The post Fukushima Daiichi energy landscape casts up new winners--and a loser or two

05/27/2011 11:18 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

In the middle future—say, the next five years—the energy sector landscape looks like it’s going to be very different than forecast just a year ago.

Nuclear energy seems to be, if not dead, on life support. (At least until everyone forgets Fukushima Daiichi. Five years or so?)

Predictable grid distribution problems have hit wind power harder than predicted.

Solar companies are driving costs down and efficiencies up faster than all but the most optimistic advocates forecast.

And while natural gas prices remain so low that it’s hard for gas producers to make a profit, the makers of equipment for generating electricity from natural gas are experiencing boom times.

It’s tempting to put this all down to the nuclear disaster (or near-disaster if your definition of a nuclear disaster requires molten nuclear fuel burning its way toward the earth’s core) at Fukushima Daiichi. The operator of that nuclear plant, Tokyo Electric Power, now acknowledges that three of the plant’s four reactors suffered fuel meltdowns in the days after Japan was hit with a devastating earthquake and tsunami. The company also says that it’s possible that the pressure vessels that house the uranium fuel rods, were breached in the disaster. But “most” of the fuel remained inside the pressure vessels, the company adds not so reassuringly.

It’s tempting, as I noted, to say that it’s the Fukushima Daiichi disaster that has rearranged the energy landscape.  I don’t think that’s the case. A lot of independent causal factors are at work here. But the Japanese nuclear disaster remains a good place to start any effort to put all those factors into a single picture.

Not surprisingly, the disaster at Fukushima Daiichi has led to a lot of re-thinking of national nuclear plans around the world.

Some of that re-thinking amounts to little more than re-assuring. I’d put the European Commission’s recommendation that national nuclear regulatory agencies inside the European Union conduct stress tests of the 143 nuclear plants now operating in Europe. Environmentalists are rightly skeptical of the rigor of tests administered by the pro-nuclear governments of the United Kingdom, France, and the Czech Republic. Reports from the negotiations say these countries fought hard to water down the plan. You can think of this stress test as the nuclear version of the banking sector test that saw almost every European bank pass.

But some of the re-thinking has actually resulted in real action. Switzerland, for example, has decided to put plans to build three new nuclear power plants on hold but also to decommission—that is shut down and entomb and/or disassemble—the country’s five operating plants.

The Fukushima Daiichi disaster came at a crucial time for the nuclear power industry. First, an entire generation of existing power plants are reaching the limits of their agreed upon lives. And second, the industry, after decades when no one built a nuclear plant was revving up for a surge of new construction based on new, theoretically safer, and more standardized designs. (The last U.S. nuclear plant to go into commercial service was in 1996. The last French reactor before the current wave of construction was built in 1999.)

Fukushima Daiichi changed all of that. For example, Germany, where Angela Merkel, had pushed through an agreement to keep the country’s aging reactors running for an extra 12 years through 2036, shut down all seven of its nuclear plants that went into operation before 1980 after the disaster. Now Merkel is looking to close the country’s remaining 10 reactors between 2020 and 2025.

And in the United States the Nuclear Regulatory Commission announced on May 19 that it had found design flaws in plans for a new generation of passive safety reactors designed by Westinghouse. Passive designs promise to be a huge improvement over older reactors: while the reactors at Fukushima Daiichi depended on active safety systems that required pumps, for example, to keep pumping cooling water, passive designs have safety systems built around gravity and convection that don’t require electricity to keep operating.

But, the agency has said, the computations submitted by Westinghouse for the design of the reactor shield building appear to be wrong or at least incomplete. The commission was on a schedule to finish its review of the design by the summer and the Southern Company has already dug foundations for two Westinghouse reactors near one of the utility’s existing nuclear plants.  (South Carolina Electric and Gas has also broken ground for another two of reactors of this design.) But now the commission is talking about an unspecified delay while Westinghouse submits another round of calculations. The Southern Company had projected that it would receive a construction and operating license by the end of 2011 and that it would have the first reactor on line by mid-2016.

If a country decides to shut down its nuclear plants or to delay building new ones, it has to find replacement sources of power. Right now that means some mix of alternative sources such as wind and solar and conventional sources such as coal and natural gas.

Wind has run into its own set of problems focused on the grid for distributing electricity. The problem is that the grid was built to get electricity from the places where conventional and nuclear power plants produced it to where the customers are. The world’s windiest places, however, are often far away—in western China or the U.S. high plains—from customers and they often require electricity to flow in new directions. In Germany, for example, the grid was designed to take electricity north from nuclear power plants located in the south. When those power plants go off line, electricity will have to flow from north to south or from east to west—and the grid wasn’t designed with those flows in mind.

