Without question, nuclear power offers environmental advantages over fossil fuels and will play an increasingly important role in global energy supply. Forget all the talk about Yucca Mountain, US loan guarantees for nuclear-power facilities and byzantine regulations regarding new plant permitting in the developed world. The build-out of reactors in Russia, China, India and other emerging economies continues to accelerate.

Germany’s approach demonstrates the futility and long-term costs of an energy policy that doesn’t feature nuclear power prominently. 

The country’s energy problems trace back to 1998, when the Red-Green coalition–an alliance between the center-left Social Democratic and left-leaning Green parties–formed a government. 

One of the Red-Greens’ major policy initiatives was to phase out nuclear power. In June 2001, the coalition reached a compromise measure that allowed the nation’s 19 existing plants to operate for an average of 32 additional years but prohibited the construction of new reactors.

Nuclear power, which accounted for more than one-quarter of Germany’s electric supply, was destined to die a slow death.

Meanwhile, Germany is the world’s largest net importer of natural gas. With few domestic sources of the fuel, the nation imported nearly 89 billion cubic meters in 2009, roughly 35 percent of which came from the world’s largest natural gas exporter, the Russian Federation.

Germany isn’t the only nation that finds itself in this bind; the Continent is home to several of the world’s largest natural gas importers. And with production from traditional European suppliers such as the UK and Norway either in or on the verge of decline, Russia will supply much of the Continent’s natural gas in coming years.

Renewable and alternative energies are the centerpiece of many governments’ energy policies. Germany has been a market leader in wind and solar. Generous feed-in tariffs effectively guarantee attractive returns for new alternative energy projects for 20 years. Despite relatively modest wind and solar resources, Germany is among the fastest-growing markets in the world for both technologies.

Although alternative energies hold some longer-term promise, blind and seemingly unwavering confidence in these solutions near-term benefits is misplaced.

By their very nature, wind and solar power are intermittent energy sources; when the wind isn’t blowing or the sun isn’t shining, natural gas-fired plants provide for much of the shadow capacity that keeps the electricity flowing. This pie graph breaks down Germany’s electricity mix from 1998 to 2008.

Source: Energy Information Administration

As you can see, thermal sources–primarily gas and coal–have lost share in Germany’s electricity grid over the past decade, though they still accounts for more than half of the nation’s net power generation. Natural gas consumption is up roughly 8 percent over this period, but coal use has flattened or declined.

Although Germany’s generous subsidies have increased its wind-power capacity significantly, this renewable energy accounts for just 6 percent of total generation. The country’s investments have produced a relatively small increase in electricity generated from wind power.

Wishful thinking aside, current wind- and solar-power technologies don’t offer a real alternative to fossil fuels.

Meanwhile, nuclear power’s share of Germany’s electricity production has fallen from 29 percent of total output in 1998 to 22 percent in 2008. And if Germany sticks to its plan, this share will continue to drop. At this point, it appears unlikely that wind, solar and biomass will be able to replace 22 percent of the country’s power generation. Natural gas is the only realistic alternative.

Russia, on the other hand, has a much different take on nuclear power. The country boasts 32 nuclear reactors–23,084 megawatts (MW) of capacity–that generate about 18 percent of its electricity. As of Oct. 1, Russia had 10 new reactors, 9,000 MW of capacity, under construction. Once completed, these plants will increase the country’s nuclear-power capacity by 40 percent.

That’s only the first wave. Russia has roughly 16,000 MW of additional capacity in some stage of planning, while reactors with a further 28,000 MW of capacity have been proposed. Nuclear power is clearly on the ascendant in Russia.

These days, natural gas remains the king, accounting for more than 50 percent of Russia’s primary energy consumption and almost 50 percent of generated electricity. But change is in the air. Russia plans to increase nuclear, coal and hydroelectric power production, enabling it to boost exports of natural gas.

The government published aggressive targets in Energy Strategy of Russia for the Period up to 2030, a blueprint released in late 2009. The report forecasts strong economic growth that will power a 58 percent jump in primary energy consumption between 2008 and 2030. At the same time, the government expects domestic consumption of natural gas to grow no more than 40 percent. Even more telling, Russia is looking to boost gas exports by as much as 53 percent, with about 75 percent of these exports destined for Europe and the balance heading into Asia-Pacific markets.

Under Russia’s plan, nonfuel power sources–hydroelectric, renewable and nuclear–will feature more prominently in the nation’s energy mix, generating 38 percent of the electricity consumed in the country, a 5.5 percent increase. Nuclear power is expected to account for 4 percent of this increase, while much of the balance will come from hydroelectric facilities. This will allow Russia to reduce its dependence on natural gas as an energy source.

Coal is the other big winner. Roughly 70 percent of Russia’s thermal-power plants use natural gas, while only 26 percent are coal-fired. The government expects that by 2030 coal’s share will have jumped to 36 percent, while natural gas-fired plants will represent 60 to 62 percent of thermal-power facilities.

