The nuclear moment
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Nuclear energy has had an image problem in popular culture since 1962, when the eponymous villain in the first James Bond film Dr No used a reactor to power his radio transmitter for disrupting US rocket launches. A cloud of public concern over the association between nuclear power and nuclear weapons, swelled by the accidents at Three Mile Island, Chernobyl and Fukushima, has hung over the industry for as long as it has existed, and is still overshadowing energy policy in many countries. Germany plans to shut down all its nuclear plants by the end of next year. Belgium has a plan to follow suit by 2025. In the US, two reactors at the Indian Point nuclear plant were closed down before their operating licences expired.
But as gas, coal and power prices have surged as a result of a rebound in demand while supply is faltering, and several countries have suffered weather-related weakness in wind and hydro power generation, the case for new sources of firm power with zero emissions has risen up the political agenda.
President Emmanuel Macron, launching his France 2030 investment plan last week, put small modular reactors (SMRs) at the forefront of his agenda, saying energy was “the first issue” that had to be addressed, and highlighting the strength of the French nuclear engineering industry. He also backed the use of nuclear power for electrolysers to produce “pink hydrogen”.
In the UK, prime minister Boris Johnson this week launched his government’s net zero strategy. It includes a commitment to secure a final investment decision for a new large-scale nuclear plant by 2024, and a new £120 million fund for “retaining options” future nuclear technologies including SMRs on a number of potential sites. Johnson wrote in the foreword to the plan: “With most of our electricity coming from the wind farms of the North Sea or state-of-the-art British nuclear reactors we will reduce our vulnerability to sudden price rises caused by fluctuating international fossil fuel markets.”
In the US, negotiations in Congress over climate and infrastructure legislation appeared to have killed President Joe Biden’s proposed Clean Electricity Performance Program, a US$150 billion plan to incentivise electricity suppliers to cut emissions. One part of the decarbonisation strategy that looks set to survive is increased support for nuclear power, which enjoys bipartisan support. The Infrastructure Investment and Jobs bill, which passed in the Senate in August, includes new credits to help keep existing reactors running, and measures to help the development of SMRs with a capacity of less than 300 megawatts, and micro-reactors with a capacity up to 50 MW.
This new enthusiasm for nuclear power makes sense if governments are serious about pursuing their net zero emissions goals. “If net zero is going to happen, then demand for power is going to go through the roof,” says Prakash Sharma, Wood Mackenzie’s head of markets and transitions for the Asia-Pacific region. “And if that happens, solar and wind are not going to be enough.”
Solar and wind still have huge potential to grow, of course. But as they grow, there will be mounting issues associated with land use and grid connections. Variable renewables will also inevitably need to be supported by firm power, and in a net zero-world that leaves just a handful of options: long-duration storage, hydro, geothermal, hydrogen and its derivatives, gas and coal with carbon capture, and nuclear.
Long delays and soaring costs for recent nuclear projects in the US and Europe will make it difficult to secure support for new large-scale plants, although France is considering a construction programme. But SMRs offer the prospect of developing new nuclear capacity at more competitive costs. Recent Wood Mackenzie analysis suggested that the levelised cost of electricity (LCOE) from an SMR in the US, Japan or Europe could be about US$120 per megawatt hour, roughly the same as for coal or gas plants with carbon capture. Those comparisons are based on Wood Mackenzie’s modelled equilibrium gas and coal prices. At a time when gas is much more expensive, as it is today in short-term markets in Europe and for spot LNG in Asia, then new SMRs look as though they could be competitive even against gas-fired plants with no carbon capture.
In the US, Wood Mackenzie’s base case forecast is that nuclear generation will remain steady over the next three decades, with financial support and regulators helping most existing plants to stay open, and new SMRs replacing any that are shut down. But that base case projects that zero-carbon generation will provide about 67% of US electricity in 2035, well short of the Biden administration’s goal that the entire power sector should have net zero emissions by then.
Scaling up deployment of SMRs to the point that they can make a material difference to US power supplies in that timeframe will not be easy, says Brian McIntosh, research director for Wood Mackenzie’s North America Power Service. TerraPower, which aims to have the first new SMR operational in the US, plans to have its first Natrium reactor completed by 2028. But in any realistic scenario for coming even close to net zero for power by 2035, nuclear generation is likely to have to increase.
Nuclear plants that can take more than a decade to build and can have expected working lives of up to 100 years do not tend to fit well with politicians’ typically short-term time horizons. But climate change is a problem that demands a longer-term perspective. There have been false starts before, but conditions for a new wave of investment in nuclear plants may be starting to come together.
