Morningstar Magazine - October/November 2017 - 58

Strategies

Market Underestimates Nuclear's
ESG Benefits
Industry has a key role in improving
utilities' sustainability profiles.

In this article, we will focus on the third point:
The market underestimates the nuclear
power industry's positive ESG attributes. With the
help of Sustainalytics, we will look at the
environmental, social, and governance factors
of nuclear operators.

Environmental
Greenhouse Emissions

INVESTMENT RESEARCH: EQUITY

Travis Miller, Doug Marrow, and Luke Raftis

Nuclear power is at an inflection point in
the United States, with a wide gap developing
between antinuclear and pronuclear
factions. This is a critical debate. The 99 nuclear
units in the U.S. provide 20% of the nation's
electricity and meet essential reliability needs
for major cities. Competition from cheap natural
gas generation and renewable energy are
pinching profits now, but we think a long-term
perspective is important.
Contrary to many forecasts that show nuclear
dying a slow death, we forecast that U.S.
nuclear-generation capacity will remain mostly
flat during the next two decades. In our fair value
estimates and earnings forecasts, we assume
nuclear generation contributes positive value
for the 18 U.S. utilities we cover that own nuclear
generation. We expect some plants to close,
but on average, the U.S. nuclear fleet will remain
economic, continue to operate cost-effectively,
and keep its market share near 17% of U.S.
electricity production.

2 We think the market underestimates the returns

for nuclear uprates. (The U.S. Nuclear
Regulatory Commission restricts the maximum
electricity output a nuclear plant can produce.
Plants can request an "uprate" to exceed
those levels.) Most market forecasts assume
natural gas is the marginal generation source,
but our calculations show nuclear uprates
have similar economic returns and less long-term
capital reinvestment risk.
3 Nuclear has a more favorable environmental,

social, and governance, or ESG, profile than most
other nonrenewable energy sources. Its low
carbon-emissions profile and reliability make it a
critical contributor to meeting state and federal
environmental policy goals.

The electricity sector is the largest emitter of
greenhouse gases, responsible for 29% of total U.S.
carbon emissions, followed by the transportation
(27%) and industrial (21%) sectors.
Political pressure-particularly through
the U.S. Environmental Protection Agency's 2015
Clean Power Plan and the international
Paris Agreement-is pushing utilities to continue
reducing their carbon footprint. Nuclear and
large-scale hydro are the only baseload
generation sources that emit minimal greenhouse
gas emissions, helping meet environmental
requirements for carbon emissions reductions.
Wind and solar are emissions-free, but to
match nuclear as a firm baseload generation
source, wind and solar require expensive battery
backup or standby natural gas generation,
which emits carbon dioxide.

EXHIBIT 1

Low Emissions Nuclear power has a lifecycle carbon emissions profile similar
to renewable energy.
gCO2e/kwh

Carbon Intensity

1,200

1,001
840

We differ from the consensus because of three
main views:

800

469

1 Our forecast for flat or growing U.S. nuclear

capacity is more bullish than most forecasts. In
particular, we disagree with the U.S. Energy
Information Administration's prediction that
nuclear capacity will fall 11% by 2040. We think the
U.S. could add as much as 5% net new nuclear
capacity by 2040.

58

Morningstar October/November 2017

400

4
Hydro

12
Wind

Source: U.S. Department of Energy.

16
Nuclear

18
Biopower

34
Solar

0
Natural Gas

Oil

Gas
Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017
