Analyzing Zero-Carbon Goals, Power Infrastructure, The Role Of Nuclear Energy, And How To Invest In Uranium

Summary

• We'll discuss the carbon neutrality targets of the UK, Europe 27, and the US.
• For the carbon neutrality targets, we discuss the current progress, the electrical grid, and the electrical storage required to meet those goals.
• The carbon neutrality targets are not only attainable with stable base loads and nuclear energy is the best option for developed and especially emerging countries.
• The rise of nuclear energy offers investors a unique opportunity to invest in uranium to profit from the upcoming 10-year uranium bull market.
• Lastly, we'll talk about how to invest in the nuclear energy market, especially the uranium market as this is the most important factor.

Photo by ilbusca/E+ via Getty Images

Developed countries are phasing out fossil fuels for energy generation and implementing laws, policies, and plans to prepare for the green-energy era.

The goal of the Paris Climate Agreement is to reduce greenhouse gas emissions (GHG) to become climate neutral by 2050.

The goals and current progress look sobering. Even developed countries have to step up their game dramatically to reach the goal of zero-carbon by 2050.

We have to differentiate between developed countries and emerging countries. Emerging countries are in the process of developing their industry and rely on fossil fuels for energy generation. The transition to renewables has a different priority for them. Nuclear energy, in addition to their energy mix, is their next step.

(If you're just interested in the uranium supply part, please scroll down).

Thesis

The green energy revolution, reduction of coal and other fossil-based fuels, and expansion of renewable energies provide investors with a unique opportunity to invest in nuclear energy.

Nuclear energy is a (nearly) carbon-free source of energy that is perfectly suited for constant baseloads. There is currently no widely available carbon-free alternative to Nuclear Energy when it comes to constant baseloads.

Developed countries are expanding their reactors' capacity while emerging countries are increasing the number of their Nuclear Power plants.

This increases global demand for uranium. But as we are just coming out of a 10-year uranium bear market, inventories and the secondary market have dried up and demand will soon exceed supply, which will lead us to a new uranium super-cycle.

At the end of this article, we'll discuss how investors can profit from this uranium super-cycle by looking at miners like Cameco (CCJ) and NexGen (NXE), ETFs like URA and URNM, and uranium investment managers like OTCPK:URPTF and OTCQX:YLLXF.

Summary

We will look in more detail at the net-zero targets of Europe, the US, and the UK and use those as references for other developed countries.

We will then look at the required investments into grid infrastructure, energy storage, and the role of nuclear energy.

Renewable energy requires a decentralized grid infrastructure, and our current systems are not prepared for this. In many reports, energy storage for renewable energies is discussed as if current solutions are realistic, but they're not. Energy storage is mostly uneconomical for renewable energy, and we'll look into what that means.

Uranium and its mining have been in a bear market for 8 years, but with India and China at the forefront of building new nuclear power plants, demand for uranium increases.

The carbon neutrality targets are attainable with stable base loads, and nuclear energy is the best option for many countries in this respect.

Lastly, we'll talk about how to invest in the nuclear energy market, especially the uranium market, as this is the most important factor.

Zero-Carbon Targets by 2050 - Progress

Ember released a paper in which they discuss the policy-making decisions of the UK and EU and compare those to the US target for zero-carbon electricity systems.

The consensus is to reduce carbon intensity to nearly 0 gCO2/kWh.

Source: Ember Research

Coal's weighting in the energy mix differs dramatically in the three states mentioned.

Coal power in the UK makes up only 1.43% of energy production in 2020/21.

Source: ofgem.gov.uk

The total share of renewable energy in the production mix in the UK is now nearly equal to the largest supplier of energy gas. Nuclear energy's share of energy production will remain 10-20% over the next 30 years. The goal in 2050 is to reduce nuclear share more to the 10% range.

In the EU27, coal plays an important role. Poland is highly reliant on coal as they have one of the largest reserves of coal in the world. Germany plans to phase out coal from its energy supply by 2038.

Germany has a weird history with nuclear energy, which leads to its higher dependence on coal. Nuclear energy was in an unfavorable spot for the German population beginning in 1980. The nuclear catastrophe in Fukushima leads to the immediate shutdown of several nuclear power plants, with the phase-out of the rest of the plants by 2022.

