Nuclear Energy in Germany

Nuclear energy has been heralded by many as one of the most important solutions to the growing energy demands of the world, particularly given concerns regarding increasing greenhouse gas emissions and the rising price of oil. The popularity of nuclear energy increased in the second half of the previous decade as various countries searched for alternative sources of energy to continue to fuel their growth. The US, for example, is looking to build new nuclear plants to meet its increasing demand and proposals for building thirty additional nuclear plants are being currently considered. As of January 2011, nineteen nuclear plants were under construction in Europe, eleven of them in Russia, one of the fastest growing economies in Europe. China and India, two of the fastest growing economies of the world, have also been looking to increase the production of nuclear energy to meet their insatiable power requirements.

However, the nuclear meltdown in Fukushima, Japan has changed this perspective. Since then, the nuclear energy discussion has been taking place under a cloud of uncertainty, specifically given the potential for plant disasters and the resulting exposure to radioactive materials leading to a myriad of health impacts (including radiation sickness, central nervous system damage, cancer and other impacts). Questions are, in turn, being asked about the safety, viability, and societal costs of nuclear energy production – there have even been a number of protests organized in various countries across the world, from Germany to Switzerland to Taiwan, forcing many governments to evaluate their position with on nuclear energy.

Partly as a result of these protests and other deliberations, in May 2011, Germany announced plans to shut down all of its nuclear plants by 2022, with eight plants closing immediately. The announcement makes Germany the first large, industrialized country to shift completely away from nuclear energy.

This decision by Germany has generated similar responses elsewhere:

• In Scotland, one of the leading members of the ruling Scottish Nationalist Party said that Scotland wishes to go down the same path as Germany.
• Not surprisingly given the earthquake impact, Japanese Prime Minister, Naoto Kan, has outlined his intent to do away with nuclear power, a view supported by 70.3% of the Japanese people in a July 2011 poll by Kyodo news agency. The chance of other countries also expressing similar directional views on nuclear energy cannot be ruled out.
• Also in May 2011, Switzerland decided to place a moratorium on building new nuclear plants and plans to stop using nuclear energy altogether. The date the Swiss have set to achieve this target is 2034, providing them sufficient time to bring about the change.
• In a referendum in June 2011 in Italy, 94% voters opposed the government’s plan to restart its nuclear program, which had been stopped following the nuclear meltdown in Chernobyl.

Impact on German Energy

In Germany, while the threat to short-term power supply is considered low (as more fossil fuels will be used to make up for the supply shortage), opposition has been raised to the plan. Specifically, this opposition stems from the fact that the change is being made within a very short time horizon with no ‘concrete’ plans. Indeed, Energy experts have warned German Chancellor Angela Merkel of power outages in the future that may result (shutting down nuclear energy without taking into account the supply of alternative energy sources to make up the shortfall could affect supply in the long run).

These developments are expected to have sizable impacts on various industries in the region, including German utilities.

According to Wolfgang Pfaffenberger, an atomic energy expert from Bremen, Germany, electricity producers in Germany will see significant revenue impact as the eight plants that are being shut with immediate effect collectively generate revenues of €3 billion, while providing profits of €1.5 billion for the producers. The impact will be greater by 2022, as the profit impact on the 17 nuclear plants in Germany will be €4 billion and revenue impact equal to €7.5 billion.. Furthermore, these companies are already incurring high costs in the form of a nuclear fuel tax introduced by the German government in 2010. (The top electricity producers in Germany have decided to sue the government for retaining nuclear tax while ordering the closure of the nuclear plants that they operate.)

With the adoption of alternative fuel sources, more emissions certificates will be required by energy companies to emit CO2 – according to Uwe Leprich, the Energy Researcher from University of Applied Sciences, Saarbrücken, Germany. €4.2 billion worth of emissions certificates will be bought annually by coal companies in Europe, with the four main energy companies bearing a large part of this expenditure.

(With the nuclear plant shutdowns and the economic impacts, it is possible that German energy companies with significant presence in the nuclear space could emerge as acquisition targets as their valuations could fall in the absence of revenue from nuclear energy production.)

At a more tactical level, the price of electricity is expected to increase as this transition happens, potentially adding to inflation in the region and impacting economic recovery. According to Tor Arnt Johnsen of the Statistics Norway Research Department, “All capacity taken out of the market tends to give higher prices. And even if Germany were to replace nuclear power with renewable energy, it will lead to increase in power prices, because renewable power is more expensive than nuclear power. This price increase will result in more expensive power for both Norwegians and other Europeans, because Germany is a large market, and price increases will spill into the integrated European electricity market.”

Shifting away from nuclear energy to other electricity forms could lead to an increase in wholesale power prices by up to €50/MW-h, according to a committee formed by the German government to assess the economic and ethical aspects of atomic energy. Electricity costs had risen across Europe after Germany’s decision to suspend operations in seven nuclear plants in March 2011. This could lead to further upward pressure on prices, especially affecting the costs and margins of energy intensive industries such as chemicals and building materials. With the German government looking to shield industries from high electricity costs, consumers are also expected to come under pressure which could affect their spending power and the performance of consumer-driven industries in Germany. The impact is expected to be broad-based in other parts of Europe as well, given that there could be an increase in pan-European electricity prices.

