Nuclear Energy Primer, a Trend too Relevant to Ignore

Welcome to the 96th Pari Passu Newsletter,

Last week, we analyzed the Trinseo restructuring transaction as a way to understand the Double Dip "Pari-Plus" structure. This week, we are moving away from great companies with bad capital structures to learn more about an interesting trend that I think everyone should be somewhat informed on: nuclear energy.

Climate change remains one of humanity’s most pressing challenges, and no industry will be more affected than the energy industry. With growing pressure to find suitable alternatives to fossil fuels, some experts have pointed towards nuclear energy as a potential solution. In today’s newsletter, we will be exploring the economics behind nuclear energy, what makes it so controversial, and some very recent developments that might open the door to more and more opportunities.

But first, a message from Range ETFs

The modern demand for energy is boundless. The more energy we generate, the more we consume—a phenomenon that fuels global prosperity. Energy fuels not only the comforts of modern living, but the essentials. As billions of people move into the middle class, global energy consumption is projected to increase by 44% by 2050. 

Navigating the complexities of decarbonizing requires investors to acknowledge the undeniable reality: nuclear power is an exceptional solution given its clean, safe, and highly efficient baseload power.  

The Range Nuclear Renaissance Index ETF – NUKZ offers an efficient access point to the sector that will power the next industrial revolution in AI.  

Invest boldly. Consider investing in the future of nuclear power.

Overview – History

Founding History

The process of harnessing energy from nuclear reactions was first discovered in the 1930s when scientists were experimenting with the creation of an atomic weapon. The first application of nuclear energy was thus the atomic bomb, invented by the U.S. during the 1940s. It would not be for another two decades in 1958 that nuclear energy was utilized for electricity generation [1].

The first nuclear power plants in the U.S. began operation in 1958. The rest of the world would quickly follow suit with power plant construction, ushering in a “golden age” of nuclear reactor construction. Spurred on by the Yom Kippur War in 1973, which caused oil prices to spike, over half of the world’s nuclear reactors were constructed between 1970 and 1985 [1].

However, investment in nuclear energy and the subsequent construction of power plants would stagnate beginning in the 1990s. This stagnation was in large part due to a series of catastrophic nuclear disasters.

The first of these disasters was the Three Mile Island incident in Pennsylvania in 1979, during which the Three Mile Island reactor experienced a partial meltdown (remember this episode for a key development mentioned later in the write-up). Just seven years later, the infamous Chernobyl catastrophe occurred. Considered the worst nuclear disaster in history, the meltdown of the Chernobyl plant in Kyiv, Ukraine left people around the world frightened by the hazards of nuclear energy. The most recent disaster was the Fukushima accident in Japan in 2011, during which a major earthquake and ensuing tsunami caused the power plant to melt down. Each of these disasters had a considerable impact on the public opinion of nuclear energy, which will be explained further in a section below [1].

Modern Landscape

Currently, there are 439 nuclear reactors in thirty-one countries in service, meeting approximately 10% of the world’s energy demands. As of 2023, there are fifty-seven new reactors in construction worldwide [1].

In the U.S.,  there are fifty-four operating, commercial nuclear power plants in the U.S. for a total of ninety-three operating nuclear reactors, contributing to approximately 20% of the country’s energy supply and nearly 50% of the country’s zero carbon emissions energy supply. The average age of these reactors is an astounding forty-two years [4] [7].

Total net nuclear electricity generation in the U.S. peaked at 102,000 megawatts (MWs) in 2013 and has declined to 94,765 MWs in 2022. As mentioned earlier, electricity generation by nuclear reactors has effectively remained stagnant since the late 1990s. Consequently, the U.S. Energy Information Administration (EIA) projects that total net nuclear electricity generation will decline to about 76,000 MWs by 2040. In the next few sections, we will explore why the outlook for nuclear energy is so grim and what the industry has been doing to change its prospects [7].

Overview – Nuclear Energy

Scientific Foundations

As is the case with most types of energy, our ability to effectively create and harness nuclear energy is heavily dependent on science. Therefore, understanding the science behind nuclear energy is key to understanding the current position of the industry and the challenges that it faces.

Nuclear power plants generate energy through a process known as nuclear fission. A process first discovered by scientists in 1938, nuclear fission is a phenomenon in which an atom of a heavy element, such as uranium, releases a large amount of radiation energy when a neutron is slammed into it at high speeds (apologies for the colloquial terms but I tried to keep it very simple). The reaction is recursive, because the heavy element atom also releases more neutrons upon the initial collision, and these neutrons can be used to activate more fission reactions. The recursive nature of fission is what makes it so powerful, and it is referred to as the nuclear fission chain reaction [2].

