Robert Kwan:
Welcome to the Industries In Motion Podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast-moving markets and industries. My name is Robert Kwan, and I'm the Global Head of Power, Utilities, and Infrastructure Research at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. I'm pleased to be joined by Maurice Choy, Canadian Energy Infrastructure Analyst; Andrew Wong, Uranium and Fertilizers analyst; and Sara Mahaffy, ESG strategist. Today, we will discuss the outlook for nuclear energy, taking a global and cross-sector approach in reviewing the nuclear energy value chain, including insights developed in collaboration with our global team of energy infrastructure, industrials, and mining & materials analysts, as well as our energy and ESG strategists.
We believe that nuclear energy generation capacity is well positioned to grow in North America and Europe over the long term, supporting energy transition objectives, and we see the industry becoming increasingly ESG-friendly and investible over the long run. Now, Andrew, let's kick it off with you to explain the long-term growth outlook for the nuclear industry. Why do you see it being positioned for a rebirth over the coming years?
Andrew Wong:
It's great to be talking about the nuclear sector, which I've been covering for over a decade now as part of our uranium coverage, and it does really feel like we've seen a turning point in terms of sentiment and interest, and it's now being backed by real investment dollars, which we think it recognizes nuclear’s critical role in our global energy transition. And we're also seeing material shifts in the energy landscapes and national priorities that give credence to this rebirth. And there's a lot of effort being put toward addressing issues that, maybe in the past, have led to nuclear underinvestment. So some of these issues could have included high capital costs and potential for delays, which have been a challenge. While this isn't solved completely, it's an area of focus as we move to newer generation reactors, and we're seeing efforts from governance to address some of these regulatory issues.
Public and investor perception on safety have also been a hurdle in the past, but we're seeing that turn now with increased acceptance of nuclear as part of our future energy mix. And we've seen challenges from other energy industries like fossil fuels with cheap nat gas and a big focus on renewables, but there's an increasing recognition that nuclear plays a role in the future energy transition. Fossil fuels now have to deal with carbon, and renewables are great, but nuclear provides about 20% of our zero-carbon energy today and will be needed in the future. So as we look forward, we see nuclear energy experiencing a rebirth as the world looks for pragmatic solutions in the clean energy transition. And as this transition drives renewed growth in the nuclear sector, we see opportunities across different industries, a need for more uranium conversion and enrichment to fuel reactors, reinvestment in the current reactor fleet to extend operating lives, and a real push to build new reactors.
Robert Kwan:
Thanks, Andrew. So, Maurice, can you elaborate on the path forward for this rebirth in nuclear energy?
Maurice Choy:
Sure. Building on Andrew's comments, the vast challenge to deliver net-zero by 2050 suggests to us that an “all of the above” approach must be taken when it comes to power generation, and that will not only mean more renewables and carbon abatement technologies, but also nuclear energy. Beyond decarbonization, we believe nuclear energy can improve a country's energy security, particularly given the recent events, including the Russia-Ukraine War. To address some of the drivers of underinvestment that Andrew highlighted, first, the nuclear energy industry needs to broadly up its game. By this, we mean not just completing projects on time and on budget, but also the cost needs to be competitive versus alternative base-load power technologies.
Second, there needs to be a better allocation of risks to help reduce the cost of capital, and these risks relate to construction, and power price and policy changes. Third, we believe globally, public and investor acceptance can improve. The industry needs to build its record on safety, reliability, and environmental sustainability, and engage the stakeholders with information that's open, honest, and balanced. Beyond these three items, nuclear capacity can also expand and extend through life extensions and capacity upgrades, which are considerably cheaper than new builds and can be cost-competitive versus other generation technologies. Also, we hear a lot about SMRs, or small modular reactors, which address some of the risks relating to large-scale nuclear builds, and it is important that we see continued political and institutional support to maintain the technologies' momentum.
Robert Kwan:
Great. Thanks, Maurice. Sara, we're seeing real evidence of changes in investor and public perspectives on nuclear energy. What are you seeing in your analysis on the ESG front?
Sara Mahaffy:
We are starting to see evidence of changes in our work and increasing acceptance of nuclear energy as part of the solution to address both climate change as well as energy security. First off, in 2022, we saw the EU move to cover nuclear energy as a transitional activity in their green taxonomy, which was a major development. Some other jurisdictions that are currently working on their own taxonomies, like the UK, have also expressed that they plan to include nuclear as an environmentally sustainable activity. Additionally, during COP 28, over 20 countries committed to tripling nuclear energy capacity by 2050, recognizing nuclear energy's role in reaching net-zero. And governments and countries like the US, UK, and Canada have already started introducing policy measures to support nuclear energy, such as the incentives included in the Inflation Reduction Act in the US. From an ESG investor standpoint, overall, we found in recent quarters, sustainable funds have been slowly adding positions to names with meaningful involvement in nuclear power.
