Piyasi Mitra examines the debate around the role of nuclear energy in Europe’s sustainable future.
The global pursuit of a net-zero future is fraught with challenges and choices. Integrating natural gas and nuclear into sustainable portfolios could potentially speed up the process, but the European Commission’s recent classification of these resources as climate-friendly prompted scrutiny and debate. Alarmed by the emissions and potential risks, organisations such as Greenpeace, Client Earth and WWF launched legal actions. So, is nuclear the key to a sustainable energy future?
Serious business
The position of the European Commission (EC) is this: “The taxonomy is an essential part of the EU sustainable finance framework in the broader context of the European Green Deal. It helps guide and mobilise private investment to transition towards climate neutrality.”
In April 2021, the EC embraced measures to enhance the channelling of funds into sustainable endeavours throughout the EU. By empowering investors to redirect their investments towards eco-friendly technologies and businesses, these actions will play a crucial role in achieving Europe’s goal of climate neutrality by 2050.
The EC also announced its intention “to adopt a complementary Climate Taxonomy Delegated Act for some energy sectors, notably nuclear and gas, where they can comply with the criteria for activities under the taxonomy regulation”.
Opinions on the topic vary widely. A spokesperson for the German investment funds association, the BVI, says: “It would have been better not to include nuclear energy and gas in the taxonomy because they are contentious and jeopardise the credibility of the taxonomy as a universal measure of sustainability.”
“The taxonomy is an essential part of the EU sustainable finance framework in the broader context of the European Green Deal. It helps guide and mobilise private investment for the transition towards climate neutrality.”
According to the BVI, a significant challenge for fund companies and fund managers is to meet the regulatory requirements for funds with sustainability features while offering suitable products because investors often have different expectations with sustainable products and their strategies. “In the European context, this particularly applies to the assessment of nuclear energy by investors,” adds the spokesperson.
Kamil Sudiyarov, ETF product manager at VanEck Europe, emphasises the need to differentiate between gas and nuclear. “While natural gas is less carbon-intensive than coal, it’s hard to justify its inclusion in the taxonomy because of its significant carbon footprint.
“Nuclear energy, being one of the safest and least carbon-intensive sources, serves as the backbone of a renewables-dominated grid,” notes Sudiyarov. He believes that although investors have traditionally avoided nuclear projects, new regulations are encouraging a positive shift in investment trends.
However, natural gas can help to meet the energy needs of large populations in Asia, Africa and South America that traditionally depend on “dirtier” sources such as coal or oil, says Sharvari Johari, senior sustainable research analyst at American Century Investments – offering a solid rationale for ESG-integrated funds to hold positions in natural gas producers and pipelines.
Rise of SMR
VanEck’s Uranium and Nuclear Technologies Ucits ETF, launched in the early days of 2023, needs more performance history to display. Based on monitoring the developed world’s nuclear power plant life extensions, the asset manager expects medium-term tailwinds for the industry if the trend persists.
“In the longer term, the state of the industry will depend on the ability of governments to deploy nuclear reactors to replace fossil fuel-based power and ageing nuclear plants, as well as the developments in the spheres of Gen IV and small modular reactors (SMR),” says Sudiyarov.
Victor Basta, CEO of DAI Magister, notes that investors have recently been wary of nuclear power, viewing the industry as a “potential minefield”. However, the growing presence of a new breed of SMRs – simpler, safer and cheaper than traditional reactors – has already grabbed the attention of private investors, positioning nuclear power as a genuine investment option.
“SMRs have also impacted the global value placed on nuclear power to the extent that it is now seen as a vital part of the sustainable energy mix if we are to hit net zero,” says Basta.
Nuclear inclusion will help the industry build upon the rehabilitation of its image that SMRs have triggered. “If the European Parliament declares nuclear power an essential part of Europe’s energy transition, investors that decide to back this source will feel secure about the industry’s future and taking the right moral stance,” he adds.
Financial incentives that nuclear inclusion will bring – coupled with the emergence of SMRs – will drastically reduce the financial pitfalls of investing in nuclear power. “SMRs take less time to build than traditional nuclear power plants, which means ESG investors supported by government initiatives will have significantly less time to wait before they start to see a return,” adds Basta.
Challenges galore
All nuclear technologies share the same problem: cost. According to the International Energy Agency, about 25% of existing nuclear capacity in advanced economies is expected to shut down by 2025. On average, the nuclear fleet in developed economies – particularly in the US and the EU – is 35 years old, with most of these fleets nearing the end of their designed lifetimes, says Anthony Catachanas, CEO of Victory Hill Capital Partners. “The requirement for dealing with nuclear waste and decommissioning costs make it a less attractive investment proposition than other more sustainable energy sources.”
With the EU taxonomy, for instance, governments are attempting to repeat the experiment of driving technological costs down by providing a framework to help incentivise private capital to support more nuclear projects. However, he argues they are still prohibitive from a capital expenditure and cost perspective.
A more practical technology is fusion. Nonetheless, the costs still need to be lowered as it will use the very expensive hydrogen molecule as feedstock, and the technology still needs to be proven. Catachanas also argues that SMRs are equally costly and far more of a problem since in the end, they still rely on fission technology, meaning that, again, the cost is prohibitive.
The effect on the ESG investment fund sector could be twofold. “None of these projects will be investable unless significant subsidy frameworks are in place for nuclear (fission), or investment firms will have to take significantly more risk by investing in relatively unproven technologies at a relatively high cost and, therefore, fairly low returns.” Long story short, nuclear needs to be more attractive for ESG investment funds, Catachanas concludes.
