A nuclear plant operating under normal conditions has one of the lowest immediate environmental impacts of any source of energy. The lifecycle carbon emissions from nuclear-derived electricity are lower than any other source of power except for onshore wind power. (Source: See Table A.III.2). But unlike wind power, nuclear power is firm power, able to produce electricity on demand. No other major source of power can consistently match nuclear power’s 70-90% capacity factor (i.e., the ratio of a plant’s actual output over a period of time to its potential output).

But the downside to nuclear power is that a single accident at a plant — while exceedingly rare — can have enormous consequences. The 1986 Chernobyl accident in Ukraine resulted in dozens of direct fatalities (and an eventual fatality toll estimated in the thousands from increased cancers), spread contamination across many countries in Europe and left more than 1,600 square miles uninhabitable because of heavy radiation contamination. And while there were no direct deaths attributed to the Fukushima disaster, 300,000 people had to evacuate their homes — many permanently — on short notice. Only a nuclear power plant is capable of such wide-ranging consequences.

While that is the primary downside of nuclear power, there is also the issue of nuclear waste. Communities have fought to keep nuclear waste repositories out of their region, and many people don’t like the idea of living along a nuclear waste transport route. Therefore, the waste often just accumulates at the power plant, which is not a long-term solution.

Nuclear power has suffered some huge setbacks, but in the long-term many developing countries will turn to nuclear energy for firm power. It will be seen as a trade-off between the world’s other major power source — coal. (A coal-fired power plant actually emits more radioactivity into the environment than a nuclear plant.) According to the European Nuclear Society, there are currently 437 operating nuclear reactors in the world with a total capacity of 374.5 gigawatts (GW). But there are another 70 reactors under construction globally with a total capacity of 66.6 GW. About 40% of the new reactor capacity is in China.

Companies that mine uranium have been hit hard since the Fukushima disaster. Canada’s Cameco (NYSE: CCJ) is the largest publicly traded uranium miner in the world, but since Fukushima its stock has dropped 56%. Another Canadian supplier, Denison Mines (NYSE: DNN) has been hit even harder, down 70% since Fukushima. The primary problems currently facing the industry are excess supply due to the decline in global nuclear power production, and a perception that it will still be a while before the industry recovers from the downturn fueled by Fukushima. Nevertheless, based on the new reactors under construction, the industry isn’t dead just yet.

Renewables

Renewables cumulatively accounted for 2.2% of the world’s primary energy consumption in 2013. These renewables consisted predominantly of biofuels, wind power, solar power and geothermal power.

The downside of the renewables falls into several categories. For biofuels, the primary downside is that most of them utilize fairly substantial fossil fuel inputs, which makes them to a certain extent fossil fuels in disguise. The high dependence on fossil fuels is also what tends to make them cost more than fossil fuels, particularly for second-generation biofuels. Further, most biofuels are made from food crops, putting them potentially in competition with food consumers.

Major biofuel producers around the world include Finland’s Neste Oil (Helsinki: NES1V, OTC: NTOIY), Renewable Energy Group (NASDAQ: REGI), REX American Resources (NYSE: REX) and agribusiness giant Archer Daniels Midland (NYSE: ADM).

For wind and solar power, intermittency is the biggest downside. Unlike firm power such as that derived from coal or nuclear power, wind and solar power can’t always be counted on when needed. Therefore, they require firm power sources as backup. Both sources have also been responsible for the death of many birds. Most recently a report from the US Fish and Wildlife Service called the Ivanpah concentrating solar power (CSP) plant a “megatrap” and made recommendations on how to make CSP safer for birds. Historically these have also been more expensive sources of energy that required subsidies, but costs are coming down (especially rapidly for solar power).

The Danish company Vestas Wind Systems (Copenhagen: VWS, OTC: VWDRY) was the world’s largest manufacturer of wind turbines in 2013, while Chinese company Xinjiang Goldwind Science and Technology (OTC: XJNGF) was the world’s second leading wind turbine wind turbine producer last year.

The top three solar PV manufacturers globally are Chinese producers Yingli Green Energy Holding (NYSE: YGE) and Trina Solar (NYSE: TSL), and Canadian Solar (NASDAQ: CSIQ). Abengoa Solar is the largest producer of concentrated solar power.

Geothermal power is perhaps the most innocuous power source of all. Geothermal electricity has a high capacity factor, and the cost of generation is comparable to that of coal-fired generation. During normal operations, there are no carbon emissions, although there are sometimes emissions of harmful gases when geothermal wells are drilled. The main disadvantage of geothermal is that it is geographically limited to regions that have relatively shallow geothermal resources — which is a small fraction of the earth’s surface.  

The largest producer of geothermal power in North America is Calpine (NYSE: CPN), while the largest producer of geothermal power in the world is Chevron (NYSE: CVX), which operates geothermal plants in Indonesia and the Philippines. Another major publicly traded producer is Ormat Technologies (NYSE: ORA), a subsidiary of Israel’s Ormat Industries (Tel-Aviv: ORMT) and a builder and operator of geothermal plants and supplier of related equipment.

