U.K. Nuclear Games: Keep An Eye On Rolls-Royce

Keith Williams profile picture
Keith Williams
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Summary

  • China’s CGN out of favour in plans about new Sizewell C large nuclear plant; possible UK Government funding back in the mix?
  • Will the Wylfa nuclear project come back to life as an AP1000 site, multiple SMRs or will it stay asleep?
  • It is clear that the buck will stop with the UK Government if the nuclear industry is to be revived, yet the UK Government is still aggressively backing offshore wind.
  • Current nuclear plants have a hint of urgency due to short-term crisis; UK Government involvement needs better finance plans than Hinkley Point C where long term expensive power prices are locked in.
  • Investors interested in nuclear power need to wait to see how this plays out, but SMR reactors could get a life.

Model of atom and elementary particles. Physics concept. 3D rendered illustration.
vchal/iStock via Getty Images

I'm on the record for viewing the 2011 Fukushima disaster as a key event that has just about finished nuclear power in the Western world. And I've identified the fate of the UK nuclear industry as a harbinger of the exit from nuclear power. However, just as Fukushima stopped nuclear developments in their tracks, there is a glimmer that the current freak weather events in Europe (particularly calm conditions and hence fall in wind power generation) may be leading the UK Government to frantically step up and fund the Sizewell C reactor. Part of that is also because China was seeking to use Sizewell C investment to develop its nuclear ambitions for the UK nuclear industry. With China definitely in the "sin bin" at the moment, thoughts of China getting more say in UK's power sector seem off the table. There are many questions, including "is nuclear on the table again?" If so "what kind of reactors?" Rolls-Royce (OTCPK:RYCEF) (OTCPK:RYCEY) is well positioned to benefit if SMR (Small Modular Reactors) get the nod.

What is the story with the current UK power crisis?

A combination of natural gas shortage with calm conditions has created a crisis, although how it will be solved has lots of experts with opinions ranging from i) return to fossil fuels, ii) accelerate offshore wind which has a higher capacity factor and is more reliable than onshore wind, iii) bring back nuclear power, which has been off the table for a while.

The upcoming COP26 Climate meeting in Glasgow provides another reason for pulling a rabbit out of the hat.

Is offshore wind still the solution?

In my previous article about UK power I concluded that the UK Government seemed very bullish about offshore wind and almost silent about nuclear refurbishment. There is no sign that the Government is backing away from its commitment to offshore wind power. Two weeks ago the UK Government announced its biggest ever round of funding for its flagship renewable energy scheme. The scheme uses a Contract-for-Difference (CfD) approach to provide project developers with significant upfront payments and long lifetime to protect price volatility. This also protects consumers from high electricity prices. The CfD scheme allocates contracts in a competitive auction with funds going first to the cheapest bids. An allocation of 224 million pounds is available for offshore wind projects, with a further 31 million pounds for renewable technologies. The UK Government claims its offshore wind funding scheme has led to a 65% reduction in the price of offshore wind. This program will ensure that the Government target of 40 GW of offshore capacity by 2030 is achieved. There is also moderate funding (10 million pounds) to support onshore wind and solar PV. Final levels of support and capacity could be higher than announced.

What about nuclear power?

Big nuclear Sizewell C

Nuclear power developments in the UK have not only become entangled in a price war with offshore wind, but there is now a geopolitical angle as the UK Government seems to be contemplating ending a role for China in a possible UK nuclear resurgence. Along with French group EDF (OTCPK:ECIFF)(OTCPK:ECIFY), China's CGN (China General Nuclear) has been a major party in seeking to get a new large nuclear reactor (Sizewell C) built in Suffolk. Now it seems that the UK Government may be considering funding the project with EDF and excluding CGN, which currently has a 20% stake.

An announcement seems possible before the COP26 meeting in Glasgow next month. It isn't straightforward as CGN is a major funder in the Hinkley Point C project which is under construction. And the plan was for CGN to help fund Sizewell C before going on to build its own reactor at Bradwell in Essex.

New Wylfa nuclear plant(s) at Angelsey?

Wylfa is another nuclear site that has run into problems in gaining traction. Over the past 5 years Horizon Nuclear Power developed a proposal to partner with Hitachi (OTCPK:HTHIY) Nuclear Energy Europe and Japan Gas Corporation to build two nuclear reactors at the Wylfa site using Hitachi ABWR technology. The project was abandoned because there was not agreement about UK Government funding.

Now there seem to be several groups exploring possible ways forward at the Wylfa site(s) (still owned by Hitachi) with the UK Government. Private US engineering firm Bechtel is exploring building two Westinghouse AP1000 reactors, while UK-based Shearwater Energy is proposing a hybrid solution involving SMRs (Small Modular Reactors) and a wind farm.

Bechtel claims that the Angelsey Wylfa Newydd site is the best location for a large nuclear reactor in the UK. Shearwater is pitching the SMR plan (see below) as a gas-replacement option that would be cheaper and more versatile than a large reactor.

The Bechtel plan is for the Government to fund a 2 year program to build a case for attracting potential investors and a developer, acknowledging that at this stage there is nothing that will attract investment. This is a way to remove major initial project costs, but it requires the UK Government to wear these costs. The Bechtel proposal involves 2 Westinghouse AP1000 reactors, based on the controversial and much delayed (and with huge cost blowouts) Plant Vogtle in Georgia, to start power production by 2035. It seems that this proposal involves off-site construction of modules that get assembled on site. The plan is to have multiple manufacturing sites to spread the economic benefits of construction. It isn't clear how this would work, but it reflects the buzz-word of offsite construction to in theory make things go faster.