“In the case of fusion, the waste is typically helium, and the feedstock is usually the very expensive hydrogen molecule, again driving the costs up and reducing returns on such projects,” he explains. Catachanas believes that investors should brace for early-stage technological risks, a sentiment shared by many ESG fund managers.
“It would have been better not to include nuclear energy and gas in the taxonomy because they are contentious and jeopardise the credibility of the taxonomy as a universal measure of sustainability.”
The costs associated with reactors, whether large or small scale, utilising fission technology are significantly prohibitive. “Besides, fission has a costly by-product in nuclear waste from an enriched uranium or plutonium process. Investing in this technology will be more difficult to explain to investors because the waste issue is unsustainable,” says Catachanas.
“For fusion, while the waste is typically helium, the reliance on the costly hydrogen molecule as feedstock escalates expenses, thus diminishing potential returns,” he adds.
From a risk perspective, he explains that investors will need to be comfortable taking early-stage risks in the technology, and ESG fund managers will have to deal with that perspective.
However, if fusion becomes a more proven technology, there will be a better balance between costs and revenue, he points out.
“In that case, the projects can become more viable and attractive to ESG fund managers – only in the smaller-scale reactors context, as the larger plants will remain government endeavours.”
UK projects
The Great British Nuclear (GBN) initiative aims to provide up to a quarter of the UK’s electricity from homegrown nuclear energy by 2050, providing cheap electricity and supporting jobs. An SMR competition will see companies registering their SMR projects with GBN to secure funding for product development.
A UK government spokesperson says they are consulting on including nuclear energy in the UK green taxonomy to incentivise private investment in this vital technology alongside renewables. “We are committed to delivering a UK green taxonomy to support an increase in financing for activities supporting the transition to net zero and delivering on UK environmental objectives.”
“Nuclear energy, being one of the safest and least carbon-intensive sources, serves as the backbone of a renewables-dominated grid,”
According to the UK’s 2023 green finance strategy: “The Hinkley Point C power plant, currently under construction, will save 9 million tonnes of CO2 annually. EDF analysis indicates this would be equivalent to taking nearly four million cars off the road annually.” Less than 0.01% of the UK’s average annual radiation exposure came from the discharges of the UK’s civil nuclear industry, it adds.
According to Basta, such legislation supporting nuclear power is important, as without such government backing, sustainability asset managers would pivot away from the industry towards other alternative energy sources.
Green light ahead
A recent report by HANetf reveals that 98% of respondents consider nuclear energy ‘green’ and a crucial part of the transition to net-zero emissions. In October 2022, 88% of wealth managers reported they had recently invested in nuclear energy or uranium-focused funds.
According to Tom Bailey, head of ETF Research at HANetf, the science behind nuclear power makes it a “clear choice” for addressing two critical challenges – energy security and decarbonisation to meet climate goals.
The World Nuclear Association notes that nuclear power plants produce no greenhouse gas emissions during operation. Throughout its life cycle, nuclear has about the same amount of carbon dioxide-equivalent emissions per unit of electricity as wind and one-third of the emissions per unit of electricity compared to solar.
Bailey underscores that the decision is leading institutional investors in Europe – previously waiting on the sidelines – to consider investing in uranium. Citing his first-hand experience with the Sprott Uranium Miners Ucits ETF (URNM), which has seen its assets under management grow to almost $70 million (€65 million) in just over a year, Bailey adds: “A lot of that is coming from institutional investors becoming more comfortable with investing in uranium, and we expect the taxonomy will pave the way to greater investment in nuclear energy and uranium mining companies.”
Concerns prevail
Caroline Langley, deputy fund manager of Quilter Cheviot’s Climate Assets funds, considers nuclear inclusion a sign that net-zero ambitions are being taken seriously. With technology’s progress, authorities must consider cleaner energy sources and other initiatives such as carbon capture, utilisation and storage.
“As sustainable investors, we negatively screen companies that generate revenue from nuclear power production or those that provide nuclear services to the military,” Langley says.
Yet, environmental concerns about nuclear waste disposal and its impact on human health and biodiversity are real, and broader safety implications exist for people working and living near nuclear power plants. “Various elements of nuclear power generation need improvement. The level of investment and research into nuclear power will help solve some of these issues but will take considerable time and resources,” adds Langley.
“If the European Parliament declares nuclear power an essential part of Europe’s energy transition, investors that decide to back this source will feel secure about the industry’s future and taking the right moral stance.”
Another drawback of nuclear power is that state or state-owned utilities are likely to remain the only suitable ownership models, says Joost Bergsma, CEO of infrastructure equity firm Glennmont Partners from Nuveen. He adds: “Nuclear does not immediately contain to solving Europe’s energy security issue, as the raw materials needed for nuclear energy generation often come from non-EU countries, and often countries with very different geopolitical agendas to ours.”
Renewables are a far more attractive option for fund managers, as they are cheaper than nuclear and fossil fuels and quick to build, says Bergsma. “Traditional renewables such as onshore and offshore wind and solar have proven reliability and are only growing more efficient. Beyond this, renewables hold the edge regarding public support and easy deployability.”
With regard to EU power prices, he warns that market distortions are possible due to extensive nuclear facilities but says market trends might mitigate these effects over time.
While some view nuclear power as costly and rigid, particularly when it comes to concerns about waste disposal, an increasing number are now exploring the nuclear domain.
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