Tom Konrad, CFA
If the Japanese use less nuclear power, what will take its place?
I’m astounded by the resilience and discipline of the Japanese people in response to the three-pronged earthquake, tsunami, and nuclear disaster, perhaps in large part by my cultural roots in the egocentric United States, where we seem to have forgotten the virtue of self-sacrifice for the greater good.
Yet while Japanese society has shown itself to be particularly resilient, the Japanese electric grid is much less resilient. According to International Energy Agency statistics, Japan produced 258 TWh of electricity from nuclear in 2008, or 24% of total production.
The situation seems to be mostly stabilized at the Fukushima Daiichi reactor complex, but according to the March 23rd update on the reactor status at Fukushima from the Japan Atomic Industrial Forum, Reactors 1, 2, 3, and 4 have all suffered damage, had their fuel rods exposed for some period, and/or had seawater pumped in for cooling. It seems unlikely that any of these reactors, with a 2.8GW total generation capacity will ever be returned to service. Assuming that these reactors normally operate at a 90% capacity factor, these four reactors would have accounted for an annual electricity production of approximately 22 TWh, or 2.5% of total production.
At the very least, these 22 annual TWh will need to be replaced with other sources or by improved energy efficiency, and the disaster will likely shift Japan (and much of the rest of the world) slowly away from nuclear power, with fewer new plants built, and fewer old ones being granted extensions in their permits to operate.
Outside Japan, regulators are likely to require additional safeguards on new nuclear generators, as well as be more strict when considering the extension of operating permits for existing older plants. This will increase the already high cost of nuclear power, and further slow the construction of new plants.
Energy efficiency, conservation, and other forms of energy generation will have to fill the gap. Which will benefit most?
The Conversation So Far
Over the last few weeks, I have read innumerable prognostications about how Japan and the rest of the world will fill the energy gap. I asked several clean energy money managers for their top post-Fukushima stock picks, which are published on my Green Stocks blog at Forbes. I also posted a quick poll to see what sectors readers thought would benefit (see chart.)
Opinion is strongly divided, especially among my poll respondents, perhaps in part because I allowed respondents to vote for as many as three sectors, since I’m fairly confident that more than one sector will benefit.
Perhaps the most vocal contingent is the group that is arguing that solar will benefit. Two of the green money managers I asked for stock picks chose solar stocks (MEMC Electronic Materials [WFR] and LDK Solar [LDK].) Among the pundits, AltEnergyStocks’ solar expert Joe McCabe was quick to see benefit for solar.
Yet even our own bloggers can’t agree. A few days after McCabe’s post, our battery expert John Peterson wrote,
John thinks oil, natural gas, and coal are the only energy technologies able to take up the slack.
John Segrich, manager of the Gabelli SRI Green Growth Fund (SRIGX) also told me “The big beneficiary in the aftermath of the Japan nuclear crisis will be natural gas related companies.” (His stock pick is Capstone Turbine (CPST), because the company’s microturbines can provide immediate, clean, and efficient distributed generation.
The market seems to think solar, natural gas, and wind will all benefit. While the natural gas exchange traded notes (ETNs) are based on baskets of commodity futures, while the solar and wind exchange traded funds (ETFs) are baskets of stocks, the gains in all three over the 10 days following the crisis are surprisingly similar (see chart.)
Can the solar bulls and the natural gas bulls both be right? Yes. As John Petersen pointed out, the amount of nuclear power going offline is large compared to the current installations of renewable energy. Hence, if renewable energy were to fill only part of this gap, it would still amount to significant industry growth, while leaving a lot of room for growth in fossil fuels.
Linear vs. Geometric Growth
However, I fell John is far too dismissive of the growth potential of renewable energy, while he completely neglects the potential of energy efficiency to fill part of the gap.
First, he compares the nuclear generating capacity going off-line to current installations of renewable energy, noting that it is half of current installed capacity. If renewable energy were on a linear growth curve, such a comparison would be valid. However, renewable energy installation has often grown exponentially in the past, and can still do so. While it takes ten years or more to permit and build a nuclear reactor, utility scale wind and solar farms are typically built in three to 18 months.
Between 2004 and 2009, grid connected PV capacity increased at an average annual rate of 60%. Over the same per
iod, wind installations grew at the relatively leisurely but still impressive compound annual rate of 26% (see chart.)
If we assume that combined wind and solar capacity continue to grow at a (slower) annual 25% rate, then replacing 43% of the world’s current renewable output will take all of 19 months. Replacing that capacity with nuclear or coal would take much longer, because nuclear and coal plants take so long to construct.
While Petersen’s critique of renewable energy installation rates are not supported by the facts, his later points regarding wind and solar variability are salient. He points out that energy storage is currently well suited to smoothing minute-to-minute variation, an important function because it greatly reduced the strain on the rest of the electric grid. He is also correct that batteries cannot cost-effectively provide the tens of hours of storage that a wind or solar facility would need to mimic a baseload or dispatchable resource.
Perhaps because Petersen is a battery expert, he missed non-storage solutions to the variable output from wind and solar farms. The most important of these is geographic dispersion. Geographic dispersion in solar and wind is akin to diversification in a financial portfolio, but much more effective because of much lower correlation in electricity generation, and because correlation falls with distance.
First, wind and solar power tend to be negatively correlated simply because, in most locations, wind tends to be strongest when the sun is weak (early morning, late evening, during storms, and at night.) In finance, there are very few negatively correlated asset classes, and those assets that are negatively correlated with the market tend to produce minuscule or negative returns, which would be the equivalent of an electrical load in the grid analogy.
Hence, there are great benefits in diversification, and long distance transmission is the key to supplying these benefits. This idea is backed up by numerous studies demonstrating the benefits of geographic diversification, and also widely acknowledged by experts in the field, as I discussed in a recent article on ABB Ltd. (ABB).
