World leaders are currently gathered at the COP28 summit in Dubai to discuss and improve on measures agreed in previous COP conferences. Of particular importance to us is the commitment made by 118 countries to aim for a threefold increase in the global capacity of renewable energy generation, targeting at least 11,000GW by 2030. Bloomberg New Energy Finance (BNEF) suggests that this ambition would require more than a doubling of annual investments from 2024 to 2030, amounting to a staggering USD 9.4 trillion, which is approximately 10% of the global GDP of 2022. Additionally, BNEF projects that 96% of this investment will be channelled into wind and solar energy, requiring a quadrupling of their combined capacity compared to last year's levels. Obviously, this pledge is not an agreement written in stone, but at a time when many investors question the future of offshore wind and expect limited growth in utility scale solar in western markets, we believe this is a good reminder of the wall of capital about to hit these industries.
Another interesting development, one that probably caught more people’s attention in Sweden, was an ambitious plan among 22 countries, of which Sweden was one of five from western Europe, stating the importance of nuclear energy in achieving global net-zero, and declaring to work for a tripling of nuclear energy capacity by 2050. No doubt an ambitious goal, but it deserves some closer scrutiny and is an opportunity to review the risks and opportunities of nuclear newbuilds for the Coeli Renewable Opportunities fund.
Currently, the world is home to approximately 445 nuclear reactors, collectively generating around 400GW of electricity. The average nuclear reactor has been operational for about 36 years, with some even surpassing the 60-year mark.
Focusing on the future, tripling the global capacity would take us to 1,200 GW by 2050, nearly 9,000 Terawatt hours (TWh) a year at 85% utilization, i.e. almost three times the EU’s current annual electricity consumption. However, what matter is global consumption and its expected total in 2050. According to ThunderSaid Energy, an energy consultancy, the world will consume about 120,000TWh of usable energy in 2050, which means that nuclear energy, if it hits these targets, would account for about 7.5% of total energy supply. This is significant and it would help the decarbonization journey, however it is a journey clearly led by renewable energy.
In any case, nuclear will be an interesting investment opportunity, one that has been on our radar for a while. However, it warrants a cautious approach. The journey towards nuclear development has historically been fraught with financial risks, as evidenced by several stalled or over-budget projects in the Western world.
The Vogtle project in the US, originally budgeted at USD 6.1 billion for a 2016 startup, has been plagued by delays and cost overruns, now expected to be finalized in 2024 with a ballooned budget well in excess of USD 30 billion. Similarly, the UK's Hinkley Point C, the first new British nuclear reactor in over three decades, has encountered its share of hurdles. Starting in 2012 with an estimated cost of GBP 16 billion, its latest completion timeline has been pushed to 2027, with costs likely reaching GBP 33 billion. Few would be surprised if the total cost ends even higher.
Lastly, France's EDF Flamanville EPR project and Finland's OL3 project were both more than a decade delayed and saw costs four and three times higher respectively than in the original budget. Building nuclear plants in the west have plainly been a high-risk activity for everyone involved over the last 20 years.
Advocates of nuclear energy however point to a number of different reasons why each project failed and that countries like South Korea do in fact manage to construct power plants on time and on budget. Why should not the west be able to do the same? Maybe it will with time, but historical evidence points squarely in one direction for now. We do hope this will change.
Digging a little bit deeper, an interesting new development is the advent of Small Modular Reactors (SMRs). Many experts claim they will be less expensive as the modules can be manufactured in factories where learning curves will be steeper. It certainly seems reasonable that the reactor pressure vessel could become cheaper over time if many identical units were produced.
However, a 2018 study by the Massachusetts Institute of Technology (MIT) sheds light on a critical aspect: the nuclear island, comprising the reactor pressure vessel, piping, steam generator etc, accounts for merely 13% of a nuclear power plant's capital cost (AP1000 reactor). The bulk of the expenses are tied up in the yard, cooling, and installation work. This could imply that a shift to numerous smaller reactors might inadvertently hike overall costs due to the proliferation of facilities and more yard work. See below for MIT’s overview of common reactor designs and costs breakdown.
Source: The Future of Nuclear Energy in a Carbon-Constrained World – MIT 2018
SMRs will surely have their share of teething problems but hopefully the standardized module design can over time also streamline the more important yard, cooling, and installation work.
While nuclear power undoubtedly offers a carbon free energy solution, the high stakes involved in nuclear projects call for a thoughtful approach. Beyond the financial implications, the spectre of nuclear accidents, like the infamous Chernobyl disaster of 1986 and the Fukushima Daiichi crisis of 2011, looms large, highlighting the potential hazards of this technology. Newer designs with better passive safety systems are showing promise, though.
Moreover, nuclear power remains a polarizing issue, with critics pointing to its high costs, safety concerns, and the unresolved dilemma of radioactive waste disposal. In contrast, renewable energy presents a safer alternative with better track record of cost reductions along with more straightforward financing options.
However, the prospect of developing nuclear energy in colder countries like Sweden could be rational. In these regions, nuclear power can provide a stable, reliable source of energy to cope with the high energy demands during long, cold winters. This is particularly relevant when renewable sources like solar and wind may at times be less reliable or efficient due to weather conditions. Additionally, the geographical stability, the public support, and the advanced technological infrastructure of countries like Sweden could mitigate some of the safety and logistical concerns associated with nuclear energy.
While we are optimistic about nuclear energy being part of the carbon-free energy mix and hope that it will be feasible to construct nuclear plants in Europe on time and within budget, the historical evidence suggests caution. As investors, we plan to observe these developments with keen interest from the sidelines, at least in the initial stages.