Nuclear Plants to Become More Valuable in Green World

By Timothy Winter, CFA
January 26, 2021

"The value of nuclear plants could increase over the next several years..."

We believe the value of nuclear plants could be revived over the new few years given the emphasis on green energy and achieving aggressive renewable and net zero carbon goals. Higher values will be driven by the obvious more aggressive fossil-fuel (coal and old gas) retirements and pending penalties for carbon (see below) emission, but also the potential role in producing “yellow/green” hydrogen.

· In 2020, nuclear power generated roughly 20% of the nation’s power with essentially zero emissions. In addition, most nuclear plants operate at roughly 90%-plus capacity factors, which means they run non-stop all year-long.

· Over the past ten years, nuclear power has become less economic due to higher Fukushima-related safety standards, low natural gas prices and subsidized and mandated renewable energy.

· The nation’s 104 nuclear reactors dwindled in number to 95 in April 2020 with the loss of Indian Point Unit 2 outside New York City. Since 2013, ten nuclear units have shut down prematurely and another seven are currently scheduled for early retirement. The largest nuclear owners are listed below.

Table 1 Largest Nuclear owners in the US are as follows:

· Five states (OH, CT, IL, NJ and NY) provide “subsidies” or zero emission credits (ZECs) designed to keep the large capacity and highly reliable baseload nuclear plants economical. The distribution utility pays the ZEC and passes onto customer. ZEC amounts are established by policy-makers to represent the social cost of carbon (SCC) with some adjustment allowed for changes in market trends or power costs. Programs in Illinois, New York, New Jersey, and Ohio show ZEC prices ranging from $10.00/MWh-to-$17.50/MWh.

· Southern Company’s 45.7%-owned Vogtle Units 3&4 expansion project in Georgia is the only pending nuclear construction project in the US. The plants are expected to be completed in November of 2021 and 2022 at a cost of nearly $18 billion, or $8,200/kw. The project began in 2009 and has gone well over budget and schedule. As a result, we do not expect any new nuclear plants to be built over the next several years. The 3,990 MW Palo Verde Nuclear Generating Station (3 units) was the last plant built in 1986-1988.

However, the value of nuclear plants could increase over the next several years for the following reasons.

1) Social cost of carbon (SCC): One of Biden’s initial executive orders was to institute a working group to establish a social cost of carbon (SCC). An SCC is the estimated cost to society of emitting a ton of carbon dioxide including items like lost productivity, storm property damages, diminished water supply, etc. An SCC would place a dollar amount on such externalities and would be used in policy decisions based on cost-benefit conclusions. Interim values are due by February 19, 2021 and final values due by January 2022. We estimate that SCC’s could range anywhere from $50/ton per ton to over $300/ton. The SCC would not be limited to federal policy considerations and would likely be the basis behind various state policies as well. Colorado, Minnesota, and Washington require utilities to use the federal SCC in their resource plans and other states have used SCC as an input in ZEC pricing.

2) Nuclear power ideal for producing green (yellow) hydrogen: Green hydrogen requires low-cost zero carbon power generation to produce. Given that wind and solar is intermittent with capacity factors below 50%, baseload

nuclear generation is the lowest-cost zero-carbon power and help can fill that necessary demand to create green (yellow) hydrogen. According to the U.S. Department of Energy and its H2@Scale initiative, the case for nuclear becomes even more compelling when considering the growing demand for green hydrogen. Nuclear power produces a high-quality steam that can be electrolyzed and split into pure hydrogen and oxygen. A single 1,000 MW nuclear reactor could produce more than 200,000 tons of hydrogen each year. Four U.S. nuclear operators, Pinnacle West, Xcel Energy, Exelon, and Energy Harbor (formerly First Energy Solutions), are involved in Department of Energy (DOE) projects to demonstrate hydrogen production at nuclear plants.

3) More coal and gas plant retirements: The aggressive timelines and standards suggest a pace of de-carbonization far faster than we have seen before. As a result, we expect faster and more coal and old gas plant retirements. As the demand for electricity grows at an increased rate due to electric vehicles and green hydrogen electrolyzers, the value of nuclear power stations would experience positive upward pressure.

The large nuclear plant owners (excluding NEE) have not participated in the multiple enhancing enthusiasm of the green energy wave. We expect multiple expansion for selected utilities as the increased value becomes more visible.

Table 2 Comparative Statistics for the Largest Nuclear Owners (Group Median includes all Large Cap)

Source: Thomson One, Gabelli Funds