Note how Germany and Russia’s energy plans, albeit diametrically opposed, mesh together. If Russia ramps up exports of natural gas to the EU, Germany will able to shutter its nuclear reactors and install more wind- and solar-power capacity. But this scenario depends on Russia expanding its fleet of nuclear reactors.

Nuclear Renaissance

The opposition between Germany and Russia’s policies on nuclear energy illustrates a broader point: Emerging markets are driving growth in nuclear power.

In fact, the global nuclear-power industry is in the early stages of a multiyear growth spurt similar to what the industry experienced in the late 1970s and ‘80s. What many have referred to as a nuclear renaissance will generate tremendous wealth for investors over the next few years.

The oil price shocks of the 1970s prompted many countries to stop producing electricity from crude oil. In the US, for example, the power industry’s use of petroleum has declined by more than 90 percent since peaking in 1978. To put that into perspective, total US net electricity generation has also soared more than 73 percent since 1978.

The nuclear power industry was a major beneficiary of the rise in crude oil prices in the ‘70s and the subsequent decline in the use of crude to produce electricity through the 1980s and 90s. After the oil price shocks, utilities the world over sought a power source that fit two key criteria: a lack of dependence on imports and costs that don’t vary excessively with commodity prices.

These advantages catalyzed a nuclear-power construction boom in the late 1970s and early 1980s.

Source: Energy Information Administration

Capacity is the purest measure of the number of new plants that are built and brought online. As you can see, global nuclear capacity grew quickly in the 1980s and slowed dramatically after 1990. Through the ‘80s, global capacity increased by more than 140 percent, an annualized growth rate of more than 9 percent. In contrast, total nuclear capacity grew just 9 percent in the 1990s. 

But this time emerging markets, not the developed world, are at the vanguard of the nuclear renaissance. Check out the graph below.

Source: World Nuclear Association

As of Oct. 1, there were 441 nuclear reactors operating worldwide. Total capacity stood at 376,000 MW, and generation accounted for 13 to 14 percent of the world’s electricity. Meanwhile, 58 new reactors (total capacity of 60,484 MW) worldwide are at some stage of construction. Once completed, these new facilities would increase nuclear capacity by 16 percent.

As you can see, most of the plants under construction are in developing countries. China is in the process of constructing 23 reactors with a total capacity of nearly 26,000 MW. The plants currently under construction will roughly triple the size of China’s nuclear fleet. Russia and India are also building their nuclear power capabilities.

And plants under construction are only the beginning of the story. The World Nuclear Association (WNA) also maintains statistics on plants that are “on order or planned.” Construction has not yet begun on planned reactors, though major regulatory approvals and financing are in place. The WNA estimates that these plants are likely to begin operating within the decade.

Globally, there are 152 planned reactors with total capacity of 167,401 MW–roughly equivalent to the capacity of existing reactors. Emerging economies also account for many of these planned reactors. In fact, China, India and Russia alone account for about half of the world’s planned nuclear facilities.

The WNA also tracks proposed reactors, plants that are in an earlier stage of planning and would likely take 15 years to be constructed. These plants are the least likely to be built. Nonetheless, the WNA estimates that there are 337 proposed plants with a total capacity of 382,825; most of these plants would be sited in developing countries, though some developed countries have aggressive longer-term plans for reactor construction.

A major building boom is underway for nuclear capacity. Over the next decade, capacity growth rates should resemble those of the ‘70s and ‘80s.

One of the biggest beneficiaries is uranium producers. The spot uranium market–the market for immediate delivery of material–is small and illiquid. Most uranium used in the world is contracted under long-term supply deals; the spot market typically accounts for roughly 10 to 20 percent of total volumes consumed each year.

Nonetheless, spot uranium prices are a good gauge of general sentiment surrounding the prospects for nuclear power and uranium supply and demand. Here’s a graph of uranium prices since 1995.

Source: Bloomberg

Uranium prices have been on a rollercoaster ride over the past decade. In the late 1990s up until late 2003, prices hovered around $10 per pound. But between 2003 and 2007 spot uranium prices went parabolic, climbing to just shy of $140 per pound in early June 2007.

Uranium prices have pulled back sharply since then, hitting a low of $40.50 per pound in April 2010. But prices didn’t come close to their 2001-03 lows.  

The uranium market is showing signs of life again. After flat-lining in the low $40s per pound over several months, prices climbed as high as $48 per pound in September, before falling back to $46.50. Producers, utilities and investors all increased the volume of their activity. 

This is the opening act of what’s likely to be the next leg higher for uranium. I expect uranium spot prices to climb above $60 per pound in 2011, though there will be plenty of volatility along the way. The three main catalysts for this move: the biggest build-out of nuclear reactors since the 1980s, a slowdown in uranium supply growth and rising mining costs.

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