This has led to a slow down in wind power installation—and promises to extend the grid to fix the problem on unrealistic schedules and with staggeringly optimistic budgets. Germany’s energy agency, for example, projects that the country needs to build 2,400 miles of new high voltage transmission lines from wind farms on the northern coast to urban industrial centers in the south. The estimated cost comes to a little less than $80 billion. In China where about 25% of installed wind power capacity isn’t on the grid, the national grid operator, State Grid, has announced ambitious plans to quadruple its on-grid capacity by 2015. Beijing has yet to budget the money to reach that goal.

I think these problems will get solved—but slowly.

If you’re looking for energy solutions now for plugging meeting electricity demand, I think the alternatives are solar, natural gas, and coal.

General Electric (GE) has certainly reached that conclusion.

On April 7 the company announced that it will build the largest solar panel factory in the United States. The plant, which will use thin-film photovoltaic panels using cadmium telluride, will annually produce panels with a capacity to generate 400 megawatts of electricity.  The plant is based on technology GE acquired when it bought thin-film maker PrimeStar Solar. PrimeStar Solar’s thin-film panels were recently certified by the Energy Department’s National Renewable Energy Laboratory to have achieved an efficiency of 12.8%. That’s a record for thin-film panels. Although conventional solar panels built on silicon are 16% to 20% efficient at converting sunlight into electricity, they’re also more expensive to produce than thin-film solar panels.

GE’s plans mark an important transition in solar power.” When you look at GE, we’re very good at scale,” Victor Abate, GE’s vice president for renewables told the New York Times. The company isn’t getting into this business because it believes it can make some pie-in-the-sky technology breakthrough. The name of the game in solar now, GE believes, is manufacturing to raise efficiency and lower costs—and scale to raise efficiency and lower costs.

General Electric is also going after the natural gas market at full speed. On May 25 it introduced a new natural-gas-powered turbine engineered to fit with the variable output from wind and solar power.  The company spent $500 million to develop a turbine able to quickly and efficiently vary its output of electricity to keep supply steady in utility systems with big wind and solar components.

The market for natural gas turbines has turned around in the last year. GE, the biggest producer of natural gas turbines, had projected that the market would be flat in 2011 and 2012, but now sees growth in both years that CEO Jeff Immelt has argued is the beginning of a “natural gas power generation cycle.” Siemens (SI), the world’s No. 2 producer of natural gas turbines predicts that over the next 10 to 15 years a third of the coal fleet will be retired, and probably the vast majority will go towards gas.”

“Probably.” We’ve heard this before and you’re entitled to be skeptical. Natural gas was supposed to get a big boost from efforts to control carbon emissions in order to combat global warming. Didn’t happen.

This time around, though, the global warming story would be a nice boost to what is a pretty simple economic story. Thanks to a glut of natural gas a new natural-gas-fired plant generates electricity for about 6 cents per kilowatt-hour whereas a new coal-fired plant would have a generating cost of about 7.5 cents per kilowatt-hour.

What stocks do you want to own to take advantage of the new energy landscape?

Some of the choices are simple—you want to own the makers of natural gas turbines rather than the producers of natural gas, where prices barely match costs now. That means General Electric, although I wish the energy business were more than just 25% of the company, and Siemens. The Precision Castparts (PCP) unit that makes the parts for natural gas turbines looks to be ending its long-term slowdown and to be ready to contribute to the company’s improving top line from its jet engine business. In solar I think scale and manufacturing efficiency will count: my suggestions here are SunPower (SPWRA) and one of the Chinese manufacturers such as Yingli Green Energy (YGE) with their big controlled domestic markets and access to cheap capital. U.S. thin-film leader First Solar (FSLR) has too much exposure to the currently unpredictable European market for my taste right now (Have you heard, there’s a debt crisis going on in Europe?), but the company has about six times the production capacity of GE’s new plant. I’d also take a look at General Cable (BGC), by far the global leader in high-voltage transmission cables. The company has now generates two-thirds of its revenue outside the United States.

And I wouldn’t forget coal. It remains the fuel of choice for generating electricity in China and India. I’d look for coal producers with good access to those markets, such as Peabody Energy (BTU), BHP Billiton (BHP), and Indonesia’s Adaro Energy (ADRO.IJ in Jakarta).

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Adaro Energy, Precision Castparts, and Yingli Green Energy as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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