The age of fossil fuels is coming to an end (albeit more slowly than the media would have us believe). As I wrote in my book review back in 2019, climate change is a disaster that we have to avoid, there is simply no other option. Renewables are part of the solution – but I believe the current dialogue on climate change is too focused on the potential for renewables and missing some important economic and scientific realities.
Source: JPM Research
There are two major problems with renewables: 1/ reliability and 2/ energy density.
The first point is fairly simple to understand: the sun doesn’t always shine and the wind doesn’t always blow. See the recent Texas power outage as an example.
Or look at Germany. Germany is the world leader in solar and wind energy but has experienced CO2 emissions rising while bearing some of the highest power prices in the world. The reason is simply that Germany has had to rely on back-up fossil fuel generation to account for the volatility in wind / solar output. They’ve also had to spend a lot more on infrastructure (e.g. transmission) to integrate both renewables and back-up generation into the grid. Electricity costs in Germany have risen more than 50% since they introduced the renewables initiative.
The second point, energy density, requires some understanding of physics. In very simple terms, energy density refers to how much energy is stored in a certain volume of a given energy source. Solar and wind are low energy density sources which means that solar and wind farms require large areas of land to produce sufficient electricity to meet current consumption.
A country like Japan for example would have to cover the majority of its available land with solar panels and wind turbines to generate enough power to satisfy the country’s power needs. This would mean significant disruption to wildlife and ecological systems. Wind turbines are a serious threat to important / threatened bird species like hawks, eagles, condors. Similarly, solar farms require clearing large areas of land of wildlife and vegetation. One of the biggest solar farms in California required biologists to pull threatened desert tortoises from their burrows and transport them to cages where many ended up dying.
One also needs to factor in what happens to solar panels and turbines after the end of their useful life. Disposing off of tons of glass, cement, steel, concrete is no easy task and adds to the financial and environmental costs associated with renewables. Here is an excerpt from a Bloomberg article describing the challenges of disposing off of wind turbines:
“Tens of thousands of aging blades are coming down from steel towers around the world and most have nowhere to go but landfills. In the U.S. alone, about 8,000 will be removed in each of the next four years. Europe, which has been dealing with the problem longer, has about 3,800 coming down annually through at least 2022, according to BloombergNEF. It’s going to get worse: Most were built more than a decade ago, when installations were less than a fifth of what they are now.
Built to withstand hurricane-force winds, the blades can’t easily be crushed, recycled or repurposed. That’s created an urgent search for alternatives in places that lack wide-open prairies. In the U.S., they go to the handful of landfills that accept them, in Lake Mills, Iowa; Sioux Falls, South Dakota; and Casper, where they will be interred in stacks that reach 30 feet under.”
In summary, when people claim that wind and solar are ‘cheap’ they are often ignoring the costs of backup generation, transmission, ecological / environmental costs and disposal costs. Germany’s experience teaches us that relying too heavily on wind / solar can lead to exorbitantly high electricity prices with little / no impact on CO2 emissions.
The Solution
The same physical properties that make Uranium so dangerous as an atomic weapon, are what make Uranium so useful as an energy source: the process of nuclear fission releases very large amounts of energy from a very small mass and doesn’t produce any greenhouse gases. A single soda can volume of Uranium provides enough energy to fuel an individual’s annual electricity consumption in the US. All the nuclear waste produced by the US in more than 50 years of operation would, if stacked end to end, cover a football field to a depth of less than 10 yards.
If the world is really committed to reducing carbon dioxide emissions while also meeting rising energy needs (especially in the developing world) – nuclear will have to be a bigger part of the solution. Unfortunately, there is a major misconception regarding the safety aspects of nuclear energy that have prevented widespread adoption.
In 2011, the Fukushima incident sent a shock wave of anti-nuclear sentiment globally. Some countries like Germany took the extreme step of phasing out their entire fleet of nuclear reactors. In Japan, only 9 of 54 existing reactors have been authorized to operate. All of this, despite increasingly strong evidence that the Fukushima incident caused limited (if any) radiation health risk and the fact that phasing out nuclear necessarily means using more fossil fuel-based electricity generation (which harms far more people through CO2 emissions). In contrast a country like France that has continued to generate 75%+ of its electricity from nuclear has enjoyed cheap electricity with low CO2 emissions.
The lesson from Fukushima isn’t that nuclear power is dangerous, but rather that with the right checks and balances even a full reactor meltdown can prove harmless. Fukushima has also led to improvements in reactor design and new regulations which further reduce the risk associate with nuclear power plants.
Despite all the scary headlines, nuclear remains the safest and cleanest form of power in the world, causing only 0.07 deaths per 1 terawatt-hour of energy production, compared to 2.8 for natural gas and 24.6 for coal including deaths from accidents and air pollution.
