Will Investors Go Nuclear?

Power plants can generate carbon-free energy for years to come – but it’s not without risk. 

Transitioning to net zero was never going to be a black and white process. Some of the solutions the world needs to employ – while less harmful to the climate than fossil fuels – come with their own environmental impacts that sustainability-focused investors must consider.  

Nuclear energy currently accounts for 413 gigawatts (GW) of energy capacity across 32 countries, circumventing 1.5 gigatonnes of global emissions and 180 billion cubic metres of global gas demand a year, according to a report by the International Energy Agency (IEA).  

However, due to the expense, long-term investment horizons, and unresolved waste management issues, net zero-focused investors haven’t rushed to invest, preferring to channel capital into upscaling renewable energies like solar and wind.  

The words ‘nuclear energy’ are treated with trepidation; when it goes wrong, it can be catastrophic. We only need to look at the events of Chernobyl in 1986 and Fukushima in 2011 to understand why there is concern. 

But does that mean investors should avoid nuclear energy entirely? 

“The net zero transition is going to be challenging enough without cutting out a major potential contributor like nuclear energy,” says Jeremy Lawson, Chief Economist at asset manager abrdn. 

The IEA’s 2050 roadmap has plotted a path for nuclear energy, noting that current capacity should double to 812 GW by 2050 – the equivalent of a 27 GW annual growth rate in the 2030s. It can be used to address the intermittency of renewables powered by natural elements, the agency argues.  

Policymakers are also more willing to look favourably upon nuclear.  

In April, the UK government published its Energy Security Strategy, which includes plans to grow the country’s nuclear power capacity up to 24 GW by 2050 – catering for 25% of the UK’s projected electricity demand. This is more than double the 10 GW the UK’s Climate Change Committee outlined in its central net zero scenario. 

While the government’s plans for nuclear energy clearly won’t mitigate the impact of the energy crisis in the short term, it will ultimately help to meet the “expected large increase in electricity demand”, says Phil MacDonald, COO of energy think tank Ember.  

However, if the UK government wants to encourage more private-sector investment into the industry, more specific guidance is needed, both on how risks can be minimised and what kinds of investment opportunities there are, experts say. 

There is nothing wrong with having such heady ambitions, but there is a lack of detail on how we are going to achieve them, which needs clarification,” says James D’Ath, Director of ESG at investment research and advisory firm Edison Group. 

Wasted potential 

Despite being emissions-free, nuclear energy is far from a perfect source of power. 

“An investor making a sustainability assessment of nuclear won’t only need to measure the carbon footprint of a prospective investment, but must consider the environmental and social implications across its long lifecycle,” says Lawson.  

One of the biggest environmental risks is nuclear waste. Sealed in huge drums of steel and concrete, these hazardous materials can destroy surrounding animal and plant life and cause cancerous growths or genetic issues for any person exposed. There are currently few – if any – solutions for recycling or safely destroying nuclear waste. 

A 2019 report by a group of independent experts noted that current methods of temporary storage “were not planned for the long term”. 

“These practices represent a growing and particularly high risk, especially when other options are available (solidification, dry storage) in hardened facilities,” the report said. 

However, the International Atomic Energy Agency (IAEA) noted that 95% of existing waste has a low-level of radioactivity, with just 1% of waste considered highly radioactive.  

“While there are understandably concerns around the safety of nuclear energy waste disposal, on the whole, the nuclear industry has a strong handle on it. This isn’t well communicated with the public and investors,” says Luke Sussams, Head of ESG and Sustainable Finance at investment bank Jefferies.   

The UK government has emphasised its commitment to ensuring nuclear waste is handled with care, pointing to its Nuclear Waste Services. Launched in January, the organisation aims to develop a permanent disposal capability for higher-activity UK radioactive wastes and ensure the continued safe management of low-level waste. 

Distant horizon  

If investors do then decide to invest in nuclear power plants, they need to be committed for the long haul. 

“Large nuclear power projects soak up significant upfront costs and still face cost and time overruns,” says Edison’s D’Ath. “This isn’t ideal when looking to achieve the government’s ambitious 2050 target.” 

Originally scheduled to be operational from 2017 at a cost of £18 billion, Hinkley Point C power station in Somerset has been delayed until June 2027. The estimated cost of building the plant has increased to between £25-26 billion. Once live, the power plant will generate power for up to six million homes.  

