Stocks to Watch in Nuclear

Image source: Tony Webster/ Flickr.

Nuclear power boasts the highest capacity factor of any energy source, produces enormous amounts of carbon-free electricity, and is by far the safest energy source used today, even when compared to wind and solar. Whether we like it or not, nuclear power is here to stay, or at least until the 99 reactors currently operating in the United States -- providing 19% of the nation's electricity needs -- are decommissioned decades from now. 

Of course, that says more about the history of nuclear power. Investing is about the future. So what factors will determine nuclear's role in the future of energy? Why are Southern Co (SO 1.10%), Exelon (EXC 0.71%), and General Electric (GE -1.75%) stocks to watch in nuclear? Let's take a closer look.

Largest producer in the country
No company generates more nuclear power than Exelon, which owns one-in-four nuclear reactors in the United States, and attributes 55% of its capacity, and 81% of its generation, to atomic energy. In other words, much of the company's $27.4 billion in annual revenue can be traced back to its nuclear assets. Recently, much of the company's woes have been traced back to nuclear, too.

While Exelon is comfortably profitable and pays out a respectable 3.6% dividend, it slashed its dividend 42% in early 2013 in response to its nuclear fleet's increasing difficulty competing with cheaper natural gas and wind. Despite the doomsday predictions at the time, the company appears to be on stable ground now, especially after the state of Illinois, where 62% of the company's nuclear capacity resides, altered its Clean Energy Standard to include electricity generated from atomic energy. If you're looking for stocks to watch in nuclear, then it's difficult to top Exelon.

Newest reactors in the country
In early 2012, the Nuclear Regulatory Commission approved Southern Co's bid to build the first new nuclear reactors in the United States since 1978. The company has since pushed ahead in constructing two new 1,100-MW-reactors to boost the capacity of the two operating reactors at Plant Vogtle near Augusta, Georgia. Unfortunately, the critics appear to have been right thus far.

Nuclear reactors can safely operate for 60-80 years. Image source: NRC/ Flickr.

The original price tag for Vogtle 3 and Vogtle 4 was a staggering $14 billion. While that was buoyed by an $8.3 billion Department of Energy loan and a state guarantee for Georgia Power to cover an additional $6.1 billion, construction delays and untimely setbacks have pushed expected costs to nearly $18 billion. If that wasn't bad enough, Southern Co is placing blame and responsibility on the builders, Toshiba and Chicago Bridge & Iron, while Georgia Power is now awkwardly caught in the middle.

Why does this matter for investors? Well, Georgia has a regulated power market, meaning the state can step in to artificially support large construction projects that require decades to payoff. The Vogtle additions would not be able to compete in a state with an unregulated market, which favor cheaper power sources with faster payoffs. If traditional nuclear power plants (large and centralized) can't compete in Georgia, then it may be a sign of things to come for nuclear power as we know it today.

Next-generation nuclear power
As large, centralized nuclear power plants at Exelon and Southern Co struggle to remain competitive with fossil and renewable energy sources, General Electric is forging a new path forward. The company owns one of the most advanced, albeit unfinished and unapproved, designs for a small modular reactor, or SMR. The sodium-cooled PRISM is a Generation IV nuclear reactor -- no Generation IV reactor has ever been deployed -- with an output of just 311 MW; but that's viewed as an advantage, not a setback.

SMRs can be constructed off-site in a manufacturing facility, shipped to site via truck or rail, and assembled onsite -- significantly reducing construction costs and deployment timelines. Better yet, the PRISM can consume a range of fuels including plutonium and used nuclear fuels stored at traditional nuclear power plants. Coupled with its smaller size, General Electric could build PRISMs at existing nuclear power plants to reduce waste stockpiles and boost electricity output. How's that for the future of nuclear?

What does it mean for investors?
While I support the widespread use of nuclear power, I think it's likely that traditional nuclear power will find it increasingly difficult to compete with fossil and renewable power sources outside of specialized cases. But that doesn't necessarily mean existing reactors cannot support valuable investments, nor does it mean that nuclear power is dead. It may just look strikingly different in the future.