Power Plant Classifications

Most nuclear reactors utilize the nuclear fission chain reaction to generate electricity. 

The most common type of nuclear reactor is the light water reactor. The light water reactor heats up a large body of water by activating multiple fission chain reactions. Each reaction releases a small amount of radiation energy, heating up the water to create steam. The steam is then used to move a turbine, generating electricity. The light water reactor is neither very safe nor efficient, but it was simple and cheap, thus resulting in its proliferation [1].

Advanced nuclear reactors are a family of modern-age nuclear reactors that are currently in development. These reactors are improved versions of the light water reactor, with very few refueling cycles and a very high safety pedigree. These reactors are designed to effectively eliminate any risk of catastrophe. Examples include molten salt reactors, high temperature gas reactors, and sodium-cooled fast reactors [4].

The molten salt reactor (MSR) is a particularly intriguing class of reactors. These reactors were first researched and designed in the 1960s, however, research and development stagnated between 1975 and 2010. Recently, there has been renewed interest in MSRs from top countries such as Japan, China, Russia, and the U.S. [6] [8]. 

Functionally, these reactors use a salt fuel, which is nuclear fuel, such as uranium, dissolved with a salt, such as fluoride. The molten salt acts as the primary coolant in the system, such that when the system becomes too high in temperature, the innate characteristics of the salt decrease the efficacy of the nuclear reaction. As a result, molten salt acts as a passive coolant, automatically cooling the reactor without the need for an emergency cooling system. Furthermore, MSRs can run without stopping to refuel. MSRs have a theorized running efficiency of 40-45%, an improvement to the 30% efficiency of light water reactors [6] [8].

Overview – Economics

Cost Economics

Now that we have a general understanding of the history and science behind nuclear reactors, we can examine the basic economics behind constructing and operating a nuclear power plant.

Let’s imagine a scenario where there are two new power plants being built: a new nuclear power plant and a new natural gas power plant. Natural gas is a major competitor to nuclear energy, so comparing the two will provide a good picture of the cost economics of nuclear energy.

Nuclear power plants cost approximately $5,500-$8,100 per kilowatt (KW) to construct, with an average construction time of about six years. Natural gas power plants cost approximately $920 per kilowatt, with an average construction time of about two years. However, nuclear fuel is much cheaper, with one uranium fuel pellet containing as much energy potential as half a ton of natural gas. Do note that we were unable to find accurate information comparing the specific prices of a fuel pellet and natural gas, primarily due to the use of different units of measurement and variance of energy prices [3].

Assuming a 1000 MW nuclear reactor at $6,000 per KW and a 1000 MW natural gas power plant at $1000 per KW gives us the cost estimates for each power plant: $6bn for the nuclear plant and $1bn for the natural gas plant. Let’s also assume that each plant will borrow money in increments of $1bn at a constant interest rate of 3% for twenty-five years, for an annual payment of $56.7mm. Lastly, let’s assume that each plant earns the same net income of $525mm per year during operation [3].

Our model begins with each plant borrowing $1bn, and each plant incurring an interest payment of $56.7mm. By the second year, the natural gas plant incurs two sets of interest payments, but construction of the plant has concluded. The nuclear power plant, on the other hand, is now at three sets of interest payments, one for each year of the first loan, and one for the first year of the second loan. By the sixth year, the nuclear plant has finally finished construction. It owes twenty-one sets of interest payments, while the natural gas plant is in its fourth year of operation [3].

This is where the high-profit margins of the nuclear power plant come into play. Based on our assumptions, the nuclear plant earns nearly seven times more profit annually than the natural gas plant, thanks to lower maintenance and fuel costs. By the sixteenth year, the nuclear plant has finally completed its loan payments and begun generating profits, and it surpasses the natural gas plant in total profit by year seventeen [3].

Although this model is highly unrealistic with a set of very specific assumptions, it does well in representing the key features of the nuclear business. Nuclear power plants are much more expensive to construct relative to their counterparts but carry much lower operating costs. These plants function as long-term investments, with their gains taking many more years to be realized. As a result, governments and corporations are reluctant to take a gamble on such a long-term project when alternatives like natural gas plants can quickly be erected and begin generating profit [3].

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