Investment Insight | Clean energy
In Investment Insight | 06 September 2021 | Spring has sprung we discussed that August was a turning point for our growth portfolios. In this Investment Insight, we discuss clean energy as an investment opportunity. While still early in our investment thesis timeline, clean energy has made a strong contribution to returns over the past month.
The decarbonisation conundrum
Two-thirds of the world economy has committed to achieving carbon neutrality by 2050 (China by 2060). To achieve this ambitious target, governments around the world are planning to spend huge amounts on clean energy infrastructure. This presents significant investment opportunities.
It also presents governments with a conundrum. The world's population is expected to increase substantially by the middle of the century. In many parts of the developing world, living standards are also expected to increase. This creates significant new energy demand. So how does the world meet these new energy demands while also generating a much higher proportion of clean energy?
United States led
The United States rejoining the Paris Agreement is a game-changer. President Joe Biden has set the goal of reducing emissions by 50% by 2035, with full neutrality by 2050. This includes electrifying the United States vehicle fleet. However, this represents a huge energy transition, from cars and trucks burning fossil fuels to instead being able to rely on a clean, stable electricity supply supported by a national network of charging stations. The challenge for the US is to achieve this quickly, at scale.
Nuclear energy is a key part of the picture
The United States, China and the European Union are all looking to nuclear as a crucial tool in achieving sustainability objectives. It is one of the cleanest, cheapest and most reliable forms of energy generation. In much of the world, nuclear energy is becoming essential green infrastructure alongside renewable sources like solar and wind. There are currently 54 reactors under construction around the world, with another 96 planned.
Safety first, support huge
In the wake of the Fukushima nuclear disaster, technological advancements have made nuclear energy significantly safer and more efficient. Advanced nuclear reactors are smaller, simpler, cheaper, safer and quicker to build than conventional plants. New technologies are also significantly reducing waste.
There is widespread support for new nuclear technologies in both the developed and developing worlds. Small Modular Reactors are widely backed as a future tool, including from governments in Canada, Australia, the United States and Europe, as well as from leading philanthropists such as Bill Gates. Developing economies such as Vietnam are also considering nuclear as part of their clean energy future.
A uranium deficit
Uranium is the essential fuel for nuclear energy production. Right now there is a significant supply shortage, which is driving prices higher. Prices are expected to rise significantly over the coming years.
The current global fleet of nuclear reactors needs about 175 million pounds of uranium a year to function. Estimates show that the current available supply is about 140 million pounds. This leaves a supply deficit, which will only get worse as new nuclear reactors come online.
This is why uranium prices are rising. Prices have already increased 30% in the last three weeks to US$40 per pound (/lb). Our research suggests the price could move upwards of US$70/lb; some believe it's US$100/lb. No one knows the exact number, but it is higher than where the market is today.
Given the strength in uranium prices, we have also witnessed a rally in uranium company shares such as Canadian companies Cameco and Nexgen and Australian company Paladin. Like all commodity companies, higher prices boost company profitability.
What about ESG?
At NZ Funds, we consider all our investments for their impacts on society and the environment. We work with the independent third-party organisation ISS-ESG to assess the ESG credentials of every company we think about investing in.
It's clear that nuclear energy is an ‘and', not an ‘or'. Small Modular Reactors will be used in conjunction with other renewables to smooth out supply, as they aren't susceptible to weather events in the way solar and wind are. Nuclear is part of a suite of clean solutions to current fossil fuel consumption.
Recognising that the world now expects greater corporate responsibility, leading uranium producers are developing new mining techniques that minimise environmental and community impacts while helping the world to transition to a carbon-neutra future.
Furthermore, exports of uranium for military purposes were stopped by the Canadian government in 1965. Canada's policy of selling uranium only for peaceful purposes became a permanent part of Canada's international treaty obligations in 1970 when Canada ratified the Nuclear Proliferation Treaty, which is administered by the International Atomic Energy Agency.
How we invest in clean energy
Over the years we have kept our approach to new investment opportunities simple. If an asset offers both the opportunity of a return and safeguards against a total loss of capital, we will consider it as a candidate for investment. To outperform the markets, we also look at the global picture. Our macro investment strategy means we seek out opportunities based on big global shifts.
Clean energy is a clear example. As well as a portfolio of uranium company shares, NZ Funds has invested in uranium call options to gain exposure to increasing uranium prices. Not only can options generate strong returns, they have limited downside should our investment thesis not play out as expected.
The uranium options we have purchased are the first of their kind ever traded in global financial markets. This follows several months of work alongside Goldman Sachs to develop an investment case, infrastructure, operational framework and governance structure for the options. The extensive process we undertook in collaboration with Goldman Sachs highlights that when we look for new investment opportunities on behalf of our clients, we pursue them with the utmost care, discipline, diligence and good governance.
This is another example of NZ Funds giving New Zealanders access to international investment tools and opportunities that will make a meaningful difference to their long-term financial outcomes. We want to keep building local expertise and financial markets, so New Zealand becomes an investment hub in the Asia-Pacific region. We believe this is an audacious but achievable proposition, given the stability of New Zealand's rule of law and regulatory environment.
