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].
Levelized cost of electricity (LCOE) is a metric that measures the average cost of producing a single unit of electricity for a power plant. It is generally defined as the sum of the costs of energy production divided by the sum of electricity produced over a plant’s lifetime. Nuclear energy, with its high fixed costs, has the highest LCOE, while competitors natural gas and solar energy have some of the lowest LCOEs. While this may seem surprising given the higher profitability compared to other sources, LCOE takes into consideration the total costs required for energy production. Therefore, the high upfront investments required for a nuclear power plant far outweigh the much lower operational costs in the LCOE calculation.
In reference to our hypothetical scenario, it takes until year seventeen for the nuclear plant to surpass the natural gas plan in total profit, indicating that nuclear plants require many years of operation to fully recuperate their high fixed costs and begin outperforming fossil fuel plants. [3].
However, LCOE is an inherently flawed metric to represent the true cost of an energy source. While nuclear energy does have high fixed costs, LCOE does not take into account other important factors when evaluating the efficiency of a power plant. For instance, while wind energy has an LCOE of about half that of nuclear energy, a wind farm would require 140,000 acres of land to generate the same amount of energy as that a 1,000 MW nuclear power plant. That’s 170 times more land for the same energy output. Solar energy is not much better, requiring over 30 times more land to match the energy output of a nuclear power plant. Furthermore, part of the reason why nuclear power plants have such high fixed costs in the U.S. is due to the fact that the Nuclear Regulatory Commission heavily regulates the construction process. Whereas a project might take between six to ten years to complete in the U.S., it could be finished in under five years in countries such as Japan or France [10].
Nevertheless, high fixed costs remain one of nuclear energy’s major flaws. In a later section, we will explore what is being done to combat this challenge.
Competitive Landscape
Within the nuclear landscape, there are three main categories that companies fall into: uranium mining and processing, electricity generation, and research and development.
Uranium mining and processing companies exist at the very beginning of the nuclear chain. These companies are responsible for extracting uranium from the earth and refining it such that it can be used as nuclear fuel. This industry is highly consolidated, consisting of only nine publicly traded companies with a total market capitalization of $29bn. Top companies include Uranium Energy, Energy Fuels, and Centrus Energy. Uranium Energy holds approximately 80% of the market share [9].
The most important part of the nuclear industry is the electricity generation companies. These are the companies that construct and operate nuclear power plants. A majority of top nuclear electricity generation companies are not specialized, meaning they do not solely operate nuclear power plants. Top companies include NextEra Energy and Dominion Energy. NextEra boasts a market capitalization of around $118.7bn, while Dominion sits at $40.2bn [9].
Lastly, nuclear research and development companies act as the innovative arm of the industry, developing new technologies for the other two company types to capitalize on. This arm includes corporations, such as Westinghouse Electric Company, and also institutions, such as the Idaho National Laboratory. Topics of research include advanced reactor technologies, commercial nuclear components, and strategic nuclear materials [9].
Why Nuclear
Despite the challenges that the nuclear industry faces, there are still many factors that make it an attractive energy source for humanity’s future energy demands.
Zero emissions energy source: Nuclear power is the largest source of clean electricity in the United States. It generates nearly 800 billion kilowatt-hours of electricity annually, contributing to over half of the nation’s emissions-free electricity. By relying on nuclear energy, the U.S. can avoid emitting more than 470 million metric tons of carbon each year, which is equivalent to taking 100 million cars off the road. Additionally, nuclear power has prevented the release of fifty gigatons of carbon dioxide equivalent to two years of global carbon emissions [5] [6].
Job creation and economic impact: The nuclear industry supports nearly half a million jobs in the United States. These jobs often come with salaries that are 30% higher than the local average. Additionally, nuclear plants contribute billions of dollars annually to local economies through federal and state tax revenues. Overall, the industry adds an estimated $60 billion to the U.S. gross domestic product each year, which amounts to about 1% of the U.S. GDP [5].
National security and diplomacy: A strong civilian nuclear sector is essential for national security and energy diplomacy. The United States must maintain its global leadership in nuclear technologies to influence their peaceful use. Through collaboration with other countries, the U.S. government can build relationships and create new opportunities for nuclear technologies, ensuring a secure and sustainable energy future [5].
