The best way to play nuclear power

Time is running out. This week the Climate Change Committee (CCC) urged the government to develop more nuclear power. It argues that new stations are urgently needed if Britain is to meet its target of an 80% cut in emissions by 2050. What's more, many of the UK's power stations are ageing and will need to be decommissioned over the next ten years. But while the government is procrastinating over whether to build new plants, investors can still pick off opportunities elsewhere in the sector.

Many countries are cracking on with developing their nuclear capacities. The United Arab Emirates recently signed a $40bn contract for a South Korean consortium to build four nuclear plants with a total capacity of 5,600MW. Meanwhile, according to the World Nuclear Association, China has 17 reactors under construction, Russia has nine and India and South Korea have six each. Why such a building boom?

Partly because the developing world needs more energy as populations rise and living standards improve. And in the developed world much post-war energy infrastructure now needs to be replaced. Many of the power plants in the UK, US and France were built in the 1960s and 1970s and are reaching their 'use-by' date. The increased use of electric cars will also put more pressure on the grid.

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But it's also because, as a source of power, nuclear technology has many advantages. Unlike coal, oil, gas or biomass it does not create carbon emissions. It also has the ability to provide a base load of power on demand that cannot be matched by other climate-friendly technologies such as wind or solar power. Nuclear power also has economic benefits. Compared on a kilowatt hour (kWh) basis a unit that equals the use of one kilowatt of energy for one hour nuclear is cheaper than conventional thermal fuels, says the Uranium Forum's Marino G Pieterse. And because the biggest cost is building a plant, uranium itself only makes up around 10% of the kWh price, making nuclear power less vulnerable to fluctuating commodity markets.

There are drawbacks too. In many countries environmental concerns are reflected in stringent regulations. This adds to the capital cost of a new plant roughly three times that of a coal-fired unit and almost six times that of a gas equivalent. Another concern is what happens to nuclear fuel and plants when they are decommissioned. In the West, some older facilities have already been retired and many more are fast approaching the end of their working lives.

Indeed, it's at the 'back end' of the nuclear fuel cycle decommissioning and defuelling (D&D) plants, and safely transporting and storing spent fuel and radioactive material that the best investment opportunities lie. A 100MW plant produces about 25 tonnes of spent nuclear fuel a year, which can be processed and recycled or placed in storage. Low-grade radioactive material can be stored relatively easily, but used fuel and reactor components are kept in secure facilities that use a combination of water, lead, clay, concrete and stainless steel to lock in radiation. Highly radioactive elements are kept like this for 40 to 50 years before their final disposal in deep underground structures.

Public concerns over radioactive waste will ensure that the industry is forced to continue adopting the highest back-end standards. Below, we look at one of the best plays on that theme.

The best bet in the sector

Energy Solutions (NYSE: ES) is one of the leading listed nuclear services companies. And thanks to a recent spate of indifferent nuclear energy headlines in its key US and UK markets, it looks pretty cheap. The firm's core business is transporting, processing and disposing of spent nuclear fuel and radioactive materials. It also operates nuclear plants for utilities. Its long track record, specialist equipment it boasts the world's largest commercial radioactive waste-disposal facility and experienced staff pose significant barriers of entry to rivals. Another boon is the strong client base, which includes the US Department of Energy, the UK's National Decommissioning Authority and some blue-chip commercial clients.

The share price could receive a boost if the US or UK commission new reactors. Meanwhile, the stable cash-generating operations in the US and UK will help fund the "worldwide expansion of energy solutions" that chairman Steven Rogel has highlighted as a "top priority". In March the firm announced a deal to supply and design the waste-management system for six plants in China. This adds to its customers in Mexico, Germany, Italy and South Korea. At $4.55, the share price is well below its pre-crisis range of $20-$25, while the p/e ratio for 2011 is a modest 7.7.

This article was originally published in MoneyWeek magazine issue number 496 on 23 July 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.