Source: ECIU’s net-zero tracker

The table above shows the countries and a phase-out date for the coal portion of their energy production.

We're nowhere near the level of progress required

To reach the goal of ~80% renewable energy as part of the energy production mix by 2050, all countries are nowhere near the required rate of change as they would need to.

Below you see the annual growth of wind & solar capacity in the US, UK, and EU27 and the required rate of growth going forward from 2020 to reach their goal.

Source: Ember Research

The International Renewable Energy Agency (IRENA) estimates that at least $131 trillion is needed to reach carbon neutrality in 2050. Even developed countries have a hard time reaching their goals, so emerging countries will have a harder time to transition.

Developed countries and emerging countries handle their phase-out from coal-powered energy production differently. It would be hypocritical of us living in developed countries to expect emerging countries to stop using coal as means of energy production; thus, create wealth for their population.

China is a good example that the goals that developed countries set for their coal phase-out are not directly applicable to emerging countries as their dependence on fossil fuel is high.

China plans to reach peak coal use by 2025 and then reduce coal's share in their energy production. Cheap energy is a means to foster wealth in an economy. There is a linear relationship between the wealth of a nation and its energy generation.

Some papers discuss the degree of pollution in relation to per capita GDP. In this paper, the researchers determine an inverted U-shaped relationship between economic growth and environmental impact.

Required updates to the electrical grid

Building and deploying renewables like solar and wind comes with a required update to the power grid.

Renewables nature is decentralized as wind parks, and solar panels have their geographical limitations. Our grid infrastructure was built for a centralized system where one large power plant provides energy for a city or general area. A one-way system.

With renewables, our grid infrastructure has to work two-way. Solar panels on the roofs of people's homes, smart charging cars, wind turbines, battery storage systems, and much more are all interconnected in the future.

These updates require intelligent systems to handle the load and transfer the energy where it's needed when it's needed.

Electrical Storage

The plan sounds quite easy to add batteries or some other form of battery storage to the grid to provide the required base load when the sun and wind are not generating enough electricity.

The problem here is that most storage systems are economically not justifiable, geographically limited, or inefficient.

Currently, the only economically and environmentally justifiable energy storage system used in combination with renewables is pumped hydro storage.

Source: windeurope.org

So the best environmental and economical solution to maintain a stable baseload is pumped hydro storages wherever possible and nuclear for the other cases.

Nuclear Energy's Role

Nuclear energy has a bad connotation, especially after 2011 with the nuclear catastrophe in Fukushima. But nuclear energy is actually an emission-free energy-producing technology, so it goes well with carbon-free targets set in the Paris agreement.

There are clear benefits to nuclear energy like:

• carbon-free generation of energy
• extremely high-density
• 100+ years of ground supply
• low operating costs
• Great for continuous load electric power

On the other side, arguments against nuclear are:

• risk of melt-down
• Waste management problem - still no final waste disposal
• No one wants a nuclear power plant in their proximity

Nuclear energy is the best option to reach the zero-carbon targets. We're seeing how the US is extending the lives of their reactors by decades. Japan is approving licenses beyond 40-years to refurbished nuclear power plants.

Many other developed countries are on a similar trajectory, keeping nuclear power generations in 10-20% of total energy production.

Emerging countries, especially China and India, are expanding the share of nuclear energy in their energy mix.

China operates 50 reactors, building 19, planning to build 37, and proposed plans to build 168 reactors more.

India operates 23 reactors, building 6, planning to build 14, and proposed plans to build 28 reactors more.

When we compare this to the US, it operates 93 reactors, building 2, planning to build 3, and proposed plans to build 18 more. The US is mostly replacing nuclear power plants that are retiring.

Nuclear energy plays a critical role in developed as well as in emerging countries. Emerging countries like China and India are expanding their number of nuclear power plants. In contrast, developed countries like the US, Japan, Finland, and many others keep the number of facilities steady with new power plants replacing the retiring ones.

Nuclear Energy safety concerns

We all know the nuclear catastrophes in Chernobyl and Fukushima and their tragic consequences for the people and the environment. These tragic instances in the history of nuclear energy are painting the picture in our heads.

Humans tend to think in dimensions that are easier to comprehend. That means if we compare nuclear energy generation against the burning of coal or other fossil fuels, our "gut" tends to choose the latter.