Investments in nuclear energy play a crucial role in meeting decarbonization goals, supporting economic growth, and advancing technological innovation. In the next two sections, we will discuss the future opportunities and challenges that the industry faces.
Contemplating the Future – Opportunities
Tech Investment
One of the most intriguing recent developments in the nuclear space is the trend of tech companies investing in nuclear power capabilities.
Two weeks ago, Microsoft and Constellation Energy agreed to a deal to revive the aforementioned Three Mile Island nuclear plant in Pennsylvania. The project aims to restore Unit 1 of the plant, which was operational until 2019 before being shut down. The plant’s second unit, the site of the meltdown from over four decades ago, will not be restored. Constellation Energy plans to spend some $1.6bn on the revival project, with Microsoft planning to purchase the plant’s energy for a twenty year period [11].
Microsoft isn’t the first big tech company to invest in nuclear power. In March 2024, Amazon’s Amazon Web Services (AWS) acquired Talen Energy’s 960MW Cumulus data center campus in Pennsylvania. What makes this deal interesting is not the purchase of a data center (a growing trend with the rise in demand for cloud computing capabilities), but the fact that the Cumulus center is entirely powered by the neighboring Susquehanna nuclear power station. Talen will continue supplying the AWS site with power from its Susquehanna plant. Both the AWS and Microsoft deals are of a similar theme – they involve a tech company investing in nuclear power for the purposes of its data center operations [13].
The rise in tech investment in nuclear power is representative of two key trends – 1) the growth in demand for data centers, and naturally their supporting services; and 2) the growing influence of the clean energy transition. With the rapid growth of cloud-based services and artificial intelligence, demand for data centers has never been stronger. Naturally, supporting industries, such as data center infrastructure companies and energy providers, are also experiencing growth. This is where the clean energy transition comes into play: with stricter government regulations on fossil fuel consumption, waning global fossil fuel reserves, and the increasing attractiveness of low-carbon energy solutions, these tech companies are opting to use nuclear energy, one of the most efficient sources of low-carbon energy, to power their massive data center operations. In outsourcing operations of these nuclear plants to energy companies, Microsoft, Amazon, and their peers can reap the benefits of nuclear power without needing to expand their operational expertise [11] [12].
The data center boom has presented the nuclear industry with the lucrative opportunity of forming long-lasting partnerships with the world’s most powerful tech companies. As public funding lags behind, private dollars from these tech companies will be vital in expanding the U.S.’s nuclear power capacity and funding technological innovation.
Microreactors
Microreactors are a new type of nuclear technology that act as small scale nuclear reactors. These reactors are designed to produce less than twenty MWs per unit, and are aimed at powering a single hospital, military base, disaster zone, or other compound area. The goal is for microreactors to be mass produced and widely distributed. grid security and resilience because malfunctioning microreactors can be easily swapped out for new ones [4].
A promising prototype is that of the Idaho National Laboratory, known as “Marvel”. Marvel utilizes a sodium-potassium eutectic mixture coolant designed to efficiently remove heat from the reactor core. The fuel of choice is uranium zirconium hydride. This compound was chosen for two primary reasons: 1) it has a very high safety pedigree because when the reactivity of the fuel increases, the reactor automatically powers down due to its innate characteristics; 2) it is more energy dense than uranium. Marvel’s passive cooling system combined with built-in, extensive radiation shielding makes it an extremely safe, self-regulating machine capable of generating nuclear energy [4].
Small Modular Reactors (SMRs)
Another promising nuclear technology aimed at scaling down is small modular reactors (SMRs). SMRs are smaller nuclear reactors that have an electricity production capacity of under 100 MWs. This makes them larger than microreactors, but still significantly smaller than industrial reactors [6].
Unlike microreactors, SMRs are aimed at potentially replacing large-scale industrial power plants. Instead of constructing an entire power plant, which would cost billions in funding, a system of SMRs would be able to generate a few hundred MWs of electricity, enough to power several hundred thousand homes. An SMR array would save billions of dollars and thousands of acres of land compared to an industrial plant [6].
NuScale Power is a company that specializes entirely in SMR technology. They are currently working on a promising 77 MW SMR with the capabilities to self-regulate and automatically and rapidly cool down in case of malfunction. Similar to the Marvel prototype, NuScale’s prototype is extremely safe and does not require human oversight [6].
