ups and four closures in 2020. (I checked, it was five and five in 2020. The capacity of the decommissioned ones were lower than the new ones that were brought online).
1 in 8 of construction sites are given up over time. They will never be completed. There were only 6 construction starts in 2019, followed by just 2 construction starts in 2020. There are not enough construction starts to keep the sector healthy. Another problem is that most of the running plants were built in the 70s. Experts here say there will be more closing down, and the capacity leaving nuclear then will be higher than what we are able to bring online. For the trend to stop, construction starts have to be double of what it has been in the last decade.
One has to remember what happened a decade ago in 2011. It might have a connection. In the West there is still a lack of investment while the East is ahead.
There was a reference made to corruption in the sector. The Ohio legislature is close to revoking the nuclear power subsidy after it was revealed that it passed the legislature through alleged acts of bribery.
This example is a single incident. It does not prove anything for the whole industry. Renewables like wind, solar or hydro very often have projects that are not popular with the locals. If you believe all of these projects are free of corruption and above all suspicion I have some magic beans I want to sell you.
8. Only use case is military use
After a long time focusing on the negative, the use case for defence is the first thing that gets a pass. There is a big advantage to being a nuclear power. Militarily nuclear power has a high strategic importance.
I do not object to it having strategic military importance. I just believe a stable power grid is of paramount importance too. For countries without hydro, nuclear power is a better alternative than coal and gas. Rolling blackouts in California is a direct effect of closing down nuclear power plants. This is not something countries, or states, should emulate. I would also like to remind people that NASA has switched from solar panels to nuclear power on the Mars Rover because it needed to be more reliable.
9. Age of workforce
The age of the workforce near retirement in the nuclear industry is also a concern. For EDF half of the nuclear staff are eligible for retirement in 6 years. This poses a big HR challenge. This is a complex industry where it takes time to educate people and train the right people.
For me it is interesting to observe that this is a big problem. The nuclear sector is not the only one with this challenge. One would not find it impossible to educate and attract new talent. It all is a matter of incentives and salary. If there is a change in public sentiment and support (financially and morally) you would be amazed how quickly things can change.
10. Small Modular reactors will not work
The use of small modular reactors (SMRs) will never come to fruition. The development takes too long and they are too expensive. SMRs need economies of scale and they have to sell dozens for ever turning a profit. In addition we have a climate emergency and commercial SMRs will not be available for use in time by the 2030s.
I believe that there are use cases for SMRs in several locations where one before had to depend on coal or gas power. Just in the Canadian wilderness one could find more than a dozen locations. Without enough time left before 2030 I do not see Germany on track with their Energiewende either. If we go by that timeline the only solution seems to go back to the stone age.
Their conclusion is that nuclear has had 70 years to get it right and is not a new technology anymore. They find it stunning that the sector asks for government handouts for a technology that has been around for decades. (I guess solar should get the same treatment because that is not a new technology either. Wind power has been around for centuries, just look to the Dutch windmills. By this argumentation windmills should subsidize other technologies. One should also not forget that smart people like Bill Gates are investing heavily into new technology for the nuclear sector).
In conclusion I do not see any dangers to my hypothesis after listening to this podcast (twice). I would recommend that you still give it a listen and see if you get something different out of it than me. Listening to other people’s opinions to check and control your viewpoints is healthy. I already have changed my mind in favour of nuclear power, and one would expect me to be biased. Just like I believe these people are biased.
I am not here to make a dig at renewables. I am here to defend nuclear power as a way forward. Nuclear power has always said that it should be a part of the mix alongside renewables. They are not enemies, but allies for carbon free electricity generation.
If you want to know more about the limitations of renewables I would recommend two articles by Fergus Cullen called “Non-Renewable Renewables” and “Renewable Debate.” If you have not read these before you are in for a treat.