Who Could Benefit?

Utility companies based outside Germany could benefit as demand for the import of electricity into Germany rises, along with the rise in electricity prices. France and the Czech Republic are two countries that are likely to meet the electricity demand from Germany through exports. CEZ, the largest power company in the CEE region, is expected to reap a short term windfall of €41 million, as electricity prices rose 23% in March 2011 following the Fukushima meltdown, on the Prague-based Power Exchange Central Europe (PXE). Germany is also home to some of the largest wind and solar power companies in the world, generating approximately €16 billion in revenue. Forbes has reported that First Solar, the manufacturer of photovoltaic solar modules and photovoltaic solar systems, is one of the companies that could benefit from this development due to its strong presence in Germany. Given the potential future growth that renewable energy companies could achieve as a result, the shares of Europe-based SolarWorld, SMA Solar, Nordex, Q-Cells, Phoenix Solar, Renewable Energy Corp, and Vesta gained between 2.7- 13.3% on the day of the announcement.

Until new renewable energy sources can be built, however, the German economy will be dependent on imports to meet its electricity demand and generate power from fossil fuels. Closing just 40 nuclear plants (of the 440 plants worldwide) is likely to drive an increase in worldwide consumption of natural gas by about 7 bcfd (billion cubic feet per day), consequently leading to increased gas prices. Liquefied Natural Gas (LNG) prices spiked world over after the shutdown of the nuclear plants in Japan and this movement could intensify as Germany and other countries shift away from nuclear energy, ensuring significant benefits for oil and gas producers. According to Guenther Oettinger, energy commissioner, EU, “We need more gas. After Berlin’s decision, gas will be a driver of growth.”

Russian energy companies, which are the leading suppliers of natural gas in Europe, are expected to be one of the largest beneficiaries of the nuclear shutdown in Germany. Even though bearish sentiment in Europe on the back of the Greek debt crisis has prevented any substantial increase in oil and gas prices in the region, worldwide increase in demand for oil and gas combined with various supply constraints (such as unrest in the Middle East, increased difficulty in finding new sources of oil and gas, among others) are expected to maintain upward pressure on prices.

Prices of Uranium (probably the commodity most affected by this decision) have been experiencing a steady fall since the nuclear meltdown in Fukushima and Germany’s decision to shut down its nuclear plants. However, uranium prices are expected to remain strong on the back of demand in different regions of the world, especially China and India. David A. Talbot, an analyst with Dundee Securities, believes that by 2020, the demand for uranium in China will be five times the present demand for the fuel in Germany. There are 27 nuclear power plants under construction in China, with an additional 50 plants in the planning phase. According to Adam Schatzker, analyst with RBC Capital Markets, “The market will begin to recover in 2012 as the events at Fukushima become less of a driving force and the supply-demand fundamentals re-assert themselves. There is not enough uranium production, either current or planned, to satisfy reactor needs, initial core requirements and inventories for new reactors. A sustainably higher price should help resolve this gap”. Annual demand for uranium is expected to increase at an average rate of 3.1% per annum until 2014 and large demand-supply deficits are expected to drive prices in the medium to long term. But in the short term, stock prices from uranium producers could be negatively affected on the back of unfavorable investor sentiment.

Infrastructure Investment

Germany’s plans are to increase share of renewable energy to 35% of total energy produced in the country, up from about 13% presently. As discussed above, these events and the shift away from nuclear energy could be most beneficial for manufacturers of renewable energy producers and manufacturers of new electricity grid products. According to the German Energy Agency, this increase in renewable energy production will require the construction of 3,600 kilometers (2,235 miles) of power lines by 2020, linking solar and wind farms with consumers. Construction of these power lines alone will cost €9.7 billion.

New wind farms are being planned in Germany and the government has offered $7.26 billion in loans as part of the Reconstruction Loan Corporation (KfW), to construct the first 10 wind farms. Most wind farms are located in northern Germany, so the country is facing a significant shortage of grid connectivity for providing wind energy in different parts of Germany. Remote energy developing areas are providing significant investment opportunities for grid developers. According to Simon Smith, Credit Suisse, “The scale of the capacity additions and the requirement for higher levels of availability suggest there will be disproportionate demand for offshore wind”.

Investments to increase the base load capacity and grids for transmission are expected to drive demand for power transmission equipment such as switchgears and transformers. These events will prove to be beneficial for European power equipment suppliers such as Alstom, Siemens, and ABB, in addition to French suppliers Schneider Electric and Legran. Apart from these, demand for grid management solutions and high-voltage direct current (HVDC) interconnections is expected to increase as well.

Conclusion

Germany’s decision is expected to have mixed ramifications for both the local and European energy industry. The cost of essential commodities, such as electricity and natural gas, are expected to increase, which could impact recovery across the EU. However, it is also an opportunity for developers/providers of wind and solar energy along with infrastructure developers and power equipment manufacturers in Germany and the EU.

That said, with global power demand expected to increase in the coming years on the back of economic growth in various regions of the world, players in the nuclear energy space are still expected to benefit significantly as the demand for nuclear energy is likely to remain strong.

Author: Dipanker Mahay, Strategic Services Practice