Dovetailing with societies’ needs for clean baseload power to complement variable renewable sources of electricity, nuclear energy has seen a shift in attitudes to embrace it.
The introduction of pro-nuclear government policies alongside this underpins an incredibly appealing outlook for the nuclear sector’s structural recovery, which is still only in its early stages. Furthermore, with related equities caught-up in broader recessionary sentiment, it appears an opportune time to invest.
Nuclear power has now been included in most ‘green’ policy frameworks encouraging wider use. In the US, currently the largest nuclear power market, zero emission credits and nuclear deployment incentives are now available to utilities under the Inflation Reduction Act, aimed at reducing US emissions by 40% within this decade. This builds on the Civil Nuclear Credit Program and legislation to fund a strategic fuel inventory.
Similarly, nuclear power has been included in the EU taxonomy to improve its green credentials. Meanwhile in Japan, recent surveys show popular support to restart the nation’s nuclear fleet and momentum is gathering pace in this regard after completion of more stringent reactor upgrades.
Demand outstripping supply
Crucially, acknowledgment of the ability of reactors to operate safely for significantly longer than initially stated expected operating lifetimes has allowed planned reactor decommissioning to be deferred. Typically adding around 20 years to the operating life, such extensions have instantly boosted fuel demand expectations.
More significantly new reactors require around three times this quantity of fuel for an initial charge and with 59 reactors currently under construction and a further 100 planned, underlying uranium demand is expected to rise by over 50Mlbs (>3% pa) by the end of the decade.
Ambitious roll-out plans in developing nations will sustain momentum beyond this timeframe. Commissioning around eight reactors a year, China is on course to supplant the US as the largest nuclear fuel consumer before 2030, while longer-term plans to build another 150 new domestic reactors by 2035 will see construction accelerate. Standardisation of small modular reactor designs, to reduce upfront reactor build costs, is increasingly appealing and should also accelerate industry growth.
On the supply side, output from the restart of previously mothballed mines has already been absorbed by the market and further greenfield supply will be required to satisfy the widening deficit. As highlighted by Athabasca producer Cameco and developer Nexgen, at least 2-3 more Cigar Lake or Arrow sized and geologically scarce deposits will be required to meet end-of-decade demand. There is mounting pressure to address the future deficit. A further step up in price from current levels will be needed to incentivise this.
In addition, there is a need to insure against supply disruption given highly concentrated fuel production. Notwithstanding potential shocks resulting from operational issues, such as the 2007 Cigar Lake mine flood, the recent energy crisis highlighted an over-reliance on Russia and Kazakh origin fuel by established markets. Akin to OPEC, Kazakhstan and Russia each control over 40% of global uranium mining and enrichment respectively.
While there are no formal sanctions against using fuel sourced from these regions, governments and utilities are increasingly aware of their need to diversify supply. US legislation to establish a strategic reserve is a prime case in point and no wonder given nuclear currently, or soon will do the case of Japan, represents 20-25% of these nation’s electricity.
Alleviating bottlenecks may spur activity
Consideration also needs to be given to other factors that could spur activity. Notably, downstream bottlenecks in the fuel cycle, particularly conversion, in which uranium is converted from a solid ‘yellowcake’ form into a gaseous ‘hexafluoride’ state, are now being addressed.
The ramp-up of facilities in France and the US are crucial to increase capacity of this conversion process step, a necessary precursor to enrichment and then fabrication. Further capacity expansion will be required beyond this.
While China’s plans to add conversion capability remain undisclosed, expansion are under consideration at facilities elsewhere, such as the Westinghouse Springfield conversion plant in the UK.
Such de-bottlenecking will improve utilities’ confidence to purchase fuel and will also introduce greater flexibility to optimise the use of enrichment capacity. Rather than build incremental enrichment capacity, reactor grade fuel could instead be obtained from existing enrichment capacity by processing more uranium for a shorter period of time, a process called ‘overfeeding’.
Doing so would consume more uranium in the form of yellow cake and drive commensurately greater demand for raw uranium. Such de-bottlenecking may also prompt the US Department of Energy to purchase more meaningful stockpiles than its tepid inroads thus far.
Further positive influences include the scheduled return of 20% of France’s nuclear capacity, after a further round of safety system checks is completed later this year, and potential return of Sprott Physical Uranium Trust buying, temporarily stymied by the recent sentiment-led equity derating. With such structural impetus, nuclear’s outlook is bright.
Keith Watson is a portfolio manager on Geiger Counter Ltd. The views expressed above should not be taken as investment advice.