Nuclear Power, the Real Money to be Made in Copenhagen Conference
Commodities / Energy Resources Dec 11, 2009 - 11:04 AM GMTBy: Q1_Publishing
More than 1,200 limos, 140 private jets, and an additional 40,000 tons of carbon dioxide have converged on the Danish capital of Copenhagen this week to “save the world” from climate change.
There will be a lot of media coverage and grandstanding. But we don’t expect much except for plenty of theatrics and non-binding resolutions. We expect the most interesting aspect to be the inevitable competition among the alarmists trying to devise a prophecy more radical than the next (think Congress sound bites on steroids).
There is, however, one very important sideshow to this circus. A sideshow investors should pay close attention to because it will prove to be exceptionally lucrative as one energy sub-sector (it's not what you think) becomes more profitable than it already is.
The Greater of Two Evils
In order to show the U.S. is serious about climate change, the EPA decreed that carbon dioxide is a dangerous pollutant earlier this week.
The political ultimatum from the Obama administration was aimed squarely at Congress – “You can do something, or we’ll do something.”
After that, it’s safe to say regulation of carbon dioxide emissions in the U.S. is all but inevitable.
That’s why we’ve got to jump ahead to where the opportunity will be.
Now, as with all government economic intervention, there are unintended consequences. And there are unintended winners and losers. That’s why when the government takes a bigger step into a specific industry, one of the safest and most lucrative things to do is figure out the unintended winner.
Carbon regulation will be no different.
In this case, the end result of more regulation – whether through EPA decrees or cap-and-trade – will be an increase energy prices.
It doesn’t matter which system. The results will be the same.
For example, the lesser economic evil is cap-and-trade. It is specifically designed to push electricity prices higher. And that’s exactly what it will do. The University of Missouri recently released a study where its electricity costs would increase by 50% under the proposed cap-and-trade scheme. The Heritage Foundation found electricity prices would increase by 90% under cap-and-trade.
The EPA regulations would likely be even worse. The President of the U.S. Chamber of Commerce says the EPA regulation “could result in a top-down command-and-control regime.” And we all know what the resulting politically allocated capital resources would lead to – higher prices.
Either way you look at it, we have higher prices. Option A – higher prices. Or Option B – higher prices.
One Big Winner
Higher prices are bad for consumers and good for producers. So the winner will be in the producers.
There are basically three types:
Low-Cost/High-Carbon – this is the fossil fuels – coal, oil, and natural gas. They are cheap, but they produce the most greenhouse gases.
High-Cost/Low-Carbon – this is the alternative sources like wind and solar. They produce very little carbon, but they are very expensive to build and operate.
Low-Cost/Low-Carbon – the perfect combination – nuclear. Nuclear power is cheap (aside from the high start-up costs which are amortized over 40 years or more) and produces very little carbon. It’s the best of both worlds.
Economically, fossil fuels and nuclear are a win because of their low costs.
But once you attribute a cost to carbon, the cost benefits of fossil fuels are reduced or eliminated.
Nuclear, as the only source of low-cost and low-carbon electricity, is the clear winner.
The Easy Way to Win
Of course, investing in nuclear power isn’t exactly easy. There are a lot of popular ways to get in on the benefits of nuclear power. But there is one great way.
One popular way is uranium mining. For years there has been a supply/demand imbalance for uranium. Will it ever pan out? No one knows. But we do know one thing, mining is risky. There are even more risks when it comes to uranium mining though.
Basically, a rise in uranium demand, which would make miners better positioned to get better prices, is predicated on the massive scale of new nuclear power plants. So far the world has lagged far behind the aggressive nuclear power construction plants of the last few years.
So uranium mining may be a good way, but on a risk-adjusted basis, it’s hardly the best way.
Another way is with what your editor calls the real supply crunch coming in uranium. That’s in enriched uranium. Uranium is useless in a nuclear reactor unless it is enriched. And that’s where the real supply crunch will hit.
The problem here is there are very few pure-plays on enriched uranium. And the easiest pure-play to invest in is USEC (NYSE:USU), and USEC is actually facing the most headwinds.
Back in 2007, investors were jumping over each other to bid up USEC shares. USEC’s American Centrifuge, a brand new enrichment facility, was making headlines and USEC shares flew to new 10-year highs.
At the time your editor felt pretty lonely saying USEC was “using a seriously outdated enrichment process.” Technically, they were using a process developed for the Manhattan Project. And its well-publicized American Centrifuge project was “facing constant delays and budget overruns” and, basically, wasn’t going to work anytime soon.
Jump ahead two years and USEC shares are down more than 80% after the Department of Energy (DOE) refused a loan request form USEC. The DOE officially said the rejection was due to “technical and financial hurdles” resulting from the American Centrifuge project.
That’s why the final way to reap the benefits of nuclear power is the best.
Yesterday, your editor recommended Prudent Investing readers should buy shares in the largest nuclear power plant operator in the United States. It’s practically a pure-play on low-cost/low-carbon nuclear power being in the best position to reap the rewards of any legislation or regulation which increases the price of electricity.
Nuclear power may not be supported by the Obama administration. And the conference to “save the world” will be more focused on getting more windmills and solar panels installed rather than more cooling towers constructed. But nuclear power is still the cheapest low-carbon source of power in the world.
The world leaders’ goal of pushing electricity prices higher to make their politically favored forms of power generation more economical, is only going to make nuclear power – and the companies that own the power plants – more valuable in the long run.
That’s why when pundits talk about the Copenhagen conference benefitting certain alternative energy companies, they may be right or they may not be. The one thing we do know is that anything that comes out of the conference, EPA, or Congress is going to be nearly an inevitable win for nuclear power. And the nearly inevitable is going to be where I put my safe money and hope you do to.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.
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