The reason is easy. Burning something is more approachable than handling something radioactive that can kill you just by being close. The fear of the unknown intensifies with nuclear energy.

But burning fossil fuels to generate electricity has severe long-term consequences for our health, the environment, and all other living and non-living beings. These impacts are much more severe but just not as impactful or visible as a nuclear catastrophe of which we had 2 over the span of half a century.

At the same time, fossil fuels impact our environment severely, from mining to burning them. Countless research papers are showing the "non-visible" impacts of fossil fuels on humans and the environment.

South Korea is the only OECD country with more than 1000 deaths per million per year, contributing to the severe air pollution in the country. I've been in Seoul, and on some days when the air indicator is purple (a level above red!), the air is not breathable anymore. At the orange or red indicator, outdoor sports events are canceled and rescheduled.

Here, we have an example where fossil fuel burning has a large-scale effect on cities that are larger than the destroyed areas after nuclear disasters.

After experiencing the situation in Seoul and hearing from friends that visited industrial cities in China how severely fossil fuel energy production is impacting people's lives, I'd rather have a nuclear power plant based on modern safety standards than a coal-burning power plant in my neighborhood.

Source: waqu.info - shows a map with air pollution indicators

Nuclear reactors are becoming safer with each new generation deployed. The technology behind makes the reactors standardized, compact, and, with the fourth generation of reactors, modular.

Deploying new nuclear power plants is a less risky solution than powering up new coal-fired power plants.

Emerging countries switch to nuclear

I mentioned the number of new nuclear reactors in India and China before. With the information about South Korea and air pollution in industrial cities in India and China, the motivation of emerging countries to switch to nuclear energy is high.

The air pollution in industrialized cities is literally killing people. Slowly, but steadily. It makes life in cities unbearable while simultaneously most jobs are in those industrialized cities.

The government in India and China are highly incentivized to add nuclear energy to their energy mix.

Source: EIA

Source: EIA

In both countries, coal is the dominant source of energy. But going forward and with many new reactors under construction and planned, the share of nuclear energy is growing and winning in importance.

The transition to renewable without nuclear is a dream

Transitioning to renewable energies with the current state of our power grids designed towards a central system is more than foolish.

Examples of reactor shutdowns

The best example of a state living this dream is California. California shut down 3 of its nuclear plants. They are in the process of decommissioning. Many research plants were shut down and are now decommissioned.

California has two remaining plants with three reactor cores providing energy. One of those is planned to be shut down in the new future.

At the same time, California is (became) the largest energy importer of all US states. These imported energies are mostly fossil-fuel generated, so in the end, the carbon footprint is even worse than if the nuclear power plants would've been kept on.

Another example is Germany. After the nuclear disaster in Fukushima in 2011, Germany quickly shut down most of its nuclear plants. As a result, Germany's grid got unbalanced and had to add 10.7 GW of coal-fired plants to the system to maintain the balance in the electrical grid. That happened despite Germany's electrical grid being the most advanced one in the world.

It's a time and politics game. As the tenure of a politician is only ~4 years, they need to win voters in the short term. Promising to shut down nuclear plants sounds good and wins voters. But they are just shutting down a good solution, relocating the source of the problem, and making things worse for their state and the environment in the long term. The politician who promised those things will be long out of tenure when the problems of their political campaign arise.

The transition to renewable energies is definitely possible, but we require stable baseloads to provide energy to our cities and industries. With the current state of energy storage technologies, our grid infrastructure, and renewable energies, an immediate shutdown of nuclear power plants is economically worse than keeping them on or even adding new nuclear power plants to the mixture.

Nuclear Energy - Uranium Supply

With all the new reactors currently in construction and the extended lives of current reactors, demand for uranium won't decrease. I made a back-of-the-envelope calculation with 443 currently operating reactors and 10 new reactors per year in addition. That's a 2.5% increase in reactors per year.

That's not all. Before adding new reactors, old reactors' capacity is increased. The IEA's 'Stated Policies Scenario' estimates that the existing nuclear reactor's capacity will be increased by 15% from 2019 to 2040. That's an annual growth of 2% for the projected period.

In sum, we have 2.5% growth from reactor expansion and 2% from capacity expansion, making a total growth of 4.5% annually for the next 20 years.

Source: Chart by Author, Data from World-nuclear.org

The difference between production and demand comes from secondary sources.