The Tide Is Turning
10 years after Fukushima, public perception on nuclear is finally starting to change. On March 25, 2021 U.S. Senator Joe Manchin made the following comments at the U.S. Senate Energy and Natural Resources Committee hearing:
“Every year in the U.S., nuclear-generated electricity prevents more than 506 million metric tons of carbon dioxide from entering our atmosphere. If we are serious about meeting our climate goals without sacrificing reliability, we must protect our existing fleet. Why then is the U.S. fleet decreasing and why are we taking them offline?… We’ve got to now find out every nuclear plant that’s on the chopping block and make the CEOs of those companies come here and tell us why they’re taking offline something that should never have been taken offline or even considered taken offline, and why we can’t make sure they can operate. We can do that, that’s our job here in Congress, for the sake of our country”.
In Japan, the epicenter of the nuclear safety debate, 9 nuclear reactors have restarted (mostly recently in April this year) since the Fukushima incident, with 3 more expected to get approval to restart in the near future.
In fact, there are currently 54 reactors currently in development in the world with China and India taking the lead.
China’s newly announced 14th Five-Year Plan for Nuclear Power targets power output of 70GWe by 2025. The China Nuclear Energy Association estimates that the country’s nuclear capacity will reach 130GWe by 2030. This is a pretty mind-boggling level of power production. China will need to build an additional thirty-five reactors this decade to meet this goal.
India is not far behind. Last month, France’ EDF filed a binding offer to supply engineering studies and equipment to build 6 nuclear reactors in Jaiapur, India. Nuclear power generation is expected to triple in India by 2031.
Investment Implications
While the tide is turning on Uranium demand in both the developed and developing world, supplies continue to languish. Over the last several years, many of the largest Uranium mines have curtailed production because spot prices have been simply too low. The two largest Uranium producers (Cameco and Kazatomprom) remain committed to observing supply discipline after experiencing almost a decade of spot prices that were below the all-in sustaining cost (AISC) for a significant percentage of their production. COVID-19 related mine closures have further exacerbated the supply situation.
Most Uranium is bought under long-term contracts by utilities, and until those contracts expire and inventories are drawn down (and utilities are forced to re-contract or buy in the spot market), the current spot price will continue to remain too low to incentivize new capex and production increases.
This could change if financial demand for Uranium picks up and forces the utilities’ hands (something I will cover in more detail in follow-up articles), but for now most utilities seem to be asleep at the wheel and/or content to let their contracts expire, run down inventory and risk re-contracting at a much higher prices in the future.
The percentage of utility demand under long term contracts has already fallen significantly over the past few years and inventories that were built during the demand shock in the post-Fukushima era are the only cushion insulating further spot price increases.
So what is the right spot price? Let’s take a look at the current supply/demand picture.
Base on most analyst estimates, the world will need to produce 200mm lbs/year + of U308 (Uranium oxide) to meet demand post 2025. Currently, only about 105mm lbs/year of supply has an AISC below today’s spot price of ~$30 / lb. In fact, only 140mm lbs/year has an AISC of below $50 / lb. A significant portion of this capacity (~20mm lbs/year) capacity is on ‘care and maintenance’ and some of it (~3mm lbs/yr) depletes every couple of years.
Sachem Cove Partners estimate that a $55 / lb long-term price is a starting point to incentivize new production and that much higher prices will be needed to eliminate the projected deficits. This is because of the sheer scale / magnitude of the demand increase required to meet the aggressive nuclear development plans announced by China and India over the next 5-10 years. In order to meet the recently announced nuclear development plans, the world will need to replicate 2-3 of the world’s current largest Uranium mines!
Below is a supply/demand forecast from Canaccord Genuity projecting a 100mm lbs/d deficit by 2030 even if spot prices increased on $60 / lb:
Here’s another one from TD Securities projecting a cumulative ~120mm lbs deficit from 2020 – 2025:
As more sell-side analysts are coming around to the view that the Uranium market is entering into a multi-year deficit, the investment community is also starting to wake up. Uranium ETFs like URNM and URA have seen massive inflows and increased their assets under management manifold.
The last time the world was on the verge of a Uranium supply deficit (in 2005 – 2007), uranium spot prices increased 10 – 12x to $130 / lb+. I believe the conditions for today’s bull market are far more constructive for a sustained price increase: 1/ the market is already in deficit 2/ the potential runway for demand is far larger and structural and 3/ there is a strong focus in the investment community to support ‘ESG’ investments which could be a big catalyst for fund flows and increased financial demand for Uranium (which will exacerbate the physical market deficit already discussed).
While Uranium spot price is already ~70% above its lows and many miners stock prices have multiplied manifold since, I believe this move is just getting started. Investors today are faced with a once in a generation opportunity to take part in major transformation of the energy landscape over the next decade. When the industry leader (Cameco) stock price breaks out of a decade + downtrend on high volume, the market is telling you the game may have changed. Are you paying attention?
The Pale Blue Dot 