Nuclear Energy: Policy Change Creates Opportunities

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Last month German politicians in a stunning policy reversal revealed that they will shut down all 17 of their nuclear reactors over the next decade. Germany is the largest national economy in Europe and the fourth-largest in the world. Nuclear power accounts for a staggering 23% of the power used in the country – a larger percentage than is used in the U.S. and U.K. (see charts courtesy Financial Times and The Economist).

electricity from nuclear powerPutting aside the cost of decommissioning the existing nuclear plants, it will be a challenge to replace the nuclear energy supply with renewable sources and fossil fuels. Seven of the older nuclear plants have already been shut over the last few months as a safety precaution after Japan’s nuclear accident. Present plans in Germany call for adding more renewable energy options, with a substantial increase in coal and natural gas powered plants.

Keep in mind that as an economy grows electrical consumption increases. Statisticians note that the two are ‘highly correlated’. In China, where the economy is growing at 10% per year electrical consumption is increasing at around the same rate. In the U.S. power consumption this year is 3.1% higher than a year ago level according to the Edison Electric Institute.  

everything in moderationLikewise if Germany’s economy continues to grow they will have additional incremental power needs, over and above the replacement power needed for the power plants being closed. In the face of the high historical correlation between economic growth and electrical energy use the German government stated it planned to cut power use by 10% by 2020 – a difficult task in the best of times, and something that will be almost impossible to accomplish without much higher energy prices or rationing.

The major beneficiaries of this policy decision, in addition to wind and solar power, will be the coal and natural gas sector. Projected growth in generating capacities for each fuel between 2011 and 2020 are in the chart at left (courtesy Financial Times).

atomkraft nein dankeIn response to the political proposal German industry association BDI said the move would push up energy prices and would mean that "the shortfall of nuclear power will have to be compensated by coal and gas power stations."

Late this week French energy companies noted that with seven of Germany’s oldest plants already off line they are seeing pressure on power supplies in France as the worst drought in half a century has cut domestic hydroelectric production. So power issues are already impacting the European grid.

Investment implications

The abandonment of nuclear power by one of the world’s largest economies will create a huge amount of incremental demand for coal and natural gas, adding to the rapid demand growth seen in China and India. To a lesser extent global crude oil demand will also be lifted.

Energy producers – especially natural gas producers in Europe or the North Sea, and global thermal coal producers – should benefit from a substantial increase in incremental demand. Germany's network of natural gas pipelines is dense and well-connected. The majority of natural gas is currently imported from Russia, the Netherlands and the United Kingdom.

Germany’s policy reversal will impact not only Germany, but energy markets in all of Europe and possibly beyond. The political change creates opportunities for investors as resources are reallocated to meet the changing regulatory environment. 

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