Morningstar - Q3 2023 - 16

Dispatches
How to Invest
in Nuclear Power's
Renaissance
The evolution of
sustainable investing
has led to a rethinking
of nuclear energy.
200
183
Adam Fleck
SUSTAINABILITY MATTERS
50
100
150
8
Jan 1999-
Oct 2004
141
Nuclear energy has been a hotly debated topic
in sustainable-investing circles for decades.
Nuclear power emits zero carbon, but challenges
with waste disposal, occupational safety, and
high-profile accidents have led to immense
backlash. For many sustainable investors, nuclear
has been an easy " no " when building a portfolio.
Portlio Condition
But opinions can change. As carbon has become
the primary focus in efforts to stem climate
Retained
Liquidated
32
Nov 2004-
July 2010
change, a reassessment of the role of nuclear as
a baseload power source-alongside the
more volatile wind and solar clean energy-
has led to a series of recent about-faces.
In 2022, Europe included the energy source as part
of its sustainable-investment taxonomy,
recognizing its role as a transition fuel to a fully
renewable power grid. Japan also confirmed
last year that it would restart its nuclear fleet after
seeing rising carbon emissions and power prices
since the 2011 Fukushima Daiichi nuclear accident.
Last year, California reversed its plan to close
its last nuclear plant, Diablo Canyon, and will now
keep the plant running at least through 2030
owing to slower-than-expected renewable energy
development. And in the investing sphere,
sustainability-focused investor Parnassus voted
to drop nuclear from its list of exclusions.
183
177
Tax
Benefit
Equity
Returns
52
24
Annualized Aftertax Improvement % (Basis Points)
50
100
EXHIBIT 1
Asia Leading Nuclear Rebound Nuclear energy supply is predicted to grow rapidly
in Asia while remaining relatively flat in other regions.
5,000
North America
3,000
4,000
2,000
1,000
2010
2020
Source: International Energy Agency. Data as of Oct. 27, 2022.
2030
2050
Asia-Pacific
Europe
Eurasia
Central and
South America
Middle East
Africa
Nuclear Power's Growth Set to Rebound,
Led by Asia
Nuclear power capacity has remained stagnant
over the past decade. Total global nuclear
generation supply flatlined from 2010 through
2021, despite total energy growing at
about 2.5% annually, on average, according to
the International Energy Agency. This led
Aug 2010-
May 2016
Jun 2016-
May 2022
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150
200
189
This growth isn't likely to be spread equally,
however. More than 90% of new worldwide
nuclear power capacity will come from
Asia through 2030, with 7% annual average growth,
the IEA predicts ( EXHIBIT 1 ). This increase
is substantially higher than the 1.7% compound
annual growth rate in the region over the
past decade and is expected to be led by China
(roughly 5% annual growth), India (about
13% yearly gains), and Japan (14.5% per year).
Conversely, nuclear supply in both the
United States and Europe is likely to be flat
or to slightly decline.
How to Invest in Nuclear Energy
Several companies covered by Morningstar equity
analysts are worth keeping on your watchlist
to gain exposure to renewed nuclear growth.
Perhaps not surprisingly, given the decades of low
investment, U.S. utilities don't have tremendous
exposure to nuclear electricity. Using product
involvement data from Morningstar Sustainalytics,
we can see that the largest production
exposure instead stems from international players,
particularly in Asia and Europe ( EXHIBIT 2 ).
This includes China General Nuclear Power
01816:HK and EDF EDF:FR, the largest power
producer in France. (The U.S. firm with the
largest contribution is Constellation Energy CEG,
a spinoff from Exelon EXC, with nearly two
thirds of its generation from nuclear, though it's
not covered by Morningstar.)
Both China General Nuclear and EDF appear
fairly valued, but they're worth keeping
an eye on should market volatility offer a more
sizable margin of safety.
16
Morningstar Q3 2023
to nuclear falling to about 10% of total power
generation from 13%.
However, this is set to change, particularly in
emerging markets. Even the IEA's most
conservative scenario (which accounts for only
stated policies rather than realized net-zero
emissions) projects nuclear power growing
at a compound rate of about 2% to 2030 as rising
demand for electricity is met with a further
focus on reducing carbon emissions.
Nuclear Power Supply (Terawatt-Hours)
Average Annualized Tax Benefit and
Equity Returns, Scaled at 100
https://www.morningstar.com/stocks/xhkg/01816/quote https://www.morningstar.com/stocks/xhkg/01816/quote https://www.morningstar.com/stocks/xnas/ceg/quote https://www.morningstar.com/stocks/xnas/exc/quote
Morningstar - Q3 2023

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