Article / 20 November 2014 at 13:00 GMT

Forget any notion of a nuclear revival

Head of Editorial Content / Saxo Bank
Denmark
  • Shares in French nuclear giant Areva fell by over 18% Wednesday
  • Nuclear share of global electricity production continues to fall
  • Saxo equities head Peter Garnry bearish on nuclear, bullish on renewables

By Michael McKenna

On first glance, the situation in the world of nuclear power appears decidedly mixed. On Wednesday, shares of French atomic energy giant Areva dropped more than 18% after the company "suspended" its financial outlook for 2015 and 2016.
 
In Japan, however, Tokyo Electric Power Company's (Tepco) stock surged by over 5%, leading Saxo Bank's Asia-Pacific equities list to new highs. Lest we forget, Tepco is the owner of the infamous Fukushima reactor.
 
So what's going on in the realm of the atom-splitters?

According to Saxo Bank equities head Peter Garnry, it is the French situation that is more representative of the sector as a whole. In short, says Garnry, "the political will is not in the direction of nuclear power but in that of renewable energy." For heavily state-subsidised entities such as Areva, of course, hesitancy on the level of policy can drastically impact that of finances.

France

The massive cooling towers of a French power plant signal the country's
immense investment in nuclear power. Photo: Gilles Paire \ iStock

For decades, France has sought to position itself as a world leader in atomic energy and an exporter of reactor technology. According to the International Energy Agency, however, nearly half of all new nuclear-generated power over the next half-century will come from China, with Russia, India and South Korea also representing key growth nodes.
 
With Areva behind schedule on major projects in both France and Finland, the question is whether French nuclear technology can play any sort of leading (or even supporting) role over the next few decades.

Complicating things further is the possibility that these delays may be related on an intrinsic level to Areva's EPR reactor design. Speaking to the New York Times on Wednesday, University of Greenwich professor Steve Thomas was forthright: "The EPR is a rotten design", he said, adding that France's state-run EDF — a regular partner of Areva's — may not be able to construct its two reactors at Hinckley Point in the UK as planned.

According to the New York Times, "all of the EPRs under construction including those being built at Taishan in China have run into delays". With France, EDF and Areva heavily invested in what seems to be a problematic design, and China on course to provide the lion's share of new nuclear construction in the coming years, it seems probable that both France and Areva's once-central roles will become more marginal in time.

Hinckley Point

Anti-nuclear protesters demonstrate against the planned Hinckley Point plant 
on the anniversary of the 2011 Fukushima disaster. Photo: Matt Cardy \ Getty

Looking at the larger, global picture, however, there are two processes of marginalisation going on in the atomic sector: Firstly, there is the shift of (literal) power towards China and other emerging players. Much more prominent, however, is the ongoing shift away from nuclear power as a viable source of energy.

"The Fukushima event caused many politicians to step back from nuclear power as a viable source of energy in the future", says Peter Garnry, adding that Tepco's recent bounce has a lot to do with its idle status in the aftermath of the Fukushima disaster. 

Essentially, says Garnry, Japanese prime minister Shinzo Abe's stated plan "will make these idle assets productive again, thus causing a change in the valuation of Tepco". The corollary here, of course, is that the Tokyo utility's gains represent no new growth in the atomic energy sector, but only the revival of disaster-sidelined assets.

For investors, says Garnry, "our view is that renewable energy will be the fast-growing energy source in this century unless a new commercial technology within nuclear or fusion power gets available. We have a negative view on nuclear power at this point." 

Garny's view is supported by the stated plans of governments around the world; erstwhile atomic leader France has said that it will cut its nuclear-generating capacity by one-third by 2025, concentrating instead on renewables. Spain and Germany have announced similar intentions.

According to a report published in India's The Hindu, "the nuclear share of the world’s total electricity production reached its peak of 17% in the late 1980s. Since then, it has been falling, and is currently estimated at about 13%, even as new uranium discoveries have swelled global reserves."

Another concern for investors considering nuclear energy companies centres on the fact that nuclear energy faces political constraints and concerns that go beyond its viability as an energy source. Witness, for example, the Russian-Iranian deal reached on November 11, which will see Moscow providing power technology and fuel under international monitoring.

The fact that Russia initially faced significant opposition from the US, Israel and Saudi Arabia on this deal points to the fact that nuclear power is more than just another method of electricity generation. 
 
As the New York Times pointed out, the Iranian uranium enrichment programme represents "the same industrial process, using centrifuges, [that] can be used to produce materials for nuclear weapons." Unlike many technologies, nuclear energy is not one that producer-nations are always willing to export without reservation.

Iran

Iran's controversial Russian-assisted nuclear programme highlights the difficulties 
that often face would-be exporters of atomic energy technology. Photo: Majid Saeedi \ Getty

In the end, both the Tepco and Areva cases are bearish on nuclear, even given the divergent stock price trends. In the first case, the utility's recent surge comes down to the fact that the Japanese government is finally willing to re-ignite its crippled-since-2011 reactors as part of a far broader effort to boost Japan's floundering economy.
 
In the second, a once-mighty nuclear power is struggling to deliver on existing commitments in the middle of a long-term national wind-down that will see the sector's output drop by 33% over the next 11 years.

Finally, even though China, India, Russia and South Korea appear to be where the action is, nuclear energy-wise, even these growth stories represent the portioning of a shrinking pie. Perhaps, like radio, gasoline engines, and (hopefully) nuclear war, atomic energy will ultimately prove a 20th-century phenomenon.

Michael McKenna is a consulting editor at TradingFloor.com, Saxo Bank's online social trading platform.
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