The COP26 climate summit in Glasgow, billed by President Biden’s climate envoy John Kerry as “the last best hope for the world to get its act together”, is now just ten days away, and the signs of discord among the key participants have been growing. President Vladimir Putin of Russia will not attend the talks in person, while President Xi Jinping of China has not confirmed whether or not he will go, but is seen as unlikely to make the trip. President Biden’s hopes of setting the US on course for a steep reduction in emissions have been badly dented by his inability to win sufficient support in the Senate for his flagship climate policy, the Clean Electricity Payment Program.
Meanwhile, some of the business sponsors of the event, including the broadcaster Sky, have reportedly complained that the conference was being “mismanaged”.
China’s government has ordered the country’s mines to “produce as much coal as possible” to build up inventories as winter approaches.
Sinopec of China has signed long-term deals to buy 5 million tonnes per year of US LNG from Venture Global, which is developing two export facilities in Louisiana. Frank Harris, Wood Mackenzie’s head of global LNG consulting, commented: “If Chinese buyers are now ready to sign long-term US deals again, it’s hugely significant for US LNG players in terms of supporting development of new capacity.” Earlier this month, Cheniere Energy of the US announced a 13-year contract to sell 0.9 million tonnes per year of LNG to China’s ENN.
India is considering creating strategic reserves of gas and imported coal to help cushion the impact of price shocks, the country’s power minister has said.
Germany’s centre-left SPD, the free-market centrist FDP and the Greens have agreed to start coalition talks that are expected to result in the SPD’s Olaf Scholz becoming the country’s next chancellor. Their joint statement included a plan to bring forward the shutdown of all Germany’s coal-fired power plants from 2038 to 2030, acknowledging that “this requires the massive expansion of renewables and the construction of modern gas-fired power plants in order to meet the rising demand for electricity and energy over the next decade at competitive prices.”
Saudi Arabia’s Public Investment Fund has an interesting idea for redeploying oil industry expertise in other sectors: it has launched a plan for an oil-related theme park, “inspired” by offshore platforms. The “extreme park”, covering 37 acres, will have three hotels, 11 restaurants, and activities including roller coaster rides, bungee jumping and skydiving.
And finally: the latest metal market that is taking off. A craze for tungsten cubes is the new fad among the same online financial crowd that has embraced cryptocurrencies, meme stocks such as GameStop and AMC, and non-fungible tokens. The cubes have been sold as paperweights and “conversation pieces” for many years, but have become suddenly fashionable, apparently thanks to a jokey Twitter post of a fake Bloomberg story warning of a global tungsten shortage. The surge in popularity has meant that some cubes are sold out, although the manufacturer Midwest Tungsten Service has most sizes available, from a $20 one-centimeter cube to a $3,000 four-inch.
The appeal of “this inanimate object that does nothing”, as one Amazon review puts it, is mostly in its weight. Tungsten is one of the densest of all metals, roughly as heavy as gold and almost as heavy as platinum, but much cheaper than either. You can buy a set of equal-sized cubes of tungsten and magnesium, and the tungsten weighs ten times as much. So far the market for ammonium paratungstate, the main traded intermediate material for tungsten, seems not to have been affected by the surge in demand from collectors, and the metal’s sudden fashion status does not look like much of an investment opportunity. But like many of the recent crazes that have swept through the online financial community, it does at least have some comedy value.
Quote of the week
“There was an opportunity, 15 years ago probably, plus or minus, for the oil and gas industry to lean in very heavily into renewables, and to really start the energy transition. That’s when they had a cost of capital advantage, that’s when they had great balance sheets. And that didn’t happen… That was a missed opportunity.” — Chris James, co-founder of the activist fund Engine No. 1, argued in a Ted panel discussion that some oil and gas companies should not diversify into renewables in the face of the rise of electric transport and the pressure to cut emissions. “They have to do something, but every company is going to be different,” he said. The whole session, including some thoughtful debate and an emotional intervention from climate justice activist Lauren MacDonald, is well worth watching.
Chart of the week
This comes from the latest in Wood Mackenzie’s series of briefings on the COP26 climate talks next month, looking at the implications for oil and gas companies. Kavita Jadhav, our research director for the Asia-Pacific region, and Akif Chaudhry, a senior research analyst, set out the key questions in the negotiations, and highlight some areas where COP26 could provide more clarity on the outlook for energy and carbon markets. This chart shows the crucial background: companies are under growing pressure from their investors to set strategies for decarbonisation. The assets under management by investment companies that have signed up to climate initiatives has been growing rapidly.
The Climate Action 100+ group, which engages companies on improving climate change governance, cutting emissions and strengthening climate-related financial disclosures, has more than 615 investors with a total of about $60 trillion under management. The Net Zero Asset Managers Initiative, committed to “supporting investing aligned with net zero emissions by 2050 or sooner”, has 128 signatories with a total of $43 trillion under management. There is some overlap in the membership of the two groups, so you can’t just add the two figures together to get a total. But the members of the Climate Action 100+ group alone now account for more than half of the total global assets under management at the world’s top 500 investment firms in 2020.