The decarbonisation conundrum
Two-thirds of the world economy has committed to achieving carbon neutrality by 2050 (China by 2060). To achieve this ambitious target, governments around the world are planning to spend huge amounts on clean energy infrastructure. This presents significant investment opportunities.
It also presents governments with a conundrum. The world's population is expected to increase substantially by the middle of the century. In many parts of the developing world, living standards are also expected to increase. This creates significant new energy demand. So how does the world meet these new energy demands while also generating a much higher proportion of clean energy?
United States led
The United States rejoining the Paris Agreement is a game-changer. President Joe Biden has set the goal of reducing emissions by 50% by 2035, with full neutrality by 2050. This includes electrifying the United States vehicle fleet. However, this represents a huge energy transition, from cars and trucks burning fossil fuels to instead being able to rely on a clean, stable electricity supply supported by a national network of charging stations. The challenge for the US is to achieve this quickly, at scale.
Nuclear energy is a key part of the picture
The United States, China and the European Union are all looking to nuclear as a crucial tool in achieving sustainability objectives. It is one of the cleanest, cheapest and most reliable forms of energy generation. In much of the world, nuclear energy is becoming essential green infrastructure alongside renewable sources like solar and wind. There are currently 54 reactors under construction around the world, with another 96 planned.
Safety first, support huge
In the wake of the Fukushima nuclear disaster, technological advancements have made nuclear energy significantly safer and more efficient. Advanced nuclear reactors are smaller, simpler, cheaper, safer and quicker to build than conventional plants. New technologies are also significantly reducing waste.
There is widespread support for new nuclear technologies in both the developed and developing worlds. Small Modular Reactors are widely backed as a future tool, including from governments in Canada, Australia, the United States and Europe, as well as from leading philanthropists such as Bill Gates. Developing economies such as Vietnam are also considering nuclear as part of their clean energy future.
A uranium deficit
Uranium is the essential fuel for nuclear energy production. Right now there is a significant supply shortage, which is driving prices higher. Prices are expected to rise significantly over the coming years.
The current global fleet of nuclear reactors needs about 175 million pounds of uranium a year to function. Estimates show that the current available supply is about 140 million pounds. This leaves a supply deficit, which will only get worse as new nuclear reactors come online.
This is why uranium prices are rising. Prices have already increased 30% in the last three weeks to US$40 per pound (/lb). Our research suggests the price could move upwards of US$70/lb; some believe it's US$100/lb. No one knows the exact number, but it is higher than where the market is today.
Given the strength in uranium prices, we have also witnessed a rally in uranium company shares such as Canadian companies Cameco and Nexgen and Australian company Paladin. Like all commodity companies, higher prices boost company profitability.
What about ESG?
At NZ Funds, we consider all our investments for their impacts on society and the environment. We work with the independent third-party organisation ISS-ESG to assess the ESG credentials of every company we think about investing in.
It's clear that nuclear energy is an ‘and', not an ‘or'. Small Modular Reactors will be used in conjunction with other renewables to smooth out supply, as they aren't susceptible to weather events in the way solar and wind are. Nuclear is part of a suite of clean solutions to current fossil fuel consumption.
Recognising that the world now expects greater corporate responsibility, leading uranium producers are developing new mining techniques that minimise environmental and community impacts while helping the world to transition to a carbon-neutra future.
Furthermore, exports of uranium for military purposes were stopped by the Canadian government in 1965. Canada's policy of selling uranium only for peaceful purposes became a permanent part of Canada's international treaty obligations in 1970 when Canada ratified the Nuclear Proliferation Treaty, which is administered by the International Atomic Energy Agency.
How we invest in clean energy
Over the years we have kept our approach to new investment opportunities simple. If an asset offers both the opportunity of a return and safeguards against a total loss of capital, we will consider it as a candidate for investment. To outperform the markets, we also look at the global picture. Our macro investment strategy means we seek out opportunities based on big global shifts.
Clean energy is a clear example. As well as a portfolio of uranium company shares, NZ Funds has invested in uranium call options to gain exposure to increasing uranium prices. Not only can options generate strong returns, they have limited downside should our investment thesis not play out as expected.
The uranium options we have purchased are the first of their kind ever traded in global financial markets. This follows several months of work alongside Goldman Sachs to develop an investment case, infrastructure, operational framework and governance structure for the options. The extensive process we undertook in collaboration with Goldman Sachs highlights that when we look for new investment opportunities on behalf of our clients, we pursue them with the utmost care, discipline, diligence and good governance.
This is another example of NZ Funds giving New Zealanders access to international investment tools and opportunities that will make a meaningful difference to their long-term financial outcomes. We want to keep building local expertise and financial markets, so New Zealand becomes an investment hub in the Asia-Pacific region. We believe this is an audacious but achievable proposition, given the stability of New Zealand's rule of law and regulatory environment.
Source: Bloomberg.
Source: Source: ourworldindata.com. Measured in emissions of CO2 equivalent per gigawatt-hour of electricity over the lifecycle of the power plant.
Source: UxC LLC.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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