Additionally, when we look at explicit exclusion policies related to nuclear power involvement, we've seen evidence of US sustainable funds removing exclusions in recent years. While we have not yet seen exclusions coming off among European or Canadian funds, we point out that in Europe, the use of exclusion policies has broadly ramped up across categories in recent years due to the introduction of SFDR regulation, their sustainable investing regulatory regime, and in Canada, the sample size of sustainable funds is still fairly small to analyze. One final point that has jumped out in our work is that nuclear power stands out as one area in the energy complex where we are seeing rising public support among both Republicans and Democrats based on recent surveys of Americans conducted by the Pew Research Center. Partisan differences remain wide over support for traditional renewable energy sources and fossil fuels, but nuclear power stands out as one key area where we're seeing rising bipartisan support in the US.
Robert Kwan:
Thanks, Sara, for that. So, Maurice, the political and regulatory landscape is hugely important for the future of nuclear energy. What are the key factors to consider?
Maurice Choy:
With any capital-intensive infrastructure project with a long construction period, the cost of capital is important to the overall costs, so anything that the government can do to reduce the cost of capital will be helpful. Number one, have supportive and durable energy policies that solidifies nuclear energy's role and energy mix. Number two, have the government be involved financially, and this can be in a form of being invested in a project, providing investment tax credits, or ITCs, or even supporting revenues of the projects through PPAs, contracts for difference, or a regulatory asset base model. Number three, the government can ensure regulatory clarity and predictability throughout the construction period, which allows developers to preserve engineering stability throughout the construction.
Robert Kwan:
That's really interesting, Maurice. So turning to Andrew now, what are some of the key differences across regions in terms of the outlook for nuclear energy support and development?
Andrew Wong:
So across our research team's geographic coverage universe, we believe North America and parts of Europe are supportive for nuclear energy growth and reinvestment, with increasingly supportive government policies and opportunities for investment. In the US, we've seen reactor life extensions like the Diablo Canyon nuclear facility in California that was originally set to be shut down in 2025, and there's lots of discussions on reinvesting into the domestic nuclear supply chain, which currently relies just too much on countries like Russia and Kazakhstan.
In Canada, new nuclear builds are being considered, such as a major expansion to the Bruce Generating Station in Ontario. And turning to Europe, we see France recommitting to a nuclear fleet that currently provides 70% of domestic electricity needs, the UK recently signaling a major investment in new reactors for the coming decades, and even a country like Belgium extending the lives of reactors when previously they were considering a full phase-out. And in Australia, we see less opportunities where nuclear energy is currently banned, but the country should benefit from increased uranium demand, and there continues to be a debate on their nuclear energy policy. And there's obviously a lot of nuclear investment in other regions, including China, India, and the Middle East, but these are often more state-driven and outside of our coverage for now.
Robert Kwan:
Now let's examine the outlook and exposure to the nuclear energy value chain across sectors. Maurice, what's the outlook for the energy infrastructure sector?
Maurice Choy:
Infrastructure investors generally are risk averse and they like the sector not only for the long-term role infrastructure assets play in everyday lives, but also for the low-risk, stable, and predictable cash flows the assets generate. To this end, we believe infrastructure investors will be supportive of nuclear energy projects so long as the risk are substantially mitigated. This means structuring the cash flows that are either regulated or, at the very least, long-term contracted with costs that are passed through to customers. Pre-operational assets may also be possible, although investors will likely want a very limited amount of construction risk.
Robert Kwan:
Great. Thanks, Maurice. So turning to Andrew, take us through the implications our global team sees across the industrials and mining & material sectors.
Andrew Wong:
So industrials, our North American industrials analyst, Sabahat Khan, believes that the engineering and construction sector is ready and able to provide expertise and services across the value chain to support nuclear energy's growth plans. He sees opportunities for the E&C companies across new builds, refurbishment, and decommissioning, providing engineering and technology services as well as construction work. And as growth continues in the nuclear space, a key focus for the industry will be ensuring a strong pipeline of talent to support increasing demand. In mining and materials, we believe uranium will be critically important in the future growth of the nuclear industry as well as the processing required to turn uranium into nuclear fuel.
So that would include conversion, enrichment, and fuel fabrication, and specific to uranium, it's currently very tight right now with little ability for a major supply response in the near to medium term. We also see a longer term significant deficit opening up toward the latter part of this decade and into the 2030s. Uranium resources themselves aren't lacking, but the economic incentives and prices that are needed to support future production are needed, and it'll take time to permit and build new supply. Given that nuclear fuel costs are a relatively small portion of the overall capital and operating costs for a nuclear plant, we expect utility customers will help fund new supply through long-term contracts at relatively high uranium prices, and that'll reflect attractive returns for the miners.
Robert Kwan:
Well, Maurice, Andrew, and Sara, thank you very much for your time. This has been a very informative discussion, and certainly there seems to be a great deal of growth potential for nuclear energy over the coming years. So what else lies ahead in today's every evolving markets and industries? We'll be keeping track right here on Industries in Motion. Thank you for joining us for this episode recorded on February 1st, 2024. Please make sure you subscribe to Industries in Motion wherever you listen to your podcasts. And if you'd like to continue the conversation or if you're interested in more information, please contact your RBC representative directly or visit our website at www.rbccm.com. Thank you very much.
Speaker 5:
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