Max Pacella
Investment Analyst
4 May, 2021

The finale to this series is really heating up as we get to the exciting energy sources, fire and brimstone, harnessing the raw power of volcanic vents or watching the gradual but spectacular breakdown of heavy elements.

Can a wind turbine turn lead to gold over a decade? Didn’t think so. But a nuclear reactor can.

Concluding our green energy series, beginning with solar and discussing wind & water last week, today we examine the market, science and investible opportunities across geothermal power and nuclear energy as they exist today – we may touch on the investment possibilities for nuclear fusion in a note on its own.

Fire and Brimstone

Geothermal power is likely the most obscure of all green energy sources – whilst all other sources are mostly visible on our roofs or along hilltops, geothermal plants are several kilometres deep and are not possible in many parts of the world.

As of 2019, the total installed capacity of geothermal power only 15.4GW (BP), with just under 24% of that capacity being located within the United States.

With that being said, the Geothermal Energy Association released a report in the late 2000s estimating that there could be global capacity for up to 2 TW of geothermal power untapped.

Geothermal power plants utilise the heat trapped within the Earth’s crust, ideally in areas with high levels of volcanic activity – for this reason, Iceland produces over 26% of its national electricity using geothermal stations.

Source: Environmental Protection Agency

An interesting observation is that geothermal is one of the most expensive up-front costs per unit for renewable energy – around $2,500 USD p/kilowatt of capacity (International Energy Agency), far in excess of wind power which is approximately $2,000 UDS p/kilowatt.

But once established and upfront costs are accounted for, geothermal is one of the cheapest long-term power sources since the main costs of operation is comprised of drilling; the actual station needs to be replaced every 30-50 years, a longevity and cost savings which you would not see for solar panels or wind turbines.

Perhaps surprisingly, there are investible pure-play opportunities within the geothermal energy space.

Ormat Technologies (ORA:NYSE) is one of the largest listed geothermal providers in the world, with an installed capacity in excess of 3,200MW across 190 plants. This means Ormat controls and supplies 6% of the world’s current geothermal energy.

It sits within the top 20 holdings of the iShares Clean Energy ETF (ICLN:NASDAQ) as well.

One of the biggest points made by analysts covering the stock is that it is the only vertically integrated geothermal company, meaning that it is involved in each stage of the process from designing and funding the plants through to operation and power supply.

There has been some controversy around the company, including targeting by short sellers in the last two months regarding corruption claims, so exercise caution in your due diligence here.

Source: Bloomberg

For a more diversified holding, Chevron Corporation (CVX:NYSE), better known for its oil and gas operations, has begun making investments into small geothermal assets such as Baseload Capital (private investors focussing on developing new geothermal technology).

It is likely that as the global demand for petroleum declines, the oil companies will begin making investments into more and more alternative energy sources, with geothermal seeming a natural fit since they already have the drilling equipment and expertise.

And last but not least, Vulcan Energy (VUL:ASX) is increasing its exposure to geothermal energy by making a second acquisition of a German geothermal engineering company last week – with their on-going aims to be the worlds first zero carbon lithium producer.

Destroyer of Worlds

Nuclear power is the most controversial source we will have touched on in this series – and with that comes the understanding that until a global education process occurs, there will be challenges to investment.

Globally, around 10% of our electricity is generated by nuclear plants (Source: Our World in Data), with those reactors which are used to generate electricity for a commercial power grid amounting to a combined 329GW. This may be surprising that nuclear is actually a smaller source than wind or hydro.

Although I’d like to spend a thousand words explaining the nuclear fission process – in the event my high school physics teacher reads these notes – we’ll exercise a little restraint and touch on it at a high level so we have ample opportunity to explore investments.

Nuclear fission is the process of splitting atoms of a ‘fuel’ apart – neutrons are fired at a heavier atom to break it apart into lighter elements, releasing both heat and radiation as links between the sub-atomic particles are split, in turn releasing more neutrons to continue the process.

Source: Encyclopedia Britannica

The process of the neutrons splitting to then collide with other atoms is known as the “nuclear chain reaction”, the speed at which it occurs simply known as the multiplication or ‘K-value’:

  • If k=1, then the reaction is called ‘critical’, which means the number of neutrons will always stay constant. No risk of meltdown.
  • If k >1, then the reaction is ‘supercritical’, which means the neutron population will grow exponentially. Risk of meltdown.
  • If k <1, then the reaction is ‘subcritical’, which means the neutron population will shrink exponentially. Reaction will eventually stop.

Power-generating nuclear reactors will run at a rate slightly higher than k=1, in order to generate power in excess of what is needed to keep the reaction going.

In Sydney, the Lucas Heights nuclear reactor is a research reactor and as such does not use a fuel or k value which can physically go supercritical – it literally cannot melt down, despite the concerns of locals.

And that again illustrates the important point of education and controversy around nuclear power. A key risk for investors is the acceptance of nuclear power by the broader population, with the meltdowns of Fukushima (caused by an earthquake disabling cooling mechanisms) and Chernobyl (human error) in the back of their minds.

The two most common ways to get exposure to nuclear energy is through the builders, operators and suppliers of the plants, or through the materials which are used as nuclear fuel.

One of the largest companies which handle the construction and operations of nuclear power plants is General Electric (GE:NYSE), primarily through their subsidiary GE Hitachi Nuclear Energy. This is a more direct holding than other large utility companies, since the company will benefit from a range of increased revenue factors if/when nuclear energy is implemented more broadly across the developed market.

To invest into nuclear fuel (at least for the moment) is to invest into uranium miners – most reactors employ the highly reactive U-235 isotope, although for smaller reactors like the ones we would need for commercial use in Australia, U-238 would suffice (which we coincidentally have an abundance of).

Cameco (CCO:TSE) is the largest publicly traded uranium company, producing more than 20 million kilos of uranium each year – in 2019, their mining accounted for 9% of the world’s uranium production. Jesse had this as a recommendation for the ESG/re-opening trade back in September – it’s done as well as you would expect since then.

Source: Bloomberg

A little closer to home, BHP (BHP:ASX) holds one of the largest deposits of uranium in the world at its Olympic Dam mine – that mine alone accounts for around 6% of global supply in 2019. Similarly, RIO (RIO:ASX) produce uranium (albeit a lower grade) from its Ranger mine, which accounted for around 2% of global supply in 2019.

BHP and RIO are diversified exposures to the commodity market in general, so may either play better or worse into your portfolio depending on your positioning on that theme.

It’s Not Easy Being Green

To conclude this series, it’s clear that there are ample ways to play the green energy theme.

There are few investment ideas which have stronger structural tailwinds behind it than ‘clean energy’, from both the growing ESG appetite of the market to the government-mandated shift away from fossil fuels towards renewables.

From the components and resources, to the researchers and technology providers, to the builders and providers, there are multiples of opportunities across each clean energy source to invest at any stage of the supply chain and at the market cap of your choice.

It is inevitable that technology will improve and get to the point where renewable energy sources will be able to supplant the current reliance on fossil fuels – it is only a matter of time and capital.

On that note, I conclude this series with a quote from J Robert Oppenheimer on the only true headwind against this investment thesis:

“There are no secrets about the world of nature. There are secrets about the thoughts and intentions of men.”

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.