It sounds like Wylfa still has a way to go before anything concrete happens and substantial Government finance is going to be needed for any nuclear proposal. There is a suggestion that only one major nuclear project could get Government support in the near term, so successful Government funding of Sizewell C could mean that a Wylfa large nuclear plant proposal would miss out.

Small Modular Reactors

Of course any nuclear discussion today has to include the great white hope of SMRs (Small Modular Reactors). SMR is a technology that is constantly talked up although the technology is still not implemented.

Enter Rolls-Royce SMR program. Rolls-Royce is a major aviation defence contractor, which is the second largest aircraft engine maker, and so has challenging times with COVID. An overview of the company has been published recently by the Wolf Report on Seeking Alpha. The Wolf Report sees Rolls-Royce's interest in SMRs as more wishful thinking that reality at the moment, preferring its exploration of electrical engines for aircraft as a more interesting new direction. However Rolls-Royce is itching to get the opportunity to build a portfolio of SMRs to prove that multiple reactors can be built off-site and quickly assembled.

The previously thought-to-be-dead deal at Wylfa Angelsey is a concrete example (see above). Two SMR proposals cover both sites at Angelsey (Newydd and Magnox). Magnox is currently being decommissioned.

The proposal(s) for Wylfa from Shearwater Energy involve multiple SMR facilities. The Wylfa Magnox site would trial twelve 77MW SMRs (manufacturer not identified, to generate 1 GW of power), while the Newydd site would locate ten GE-Hitachi BWRX-300 reactors. It seems that a proposal concerning the BWRX-300 reactors has been submitted to GE (GE)-Hitachi with a cost estimate provided to UK Dept Business, Energy & Industrial Strategy. It is claimed that the BWRX-300 project could start in 2025, with first power generated by 2028. The other SMR project is less well defined.

The SMR programs are claimed to be more flexible and more suited to complement renewables than a large nuclear reactor program.

With talk of nuclear submarines and sealed power units not requiring replacement for the 35 year life of the facility, I'm surprised that this kind of SMR hasn't surfaced (pun intended) as a possibility. Perhaps I'm missing something about these reactors?

Conclusion

For quite some time UK Government officials have not been talking about nuclear energy, instead focusing on offshore wind as becoming the major energy source in the UK. Politics is fickle and it may be that a resurgence of nuclear discussions reflects the need for a quick response to power prices rising through a combination of gas shortages and freaky low wind output. The energy issues also seem to involve a Brexit component as there are also gasoline shortages due to lack of truck drivers and panic buying of fuel. This crisis is about transporting the fuel around the country rather than a lack of fuel; it shows that the UK is off-balance with too much happening (Brexit, COVID).

I reserve judgement about what is going on with nuclear energy in the UK until it is formally recognised (or not) that, as has been the case for a long time, the UK Government is going to have to take a major funding role if nuclear is to be revived. This will bring back the fiasco of funding Hinkley Point C which has locked in hugely expensive electricity prices for a very long time. Until that nettle is grasped, I remain on the side about nuclear power and hence SMR technology. The new element is a RAB Nuclear funding model which involves payments prior to actual power generation. Given that two characteristics of nuclear projects seem to be cost overruns and time delays, it isn't clear how popular a funding scheme that involves substantial payments well prior to any benefit to consumers, who would take the risk of cost overruns and delivery delays. There isn't sufficient detail yet to understand exactly what is being proposed, but this is probably the key to any substantial nuclear resurgence.

Rolls-Royce and others have to wait to see how this plays out, notwithstanding that in the past week the Rolls-Royce stock price has increased 17% after being moribund for 12 months (down 8.6% year on year). Even if you are a nuclear enthusiast there is time to sit back and watch what happens, as it is still not certain that the UK Government will take a big role in nuclear resurgence. Keep an eye on Rolls-Royce if the Government steps in.

I am not a financial advisor but I do follow closely the dramatic changes happening as everything gets decarbonized. This includes decisions about where nuclear energy fits. I hope that my commentary helps you and your financial advisor in making investment decisions in the energy space.

This article was written by

Keith Williams profile picture
8.06K Followers
Keith began his career as a research scientist (developmental biology, biochemistry, molecular biology) at the Australian National University, University of Oxford (UK), the Max Planck Institute for Biochemistry (Munich, Germany) and finally Macquarie University (Sydney) where he held a Chair in Biology and established the Centre for Analytical Biotechnology. Pioneering the area of proteomics (with Marc Wilkins in his group coining the term), Keith established the world’s first government-funded Major National Proteomics Facility (Australian Proteome Analysis Facility) which was involved with industrialising protein science. Keith left academe with his team to found Proteome Systems Ltd in 1999 to commercialise proteomics. The company had a strong focus on intellectual property, engineering/technology and bioinformatics. As CEO he led the company to ASX listing in 2004. Since 2005 Keith has been involved in new business development in biotech, e-health and other emerging technologies. Keith sees climate change and sustainable development as a major issue for humankind and also a major business disruptor/risk and opportunity. Keith holds a Bachelor Agr Science from the University of Melbourne and a PhD from the Australian National University. He is a Fellow of the Australian Academy of Technological Sciences & Engineering and received an AM (Member of the Order of Australia) for services to the Biotechnology Industry. He has received various industry awards including an Innovation Hero Medal from the Warren Centre for Advanced Engineering. With 300 scientific papers and many patents written, Keith has a clear view of innovation in the Biotechnology and Climate/Renewable Energy space. He is not a financial advisor but his perspective adds relevance to decision-making concerning feasibility and investment in technology innovation.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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