Large-scale industrial power plants of the past half century are no longer at the forefront of the nuclear industry. With new technologies such as microreactors and SMRs, the name of the game of scaling down. The ultimate goal is a small, highly-reproducible, versatile reactor system that is self-regulating with a very low LCOE.
Contemplating the Future – Challenges
Costs and Logistics
The most pressing concern that the nuclear industry faces is cost. Simply put, nuclear energy is too expensive to produce. The price of constructing an entire nuclear power plant is often too high for corporations to consider. As mentioned earlier, nuclear energy has the highest LCOE among all relevant energy sources. In order to address this issue, the industry will need to depend on government subsidies or invest in smaller-scale, cheaper reactors [3].
Competition
Nuclear energy is also being outcompeted by other forms of energy. Fossil fuels such as coal and natural gas are still much cheaper and easier to source, while renewables such as solar and wind are also cheaper. Furthermore, the deregulation of the U.S. energy markets in the 1990s made it even more difficult for the underdeveloped nuclear energy industry to compete [4].
Public Opinion
The last and arguably most difficult challenge for the industry to overcome is public opinion. The public opinion on nuclear energy is extremely poor in the U.S., with 54% of Americans opposing its use. This negative outlook was likely caused by the series of nuclear accidents beginning with Three Mile Island. Negative portrayals of nuclear meltdowns in entertainment and media, as well as fear surrounding nuclear weapons, added to the harsh public opinion towards nuclear energy [2].
Consequently, anti-nuclear protests and movements have often hindered the development of the nuclear industry. For instance, the last nuclear power plant in California, the Diablo Canyon Power Plant, will close before 2030, in part due to anti-nuclear activists. The shutdown is largely unrelated to plant performance, with the plant accounting for 9% of California’s energy supply while occupying fewer than 600 acres [2].
Fears surrounding the safety of nuclear power plants are also largely baseless. According to a 2020 Our World in Data study, coal, oil, natural gas, and biomass consumption has killed approximately 100mm people in the last fifty years. On the other hand, the NASA Goddard Institute nuclear energy has prevented 1.8mm deaths if the energy was produced by fossil fuels instead. Furthermore, the World Health Organization states that it is safer to work in a nuclear power plant than in an office building due to the pollution one experiences in an urban setting. In fact, nuclear energy accounts for only 0.005% of an American’s yearly radiation dose, equivalent to the radiation from eating one banana [2].
Nuclear Waste
Nuclear waste is produced by all nuclear reactions. Disposing of this waste is another challenge faced by the industry, because it cannot simply be returned to the earth. However, this concern is often overblown by those critical of nuclear energy.
The entirety of the U.S.’s nuclear waste amounts to about a stack of fifty soccer fields. All nuclear waste in the U.S. is encapsulated in specially engineered casks and stored through the deep borehole disposal process, which keeps the casks deep underground and prevents any movement of radioactivity for thousands of years. Furthermore, 96% of nuclear waste can be recycled for new fuel and byproducts [2].
Key Takeaways
The nuclear energy industry is an extremely complicated field and this primer only provides readers with a basic overview. Below are three key takeaways that we want to highlight:
Science-driven industry: The nuclear industry is wholly driven by innovations in science. The industry was initially birthed when the process of nuclear fission was discovered nearly a century ago, and it is on the verge of a renaissance thanks to new innovations in modern science. Its future performance will be heavily dependent on how effectively nuclear research and development can keep up with the energy market.
Scaling down is key: As outlined in the “Contemplating the Future – Opportunities” section, the current theme in the industry is scaling down. In response to the high costs of constructing industrial nuclear plants, companies have been looking towards decreasing the costs of producing nuclear energy by simply making smaller reactors. If successful, small-scale reactors such as microreactors and SMRs could have a major impact on the energy industry.
Public opinion may mislead: The general public view on nuclear energy has been consistently negative for many years. While these fears may have been warranted decades ago, new age nuclear reactors are no longer susceptible to malfunction and have been designed with safety as a top priority. Simply adopting the perspective of the general public may prove to be dangerous at times, as is the case with nuclear energy.
Thanks again to Range ETFs, for sponsoring this edition of Pari Passu.
Sources: [1], [2], [3], [4], [5], [6], [7], [8], [9], [10], [11], [12], [13]
Interested in our updated reading / wellness list? Check it out here.
How did you like this week’s Pari Passu? Loved | Great | Good | Meh | Bad