With five of the UK’s six existing plants scheduled to go offline within the decade, there will be plenty of opportunity to invest in upscaling nuclear energy to reach the 24 GW target. 

“Projects will need to attract the necessary debt and equity funding, with investors needing to be satisfied that government and regulatory support adequately addresses the long-tail construction risks,” says Neil Griffiths-Lambeth, Associate Managing Director of Moody’s Investors Service’s Project and Infrastructure Finance Group.  

Adding to the £2 billion the government has already invested in new nuclear projects, a £120 million Future Nuclear Enabling Fund has been launched to support the development of mature potential nuclear projects across the UK. The grant funding will be awarded following a “competitive process” the government said. It also introduced the Great British Nuclear vehicle, which will support nuclear projects throughout the development process so they are “investment ready”, and facilitate negotiations for future projects.  

The government is also adopting a regulated asset base model (RAB) to improve the risk thresholds for investors looking to funnel capital into new projects. First introduced in the Nuclear Energy (Financing) Bill), the RAB model shares the operating and constructions costs of a project between investors and consumers. The UK has previously adopted this model for constructing and operating water, gas and electricity frameworks.  

“We believe opportunities will come to the market regarding direct investment into nuclear power stations under the RAB model,” Alistair Godrich, Research Analyst at Lazard Asset Management, tells ESG Investor. 

Nuclear through a new lens 

As policymakers incorporate nuclear energy into their net zero strategies, sustainability-focused investors are beginning to re-evaluate their position. 

The EU Parliament’s decision to include gas and nuclear energy in its environmental taxonomy was a controversial one, but lawmakers did set parameters for investors, defining exactly what nuclear-related economic activities will be sustainable – for example, R&D investment in advanced technologies promoting safety and minimal waste.   

Given the UK government’s plans for nuclear energy, experts believe nuclear energy will be included in the country’s equivalent Green Taxonomy, which was originally expected at the beginning of this year.  

This means UK-based investors will have a clearer view as to what areas of nuclear energy they can invest in. 

Greencoat Capital, a subsidiary of asset manager Schroders, is currently considering creating a nuclear investment fund to enable institutional clients to invest in electric utility EDF’s proposed Sizewell C plant in Suffolk and Hinkley Point C in Somerset. 

“It’s not an easy sector to play,” acknowledges Jefferies’ Sussams. “But there are other investment opportunities throughout the nuclear value chain.” 

He points to infrastructure companies such as Balfour Beatty or civil engineering firms that are winning contracts to build the nuclear power plants needed.  

MacDonald cites UK-based companies like First Light Fusion and Tokamak Energy, both of which are researching and developing fusion power – a process which could generate a virtually limitless and renewable supply of energy.   

Investors looking further along the supply chain may consider uranium miners, says Godrich.  

“There’s potential for global demand [for uranium] to grow. Companies like Cameco and Yellow Cake will be fundamental to the future of nuclear,” he says.  

But investors “must ascertain that they are assessing their investments for broader ESG-related risks”, such as whether the uranium mine has a health and safety policy, warns abrdn’s Lawson. 

Future promise  

One of the most exciting developments in the nuclear industry is the emergence of small modular reactors (SMRs), which have a power capacity of up to 300 megawatts (MW) per unit.  

As they are smaller than traditional plants, they can be built and installed in locations not suitable for larger facilities, and at a much faster rate. Further, parts of SMRs can be factory-assembled and transported to a location for installation, making them both less resource-intensive and more cost-effective. 

“SMRs offer the chance for nuclear to follow the path of wind and solar in rapidly iterating and improving efficiency and cost, so will be vital if nuclear is to play a substantial part,” says Ember’s MacDonald.  

In November 2021, the UK government announced it would be investing up to £210 million in an SMR programme run by Rolls Royce SMR, the nuclear energy R&D arm of the car and aeroplane engine manufacturer. 

However, similarly to other sustainable technologies like carbon capture and storage and green hydrogen, SMRs are “still a nascent technology”, says Lawson. 

Ultimately, while there are attractive opportunities in nuclear energy, D’Ath expects many sustainability-focused investors to keep their distance, unless it’s within the framework of an energy transition case. 

“Power shortages and debilitating air pollution are driving the development of clean energy solutions, so any companies with exposure to those markets – such as nuclear power adoption or uranium mining – are worthy of note,” he says.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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