We expect Japanese policymakers to announce the long-term energy policy shortly. Among other attributes, the new policy would set the goal for the share of nuclear power in Japan's future energy mix. The decision is likely to have a lasting impact not only on Japanese society, but also on the global nuclear energy market (see more details).
Here are four key points nuclear energy investors should watch for:
- Long-Term Target: Prime Minister Noda's administration is likely to yield to the growing anti-nuclear public sentiment and call for a "zero-nuclear" policy in the future. Yet meeting this target by 2030 might not be realistic given the size of the Japanese nuclear fleet and potential costs for the economy. Therefore the phase-out may be set a slower pace with 2030 target at 15% of the total national energy mix (compared to about 30% before the Fukushima accident) and a goal of complete phase-out at some point further in the future. In our view, the market is already discounting reduced nuclear target for Japan, but zero nuclear policy is not the current consensus view. Depending on the details of the path to "zero-nuclear" policy, nuclear equities might be at risk of further downside correction. Alternatively, any policy decision with the nuclear target above 15% (albeit unlikely) could boost investor confidence and bring an upside support to the battered nuclear energy and uranium stocks.
- Restart of Existing Nuclear Fleet: Adoption of the new energy policy would pave the way for the restart of the existing Japanese nuclear fleet. Now that formation of the new nuclear regulatory commission in Japan seems close to reality, we expect more nuclear power plants to be gradually restarted, beginning with those that have passed stress tests. However, the process is likely to be very slow and highly politicized resulting in most reactors coming back online only in 2013 and 2014.
- Decommissioning Plans: If the reduced nuclear target is adopted, we anticipate that nuclear power plants will be decommissioned in succession as they reach 40 year limits. Following this guideline should reduce Japanese nuclear generating capacity to about 15% of the national energy mix by 2030. However, investors should also watch for signs of early decommissioning plans as a potential negative catalyst for a broad range of companies, from Japanese utilities (TEPCO (TKECF.PK), Kansai Electric (KAEPF.PK), Chugoku (CGKEY.PK), etc.) to companies supplying nuclear fuel to Japanese utilities (Areva(ARVCF.PK), Cameco (CCJ).
- Nuclear Construction Plans: Prior to Fukushima Japan had plans to build a number of additional nuclear plants. While we expect no new nuclear construction in Japan for the foreseeable future, the country currently has 2 reactors under construction (Chugoku's Shimane 3 and J-Power's Ohma project). The fate of these reactors is still unclear, however resumption of the construction (as currently expected by S&P rating service) may be viewed as a gleam of hope for nuclear industry in Japan.
While initial impact of the new Japanese energy policy likely to be negative for nuclear equities (Market Vectors Nuclear Energy ETF (NLR) and Global X Uranium ETF (URA) among those to be affected), it does remove a major element of uncertainty in the industry and ultimately may create a foundation for a returning investor confidence into the nuclear energy sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.