Conclusions

Energy policy is dictated by politics, which is dictated by perception. We must understand that there is no perfect energy source, even among those considered renewable. Each of our energy options has its advantages, but there are also costs, trade-offs, and risks associated with each. It is important to understand the nature of these costs and trade-offs, as well as the potential risks and consequences in order to have fruitful discussions over the direction of US energy policy.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

ETP Rises to the Top

Master limited partnerships didn’t have a good month in September, but they had a much better one than energy equities on the whole. That’s not surprising: generous yields from stable fee-based businesses with lots of growth opportunities are a scarce commodity in this market.

Even within the MLP space, yields are down a lot in a relatively short time. And that makes those that can still provide meaningful current income with a growth kicker all the more valuable.

Energy Transfer Partners (NYSE: ETP) fits the bill. It still yields more than 6% and is growing its distribution at an annualized rate of more than 8%, while profiting from its general partner stake in two affiliated MLPs and the strategic scale of its parent.

The market has finally taken notice. On Monday, ETP’s unit price rose 3.2% to a new record high. It is the second best-performing MLP for the month of September with a gain of 9.6% through Monday, while the Alerian MLP Index was losing 2%.

The recent strength has been accompanied by heavy call buying, especially of the December, January and March calls with modestly out-of-the-money strikes.

Last month’s Kinder Morgan (NYSE: KMI) offer to buy out its MLP affiliate Kinder Morgan Energy Partners (NYSE: KMP) is very likely fueling some of this excitement because, like KMP, ETP is large, relatively high-yielding and slowed by an incentives scheme entitling its general partner to a rising share of its profits.

Late last week, in a note reprised on Seeking Alpha Monday, Morningstar’s director of energy equity research, Jason Stevens, singled out Energy Transfer Partners’ general partner, Energy Transfer Equity (NYSE: ETE), as the GP likeliest to follow Kinder’s lead. ETP’s growth is actually accelerating rather than slowing as was the case at KMP. Still, even after the recent rally its yield of 6.1% is far more generous than ETE’s 2.5%. An all-equity merger would save ETE quite a lot of distribution money that it could funnel into new projects and acquisitions. And because ETE is itself a master limited partnership, ETP’s unitholders would not be subject to the same unpleasant tax consequences faced by the most loyal investors in KMP, because an all-equity merger between MLPs wouldn’t trigger deferred taxes.

But we’re getting ahead of ourselves, and there are more obvious reasons to like ETP here. In our case, they’re sufficient to add ETP to the Conservative Portfolio with a buy below target of $70. 

Start with the yield, which still looks quite rich for a partnership with good growth, solid coverage and continental scale. And while ETP has its own demanding GP, it is itself a general partner to fast-growing Sunoco Logistics (NYSE: SXL) and now, following the closing of the acquisition, to Susser Petroleum Partners (NYSE: SUSP).

SUSP, soon to be renamed Sunoco, has already agreed to the first of numerous likely dropdowns from ETP, paying $768 million, including $556 million cash, for a portfolio of mid-Atlantic filling stations and convenience stores. ETP retains a network of more than 5,000 Sunoco stations, along with its GP interest in SUSP and SXL and the 50% of SXL incentive distribution rights it hasn’t yet sold to its own parent.

Further dropdowns into Susser/Sunoco and the eventual sale of its remaining SXL incentives to ETE provide one avenue for distribution growth. New crude and natural gas transportation routes are also in the offing, ETP is likely to see the benefits of these within two years.

In June, ETP’s board approved a new 1,100 mile pipeline transporting  Bakken crude to the Midwest, where it will link to a converted ETP gas pipeline for transit to the Gulf Coast. The new Dakota Access Pipeline’s initial capacity of 320,000 bpd has already been fully subscribed, and Energy Transfer is already marketing additional capacity that would take the throughput above 450,000 bpd and possibly to as high as 570,000 bpd. The $5 billion pipeline is expected to enter service by the end of 2016.

By about that time ETP also hopes to have completed the first stage of another major project recently greenlighted by its board, the $4 billion Rover Pipeline shipping Marcellus and Utica natural gas to western Ohio and ultimately to trading hubs to the west, north and south.

These projects are not providing any growth yet, and neither is the big Lake Charles LNG export project that ETE has already successfully marketed, and for which ETP would be the principal shipper of natural gas.

As far as the market is concerned, ETP is still a modest grower that wasn’t growing its payouts at all as recently as last year, and which has badly lagged the MLP sector’s gains. As recently as April, ETP’s unit price was no higher than it had been in early 2011.

But this is a much stronger partnership now than it was then or even last year, with a strong slate of growth drivers, valuable assets and a yield many crave.     

                                                                                                — Igor Greenwald