ESG Focus: Europe Snubs Nuclear Post Ukraine

ESG Focus | Mar 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:

ESG Focus: Europe Snubs Nuclear Post Ukraine

Industry and nation lobbyists won the inclusion of nuclear energy as a sustainable energy under the European taxonomy – but the Russian invasion of Ukraine suggests uranium is losing the battle with gas for favour as a transition fuel – and that both may have lost the war as Europe doubles down on renewables.

-European Commission (EC) gives green light for nuclear energy to be included for inclusion in the EU taxonomy
-EC’s response to Ukrainian invasion doesn’t mention nuclear energy
-Ukraine war fires energy and gas markets but medium-term prospects dim as Europe accelerates transition

By Sarah Mills

The European Commission (EC) in February classified nuclear energy as green under the Taxonomy Regulation, opening the way for its inclusion in the European Union (EU) Taxonomy Climate Delegated Act, raising the hopes of the uranium industry.

But uranium did not even garner a mention in Tuesday’s publication of the European Union’s (EU) revised energy strategy after the Ukrainian invasion; and the details of EU taxonomy inclusion have yet to be legislated.

Similarly, the International Energy Agency's plans to wean Europe off Russian gas failed to include nuclear power, indicating just how polarized its adoption is in the EU.

All this despite the EU’s announcement on Tuesday that it plans to cut its dependence on Russian gas by -80% this year. 

Russian gas imports account for up to 40% of all fossil fuel consumed in Europe and more than 50% of German consumption.

The EC’s classification of nuclear energy as “sustainable” follows a period of intense back-room lobbying and political argy-bargy between bloc members, which has increasingly been shaping up to outsiders as a battle between uranium and gas for favour as a transition fuel (the EC also classified gas as a transition fuel).

Or more succinctly, a battle between toxic nuclear energy and carbon-polluting fossil fuels. 

The response to the Ukraine invasion suggests gas has emerged victorious.

Pro-Nuclear Arguments Face Off Against ESG

Those in favour of nuclear inclusion say what is the point of closing nuclear plants during an energy shortage when fossil fuels may need to be used to fill the nuclear energy quota.

Those against say describing nuclear fuel as clean defies the imagination and that nuclear energy represents a far more immediate existential threat (not to mention a homeland energy security threat) than climate change.

They point to the capture of the non-operational Chernobyl as one of the opening gambits in Russia’s Ukraine offensive.

ESG purists argue the inclusion of nuclear energy in the European taxonomy strongly undermines the ESG narrative and sends a signal to the global investment community and consumers that it is all just business as usual – that ESG is nothing more than another predators’ ball.

These voices argue that to be genuinely sustainable, an energy source should be both renewable and clean. 

In contrast, proponents of nuclear energy downplay the toxicity of nuclear waste in a in a bid to position nuclear energy, counter-intuitively and counter-factually as a “clean fuel”. 

Political Argy Bargy

The classification of nuclear energy as “sustainable” in the EU Taxonomy was not an easy sell. 

There was clear opposition between Germany, Sweden and Belgium in the one corner, and mainly France, Finland and Eastern bloc states in the other. 

Germany and Belgium have been closing nuclear power stations over the past decade. 

Bloomberg Week in Green notes that Germany had shut nearly 50% of nuclear plants by the end of 2021 and the balance were scheduled to close by the end of 2022. German voters are strongly against nuclear energy.

But France has proved recalcitrant, and is committed to nuclear power for the next 50 years and is investing heavily in joint nuclear projects with China.

Belgium has recently softened its position on nuclear fuel and Germany had been reconsidering extending the life of its nuclear plants.

This led many to suspect that perhaps the wind was shifting in favour of nuclear energy.

Ukrainian Invasion Brings True Intentions Into Sharp Relief

Russia’s invasion of Ukraine suggests the sustainable classification may merely have been a political concession, carrying no real commitment from the major power brokers in the EC.

If anything, the invasion may have rallied bloc members’ around gas (over nuclear energy), Russia’s swift occupation of Chernobyl sending a shiver down spines.

The European Commission’s revised energy strategy will tap new gas supplies and increase energy efficiency. 

Ukraine War Accelerates Rush To Renewables

Rather than send policymakers flocking back into the arms of nuclear energy and fossil fuels, the opposite appears to be the case.

The European Commission’s revised energy plan commits to accelerating the Green Deal. 

Ursula von der Leyen, the EC president, said: “The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.”

Executive VP of the European Green Deal Frans Timmermans said: “Let’s dash into renewable energy at lightning speed.”

