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ESG Focus: EU Taxonomy To Accept Uranium, Gas

ESG Focus | Jan 11 2022

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

EU Leaks Taxonomy Criteria For Uranium And Gas

The European Commission is set to include nuclear energy and gas energy in its taxonomy but only under strict conditions – a move that could attract a capital influx to help the industry to adapt to new standards

-ESG investor attitudes to nuclear energy
-France, China and India see strong nuclear future
-Thorium in the game

By Sarah Mills

The European Commission (EC) has announced plans to include nuclear and gas in the European Union’s (EU) taxonomy.

A leaked draft of the technical screening criteria shows gas and nuclear energy will be included in the taxonomy under certain limitations.

It includes one project that permits a deadline of 2045 for nuclear energy plants and 2030 for gas-fired plants.

This comes as no surprise to industry observers.

Europe has been taking a temporary step back on many strongly held environmental positions, as China has taken a step up.

In addition, France has long been the outlier on nuclear energy with sources saying the nation is committed to nuclear power for at least 50 years, and it is widely reported the nation is involved in joint ventures with the Chinese in developing more advanced nuclear technologies such as cold fusion.

On the flipside, the German and Belgian governments have been orchestrating the closure of nuclear power plants, though overall sentiment towards nuclear seems to have turned in both countries.

The concession may be aimed at resolving these tensions within the bloc while securing access to a low-carbon energy source in the process.

It also suggests the recent public change of heart towards nuclear energy is likely to have greater longevity than the recent relaxation on gas KPIs.

The EC document says the commission will change the disclosure requirements for non-financial and financial undertakings to disclose the percentage of gas and nuclear activities in the denominator of KPIs in such undertakings.

Rules For Inclusion

For nuclear investments, companies will need a safe disposal plan and site for radioactive waste; use accident-tolerant fuel; and existing power plants may be granted a life extension it they modify and upgrade safety standards.

The leaked document also shows that new nuclear plants may be included if they receive construction permits before 2045, which doesn’t appear to be too great a hurdle.

New gas power plants will need a construction permit before December 31, 2030, reflecting the likely shorter life for gas in the renewables world.

For a new gas power plant to qualify for inclusion in the EU taxonomy, the plant would have to produce emissions below 270g of carbon dioxide per kilowatt hour and would have to replace a more polluting fossil fuel plant. It must be technically equipped to burn low-carbon gases.

ESG investment attitudes to nuclear policy

Morgan Stanley’s recent AlphaWise survey found that 19% of respondent investors apply a nuclear exclusionary policy to their funds.

ETF Stream notes that uncertainty about nuclear has caused ETF issuers and index providers to steer clear of nuclear energy plays to date.

Robeco reports the global share of power generated by nuclear energy fell -3.5% in the decade to 2018 and predicts Europe’s capacity will be 35% of its pre-2018 levels, and the US will be down to just 56% of pre-2018 levels.

Circularity is a critical theme for big capital and renewable energy will always be favoured over non-renewable energy, all things being equal.

But much depends on the stance of the industrialising world and the rate of price falls in renewable energy. 

And nuclear power is the only immediately available source of energy that does not cause global warming so it is likely to pay a critical role in the transition, ahead of gas.

This view is reinforce by France, China and India’s stance on nuclear fuel.

The main threat will be geopolitical trade wars. But most investors are likely to stay on the sidelines as the implications for various fuel sources become clearer.

ETF Stream notes that in the specialist spectrum, iShares Global Clean Energy UCITS ETF contains a 14% weighting to nuclear sectors, and that Xtrackers EUR Corporate Green Bond UCITS ETF allocates as much as 17%. 

Thorium In The Game

Should it be decided to divert capital to the industry, uranium wouldn’t be the only player in the game.

The EU taxonomy leak specifies nuclear power plants should use accident-tolerant fuel.

Thorium for example, is considered a safer fuel than uranium, is wildly cheaper and produces substantially less radioactive material than uranium, all of which make it a prime contender under early EU taxonomy criteria, which are only expected to tighten over time.

China has been experimenting with the fuel for some time and believes it to be an acceptable substitute.

India, which has some of the world’s largest thorium reserves, also leads the world in terms of commercialisation and in 2012 planned to meet 30% of its electricity demand through thorium-based reactors by 2050.

While its construction of fast-breeder reactors are more than a decade overdue, the nation’s first pressurised Fast Breeder Reactor is scheduled to come on line late this year, or early next year, and one assumes it will meet the EU taxonomy’s requirements.

China intends to pip India at the post and switch on the world’s first thorium reactor any time now.

Investors eyes will be peeled to the outcomes.

Still weapons-demand for uranium

On the flipside, nuclear plants have traditionally used uranium to produce weapons-grade plutonium, and judging from recent geopolitics, demand for such is likely to continue – but likely at a much lower scale.

Weapons production represents only a small percentage of energy production, particularly if nuclear energy receives the ESG green light.

The industry’s public image is deservedly poor given disasters such as Fukushima and Chernobyl, on top of the problems associated with waste disposal.

Thorium could give the nuclear energy industry the makeover it needs to survive in an ESG world. 

And, of course, there is always the hoary chestnut of fusion.

The Question Of Methane

The EU taxonomy provides early insight into the medium-term future of gas production.

Investors have been waiting for well over a year now for rulings on methane discharges.

Developments in satellite technology allow methane emissions to be more accurately calculated, laying the foundations for a new regime.

The subject was raised for the first time at COP26 in November, suggesting guidance should be forthcoming in 2022.

Morgan Stanley believes the cost of reducing methane in the energy sector should be manageable.

Many industry observers also note opportunities for miners to gain credits for capping existing methane leaks – some of which are substantial.

Morgan Stanley believes the gas carbon-dioxide-burning threshold will pose considerable challenges for the industry and may require hydrogen, biogas or carbon capture storage. 

Green Light For Now

For now though, the EU has given the green light to nuclear energy for what appears to be an extended timeframe.

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