Natural gas prices are now below $2 per 1,000 cubic feet, the lowest they've been in over a decade. What's this mean for the energy industry - specifically nuclear power?
First, I don't think it will have much impact on solar and wind. Solar and wind are still not sources of baseload energy - meaning they are intermittent sources of energy, difficult to store, and thus dependent on when the sun is shining and the wind is blowing. Germany, which has invested over $130 billion in solar subsidies, has learned this the hard way. Solar power has only been able to generate 0.3% of Germany's total energy, and the country is still reliant on importing energy from others (like nuclear power plants in France). So, solar and wind can serve as minor, complementary elements of the energy picture - but do not threaten fossil fuels and nuclear power as sources of baseload energy (meaning energy available on demand, like what many in industrialized nations are accustomed to).
In comparison to other fossil fuels - namely coal and oil - natural gas is looking great. It produces fewer emissions, a particularly relevant fact in light of a proposed mandate from the EPA that calls for the U.S. to generate 84% of its electricity from clean sources. In other words, this proposed mandate, if it is enforced, would limit coal to 16% of energy production by 2035. And in terms of oil, that story is already well-understood. Geopolitical tensions, peak oil, and currency devaluation are all contributing to oil over $100/barrel. From this perspective, natural gas is irresistible, and it seems likely that much of the market activity currently going to oil and coal will find its way to the natural gas industry.
The other part of the equation here is nuclear power. How will nuclear power, which is also baseload and emission-free, be impacted by cheap natural gas?
Certainly, I think cheap natural gas slows down the case for nuclear. It should still be noted, though, that because of the unrivalled energy density of nuclear power, it will ultimately prove to be cheaper and more scalable than any other energy source out there. Density is the primary consideration when evaluating the quality of energy sources, and nuclear remains king.
Another consideration with natural gas is that while prices are currently cheap, there is no guarantee that prices will stay this way. With nuclear, prices are very predictable. The primary cost of nuclear power is an upfront fee, as the marginal fuel costs are very small. Natural gas prices have been very low before, and, in fact, they were low right after the Three Mile Island nuclear accident in 1979. The uncertainty of natural gas prices, and the fact that such prices will significantly impact energy prices derived from natural gas plants, make a strong case for diversifying into other energy sources. And with emissions regulations (for better or worse) becoming more common and with peak oil here, the case for diversification into nuclear remains strong.
It should also be noted that demand for energy has been fairly constant over the past few years due to greater energy efficiency and a global depression borne out of a sovereign debt crisis - but such depressed demand is unlikely to remain. The U.S. Energy Information Administration (EIA) released a report in September of 2011 which projects that world energy use will increase 53% from 2008 to 2035. The report, International Energy Outlook 2011, says China and India will account for half of the projected increase. In this regard it is especially important to note that both China and India remain committed to nuclear power. Indeed, I think this is a simple guideline for investors in the nuclear power sector keep an eye out for. So long as China and India are interested in nuclear power, demand can go higher.
The remarkably cheap prices for natural gas may slow down the nuclear renaissance, but it won't stop it. I believe that patient investors, those willing to wait up to a decade, will be rewarded accordingly. I did once believe that the end of the Megatons to Megawatts program could lead to a sharp and imminent rise in uranium prices for nuclear fuel. I'm a little less confident in that view, as I think cheap natural gas prices could make the situation less urgent and create some other options in the short-term. But as energy demand goes back up, and as the market as a whole continues to rise due to aggressive inflationary monetary policy from the world's central banks, natural gas prices will follow - and the case for nuclear power will remain strong.
Uranium miners are my favorite way of playing the nuclear sector, and I've accumulated on the recent sell-off that they've gone through. Uranerz (URZ), Uranium Energy Corporation (UEC) and Cameco Corporation (CCJ) are all attractively priced and are stocks I have in my portfolio (check out the aforementioned links for my previous coverage of those companies). Those interested in playing ETFs to capture the entire sector may be interested in NUCL or URA.