European gas prices surged 79% in response to the invasion. The EU has enough gas to close out the winter and has plenty of time to prepare for next winter, should the conflict continue.

The bloc plans to replenish stocks before the next winter by diversifying energy sources and replacing gas in heating and power generation, reducing EU demand for Russian gas by two-thirds this year.

The revised energy strategy suggests strong growing short-term support for gas prices as a transition fuel but how high will the gas price decently be allowed to rise in a war with Russia remains to be seen.

Many are betting that rather than run into the arms of nuclear energy, Germany will pay for battery storage to back up renewables, increasing demand for already stretched future-facing commodities.

Any investment in batteries is likely to continue to accelerate investment in battery technology efficiency and trigger further price falls, again reducing demand for uranium and gas.

Given Germany’s relative proximity to Russia, the closure of nuclear plants by the end of this year appears well timed. It has yet to be seen whether Germany will extend their life as a fuel source and if so, their location relative to Russia may be critical in this respect.

The Economist says European power stations have not been running at full capacity and have instead been using them in “load following mode” to moderate renewables loads.

If Europe leans on its nuclear resources, this suggests room to increase demand for uranium (which is already stretched) in the short term.

It is not altogether surprising that the revised energy strategy failed to mention nuclear energy.

Nuclear power plants are complex to build and operate and they are usually delivered behind schedule and over budget. And let’s not forget Fukushima and Chernobyl. They are also easy and dangerous military targets.

Industry is developing smaller modular nuclear reactors, which cut the risk of accidents and require lower upfront capital and lower ongoing resource usage, and this might offer a path forward for the industry but nowhere near in time to serve as an energy panacea for the Ukraine war.

The existence of excess nuclear capacity suggest the EU can lean on its reactors if need be, which could lend short term support to the uranium price. But the pointed snub to nuclear energy in the revised energy plan is far from encouraging.

Radioactive Poisoning A Most Unpopular Death

Not only does it appear that nuclear energy lacks the backing of big capital, it also remains extremely unpopular with the public, German voters in particular having demonstrated a clear aversion.

The square-off with Russia is only likely to have heightened that aversion.

In defence of covid vaccines last year, The Economist wrote an article that discussed people’s attitudes to types of death and proclaimed, rightly or wrongly, that death by covid was “feared” and considered worse than other fates such as the flu.

If that is true, then it stands to reason that radiocative poisoning would be widely considered a far more odious fate. 

Similarly, environmentalist Stewart Brand, who recently switched to being an advocate of nuclear power, doubts that environmentalists are ever likely to support nuclear energy on the basis of climate change anxiety.

Should the powers-that-be backtrack on this narrative, it would set back covid justification as well as ESG justification.

Uranium Prices Spike To New Highs After The Invasion of Ukraine

Spot uranium prices shot to new highs in response to the Russian invasion of Ukraine.

Uranium demand continues to outstrip supply after decades of underperformance and falling investment but could it be that, like fossil fuels, these are the dying gasps of an industry?

Uranium assets are fairly tightly held, the main ones being in Kazakhstan, Canada, Russia (not much of a recommendation at the moment) and Australia. 

Given the imbalance between supply and demand, should Europe shift to run its existing nuclear resources at full capacity, this could maintain support for what is starting to appear to be a fuel without a future.

Analyst Janus Henderson says the EU’s classification could fire demand in uranium and create attractive investment opportunities and says the lack of viable options suggest new discovered deposits will be “sorely needed”. 

But the analysts says in order to comply with the ESG narrative companies are incorporating landowner requirements and environmental proponents into their development proposals.

The past illustrates how shallow such commitments can be and frames such “corporate social responsibility” gestures as more as a “myth” or a “pretext” than a plausible narrative.

While non-operational, the capture of Chernobyl highlights the intrinsic military threat of nuclear power stations – and the fact that the owner of the station then wins an energy spoil.

On balance, after examining the European response to the invasion of the Ukraine, the yellow metal’s future appears far from secure, and future-facing commodities, and even gas, appear to represent safer bets.

Overall, at this stage, the Russian invasion of Ukraine appears to have done little to promote the medium to long-term prospects of either gas or nuclear energy. Although it has no doubt boosted gas and uranium producers’ coffers temporarily.

Uranium’s only real hope for the long-term would be if the Russian invasion were to cause the world to abandon its commitment to decarbonisation and blow-up ESG ambitions. 

It is still early days for the ESG movement but the weight of capital already deployed and the commitment of big capital – as demonstrated by careful planning for more than 50 years – suggests this is unlikely.

Remember, the name of the game is “Who Cares Wins”.

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