Cameco, the second-largest uranium producer globally, has one of the largest ground supplies of uranium in Cider Lake. Cameco reduced production for a few years. During Covid, Cameco shut down production completely, bought uranium off the secondary market, and sold uranium with their long-term contract at higher prices.

Source: World-Nuclear.org

The graph above shows the divergence between global uranium requirement and supply.

We will soon reach a bottleneck between supply and demand. Production of uranium from mines has to be restarted again.

In fact, Cameco just recently restarted production in its Cigar Lake!

How to invest in the uranium market

After reading the analysis above (or not, maybe you knew most of it already), we know that with the green energy revolution, global carbon taxes, and the move to carbon-free power sources, uranium is in a great spot to act as an intermediary until a fully renewable energy deployment.

There are a few companies and ETFs that I'm interested in.

URNM and URA are exchange-traded funds focused on companies that operate mainly in the uranium sector. Their largest 5 holdings comprise Kazatomprom, Cameco (CCJ), NexGen Energy Ltd (NXE), Denison Mines Corp (DNN), and Energy Fuels Inc (UUUU). These 5 holdings make up 57.05% of the total ETF.

They are well-diversified funds with companies that I would also invest directly in. Investing in Kazatomprom is quite difficult, so if you'd like to invest in the largest uranium mining company in the world, this ETF is for you. URA is a bit larger, while URNM has a bit more focus on uranium.

NexGen Energy (NXE) is an exploration and development stage company with an interesting asset in Canada. In the picture below, you see the after-tax cash flow profile of NexGen when they start producing uranium from their mines.

Source: NextGen Investor Slides

PEA means Preliminary Economic Assessment. PEA is the basis for further exploration in the mines to determine potential profits from the mine.

PFS means Prefeasibility Study and normally follows a PEA. PFS is a more advanced study of the mining area and determines the mine's operating costs and potential profits.

The studies show high-grade uranium reserves in the mine, and considering the size of the reserves, this would make Rook I one of the largest uranium mines in the world.

Source: NexGen Investor Slides

The sensitivity analysis of NexGen shows the profit potential of the mine at different uranium spot prices.

One of the riskier bets, but with a current market cap of $2.19 billion, the value of this mine/company will increase as the uranium price increases. Contrary to many other companies, NexGen is not bound by long-term uranium contracts that set the price for a pound of uranium.

It takes 5-6 years until the mine can go into production. If you have a long-term investment horizon, like to mirror the uranium price, and have an affinity for risk, NextGen is a good play.

Cameco (CCJ) is one of the largest and most established uranium mining companies in the world. Cameco owns Cigar Lake, which is one of the largest uranium mines in the world.

Cameco is definitely one of the safer bets with limited upside potential. They have long-term contracts that limit their upside potential when the uranium price improves.

Source: Cameco Annual Report

Cameco knows how to play the uranium game, and they think long-term. They have large uranium reserves and their mines life range between 10-30 years.

If you're bullish on uranium and have a long-term outlook >10 years but a lower risk threshold, then Cameco is a good pick.

Uranium Participation Group (OTCPK:URPTF) is mainly a uranium investment manager. It buys and sells uranium; thus, its market NAV should closely match the uranium price on the market.

As is always the case, their share price can fluctuate around their NAV and, at the time of writing, is trading above NAV. The entry into URPTF is important as an investor doesn't want to invest when NAV is above the share price.

Keep your eyes open and wait for URPTFs share price to balance against its NAV.

Yellow Cake plc (OTCQX:YLLXF) is a purchaser and holder of uranium and allows investors near direct exposure to the uranium price. It's very similar to URPTF, and investors should look at both these companies and their stock price vs. NAVs and consider an entry into the uranium market.

Conclusion

Developed countries need to seriously start investing in renewable energy to reach their carbon-free goals. For investors, there are plenty of opportunities to let idle sitting capital go to work.

Nuclear energy's role in the carbon-free future is important and one of the best alternatives to any existing technology we have now.

Investors have a few options to join the uranium game and profit from the next 10-year uranium bull market.

Investing in this market has to be done with a long-term investment horizon as capacities are slowly expanded and planned.

I always welcome constructive criticism and open discussions. Please feel free to comment or message me about my calculations and/or sources that I use in my articles.

Disclosure: I am/we are long CCJ, NXE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.