Investors interested in the electrical utility sector and related industries, like mining and engineering, ought to pay a little extra attention to Japan over the next few months. With the last operating nuclear plant in Japan going offline for maintenance, Japan will be operating a nuclear power-free electricity grid this summer. Whether the country gets through the summer without incident or interruption, it seems safe to bet that advocates on either side of the nuclear power debate will be paying close attention.
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Was Fukushima the Last Straw for Japan?
Nuclear power would seem to be a natural fit for Japan, as the country has very modest fossil fuel reserves of its own and significant power needs. Nevertheless, a meaningful segment of the Japanese population has never been comfortable with nuclear power and various incidents over the years have periodically reinvigorated the anti-nuke movement.
With the disaster at the Fukushima power station in the wake of 2011's tsunami, though, it looks as though the public may be fed up. Since the tsunami, Japan's nuclear reactors have powered down for maintenance and stayed offline due to public opposition to bringing them back up. Recently, Japan shut down its last operating nuclear plant and seems poised to try to go through the summer without any nuclear power – meaning that Japan's grid has to cope without plants that made up about 30% of its generating capacity.
This summer will be the real test, as the warm muggy climate of much of Japan puts a strain on the power grid. Last year, the nation made it through by implementing usage limits and asking businesses to shift activity to off-peak hours (weekends and evenings) to reduce peak demand. If similar measures manage to succeed this summer, and residents are not subjected to blackouts or excessive limitations, it may be hard to muster the support to restart those nuclear plants. Activists in other countries could likely point to Japan as proof that nuclear power is not essential.
Japan Today, Europe Next?
Pressure has already been building in Europe for countries to shift away from nuclear power. Switzerland has abandoned plans to build any new plants, while Germany intends to phase out nuclear power by 2022. With the switch in political leadership in France, even the world's leading user of nuclear energy (about 80% of their total) may be on the verge of rethinking their commitment to nuclear energy.
Against this backdrop, a few countries like China and India are continuing to push forward with plans to build new nuclear plants. As is the case with Japan, some of this is motivated by a lack of adequate in-country fossil fuel reserves, while environmental factors are also coming into play as air pollution becomes an increasing health issue in many major cities.
The United States Caught in the Model
Nuclear power hasn't been popular in the United States for quite some time, its reputation ruined by accidents like Three Mile Island, Chernobyl and Vermont Yankee, but also by an inability to solve issues like waste disposal. When it comes right down to it, nuclear power in the U.S. has never offered the cost savings that its supporters project – some of that due to regulatory overburden, but also due to lower-than-expected operating cost efficiencies.
If Japan proves that nuclear power is not an essential or necessary part of the electrical generation system, it may not change all that much for the U.S. The U.S. generates about 20% of its power from nuclear plants and many utilities have shelved plans, leaving Southern Company as one of the only U.S. utilities seriously pursuing new plant construction in 2012.
It's also worth noting that 2012 has already seen a major shift in U.S. electricity generation – due in large part to growing natural gas supplies (and low costs) and growing environmental regulations, more and more utilities are switching from coal-fired production to natural gas.
The Implications of a Full Switch
There are certain predictions that seem fairly safe if Japan succeeds in weaning itself off nuclear power so quickly.
The switch away from nuclear power should be a major boon to natural gas producers around the world. No country wants to swap out nuclear generation for more coal-fired generation, but gas turbines are an increasingly attractive option. General Electric and Siemens have poured money into developing better gas turbines, reducing the cost of gas-fired production below that of coal. The impact on engineering firms will be well worth monitoring – those firms with expertise and experience in gas-fired plants will thrive, while those committed to servicing nuclear plants are going to be forced to adapt.
In the U.S., then, this will be a big help for natural gas producers, as well as midstream and pipeline customers. Globally, it may also create an opportunity for companies like Chevron that have invested heavily in offshore liquefied natural gas platforms that are intended to supply India, China and Japan in the years to come.
Certainly the abandonment of nuclear power would be crushing to uranium miners like Cameco; there would be demand for uranium to service existing plants, but the growth story would vanish. This migration would also not be notably positive for coal; while it may create some near-term incremental demand as an immediate replacement for nuclear generation, no country seems eager to tie more of its future electricity grid to coal.
Last and not least, abandoning nuclear power should be a major positive for renewable energy companies. Solar and wind power are nowhere near as clean as their supporters like to imagine, but they are not prone to the catastrophic failures that people are so afraid of with nuclear power. Germany has already couched its transition away from nuclear power in terms of establishing the country as a leader in renewable energy, and there would be a huge incremental need for solar panels and wind turbines if countries wish to replace nuclear-powered generation without substantial fossil fuel power additions.
The Bottom Line
While using nuclear power carries certain risks, so too does abandoning it without a solid plan in place for replacement. Businesses need access to cheap and reliable electricity to thrive; a night-time map of the world dramatically highlights the relationship between power and prosperity.
The risk, then, is that Japan is effectively forcing higher costs on businesses and consumers – a decision that almost always hurts economic growth and prosperity. While the competitive risks may be reduced by other countries joining in, the fact remains that Japan's power experiment may be gambling economic growth for a greater public sense of security.
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