Should you invest in nuclear power?

published 30 November 2007

Half a century ago, nuclear advocates were promising us that their technology would provide mankind with limitless cheap, clean energy.

Businessmen were equally quick to see it as a source of enormous profit, with the potential to usurp many of our traditional sources of power.

Unfortunately, it didn't quite work out like that.

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The industry has been beset with a seemingly endless series of problems. These ranged from the apocalyptic the meltdown at Chernobyl and near-disaster at Three Mile Island to the mundane, such as conventional electricity costs so low that nuclear generation simply wasn't economic.

But after many years in which the nuclear future was in severe doubt, things are finally looking up for the sector. The rising cost of coal, gas and oil, fears over security of supply for many of these fuels, and the need to move to cleaner technologies in order to tackle climate change, have put nuclear firmly back on the global agenda.

Last week, the UK became the most recent country to reconvert to the cause. To absolutely no one's surprise, the Government's latest energy review came out firmly in favour of building new nuclear plants: sure, it was careful to discuss ways to promote alternative energy sources, such as windpower, but "few doubt that securing a new generation of nuclear-power plants remains the point of the exercise," as The Economist puts it.

Investing in nuclear power: how will new plants be funded?

But much work remains to be done before a single brick is laid for a new power station. The review maintains that the private sector should cover the whole cost of building, operating and decommissioning reactors, but investors are unlikely to be very keen on that.

The economics of nuclear are complex and unfavourable: new stations are relatively cheap to build, but expensive to run. In a deregulated power market such as the UK's, electricity prices are constantly shifting, meaning that a plant can rapidly change from profitable to loss-making.

Other countries that have endorsed nuclear have resorted to props of one kind or another: the US pays subsidies to nuclear generators, while Finland, which is building Europe's first new plant for a decade, is ensuring its profitability through long-term financing deals with big power users.

The Government hopes that strengthening the European carbon emissions trading market will provide price support for nuclear, as high carbon prices will mean fossil fuels-based energy costs more. But even if the rest of the EU plays ball, the nature of trading schemes means they do not provide the stable long-term prices the industry wants. Some other solutions are likely to be needed, regardless of what is said now.

Investing in nuclear power: what other problems are there?

And there are other problems to be resolved. Reform of the planning system is crucial and the Government is supposed to be issuing a white paper on this at the end of the year. But streamlining planning is one thing; making voters happy to have a reactor built in their backyard is another (although polls suggest a small majority of the public favours new stations in principle). Other issues are nuclear-waste disposal and decommissioning the UK's old reactors.

With this in mind, are there decent investments in the sector? Well, MoneyWeek won't be rushing to buy shares in long-troubled British Energy (BGY) or any other producer. And the sheer amount of publicity the industry has got means the obvious nuclear-exposed construction stocks probably have all the upside priced in. But we're still bullish on uranium prices and niche engineering stocks could provide an overlooked way in.

With this in mind, are there decent investments in the sector? Well, MoneyWeek won't be rushing to buy shares in long-troubled British Energy or any other producer. And the sheer amount of publicity the industry has got means the obvious nuclear-exposed construction stocks probably have all the upside priced in. But we're still bullish on uranium prices and niche engineering stocks could provide an overlooked way in.

Investing in nuclear power: where should you put your money?

The surging price of uranium means that there is no shortage of uranium explorers and producers on the market. MoneyWeek has long liked Cameco (TSX:CCO), a Canadian firm that's the largest public uranium group and supplies more than a fifth of the world's uranium.

Many of the big construction groups with nuclear expertise are benefiting from building and decommissioning work. Last year, for example, Carillion (CLLN) won a £118m contract for clean-up work at Sellafield. Deals like this should provide a healthy future profit stream for these firms, but should already be factored in to their shares.

For big (if risky) upside, investors need to look at their smaller sub-contracters, such as Redhall Group (Aim:RHL), which builds the containers to store radioactive material. The firm predicts earnings per share growth of 114% in the year to September 2007, putting it on a forward p/e ratio of 8.9.

Investors should also monitor the break-up of state-owned BNFL. Its power plant-technology unit Westinghouse has just been sold to Toshiba (6502.JP), and future disposals might create investment opportunities.

by Simon O'Brien