While geographic dispersion cannot produce baseload power, baseload power was always an artificial construct in the first place. An ideal power source would produce power that corresponds to demand: Electricity production would fall at night and peak on hot sunny afternoons (as it does from geographically dispersed solar arrays), not stay at a constant rate.
The Japanese Grid
For such a small country, the Japanese grid is not well interconnected. The Northeast and West of the country operate at different frequencies, and are connected only by two relatively low capacity frequency converter facilities. This is a large part of the reason that Tokyo (in the Northeast, as are Sendai and Fukushima) is suffered rolling blackouts after the quake: the relatively unaffected West was unable to supply the Northeast with significant electricity through these two weak links.
In order to benefit from the geographic dispersion which makes high wind and solar penetrations practical, Japan will need a more robust electric grid. It would be an incredibly daunting task to build significant new transmission in densely populated Japan, if it were not for a state of the art technology ideally suited to both transmitting large amounts of electricity over long distances with low line losses, and for running those links underwater. This technology is High Voltage DC (HVDC) transmission.
Japan currently has two underwater DC links, and the two frequency conversion stations using similar technology. These facilities were built in the late 1900s, with technology provided by Japanese companies such as Mitsubishi. The leading providers of modern HVDC are ABB Ltd. (ABB) and Siemens (SI), two companies that might stand to benefit if the Japanese decide to learn the lessons of the Sendai/Fukushima tragedy and build a more resilient grid based on strong links and safe, diversified electricity generation.
The First Fuel
Wind, solar, natural gas, and new grid links will take at least a year or three to replace the lost generation at Fukushima, and in the meantime, there is only one energy resource that can take up the slack. That is energy efficiency and conservation, often called the first fuel because it is the least expensive resource available.
Japan is already a leader in energy efficiency, but the discipline with which they are handling the disaster convinces me that they are ready to “renew their commitment to energy efficiency,” as Nobel Prize winning economist Joesph Stiglitz said in a March 19th interview with Barrons. Deployment and grid stability of energy efficiency and conservation can be enhanced with the use of smart grid technology. Smart grid technology (such as demand response) can also aid in the integration of variable resources such as wind.
Filling the Gap
Much depends on how Japan decides to rebuild, but whatever they do their priorities will probably be:
- Quick to deploy
- Low cost
- Improve grid safety and stability
- Not greatly increase reliance on foreign imports
Energy Efficiency meets all four goals. Many energy efficiency stocks are local operations, but suppliers of highly energy efficient components, such as Power Integrations (POWI) should be well placed to benefit. Investors’ focus should be on companies with industry-leading technology that the Japanese will not be able to source locally.
Wind is quick to deploy and inexpensive when compared to natural gas generation based on expensive liquified natural gas (LNG), but there will be a limited number of sites available in densely populated Japan. Most likely, we will see an acceleration of Japanese plans for offshor
e wind power. This should help wind companies with offshore turbines, and possibly integrate nicely with a build-out of a Japanese underwater HVDC grid, similar to the proposed Atlantic Wind Connection for the US.
An underwater HVDC grid makes sense, and if Japan sees this sense, ABB and Siemens are the most logical beneficiaries.
Solar power is not cheap, although it is much less expensive and faster to deploy than new nuclear power, and the high prices of imported LNG should not make it cost prohibitive as a solution. Global suppliers of PV should all benefit, as the increase in demand allows them to charge somewhat higher margins than they would otherwise.
Grid Based Energy Storage will need to increase along with wind and solar to help accommodate local fluctuations in power output, but it is easy to overestimate the market for this. It’s typically not low cost, but grid based storage (at least when it takes the form of batteries) is quick to deploy, improves grid safety and stability, and does not greatly increase the reliance on foreign imports. Petersen just published a good overview of grid based storage applications here, including the US-listed stocks he thinks are well positioned for this opportunity. One Japanese company he does not mention is NGK Insulators Ltd. (NGKIF.PK), a vendor of the Sodium sulfur batteries, the technology which currently has the greatest installed capacity for battery-based grid storage. This was my top pick for a stock to benefit from the rebuilding of the Japanese grid.
It might make sense to build some grid based storage at the sites of existing Japanese nuclear reactors. When the grid and back-up generation gave out at Fukushima, the battery backup kept the plants safe for 8 hours. Grid based storage systems cycle their state of charge over time, so if a future disaster knocked out both grid power and backup generators at a nuclear plant co-located with grid based battery storage, most of the time the grid based storage would be able to supply some extra power to the nuclear plant, and keep the cooling systems operating longer than it could with dedicated battery backup alone.
Natural gas will also see a boost, especially in the short term, now that Japan must run existing gas fired generation harder to make up for the loss of the nuclear plants. In the longer term, suppliers of gas turbines will probably see some increase in demand. Given the high price of LNG, there will be an emphasis on particularly efficient means of converting natural gas into electricity. Segrich’s Capstone Turbine (CPST) is one, especially when used in combined heat and power operations. For even more efficient conversion of natural gas to electricity, the Japanese may turn to solid-oxide fuel cells, such as those sold by FuelCell Energy (FCEL). Both these companies’ products can be used in natural gas powered buses, and so may benefit if bus buyers shift away from diesel in favor of natural gas.
Geothermal Power has, as usual, received some lip service as a possible beneficiary. Japan is on the ring of fire, with good geothermal potential. The country already had 547MW of installed geothermal generation in 2000. Geothermal also has the advantage of being baseload, often operating with capacity factors of 95%, even higher than nuclear.
However, geothermal plants take four to six years to construct, which means that new geothermal (unless it involved installing upgraded turbines or bottoming cycles at existing plants) will only make a small contribution to fill the gap left by lost nuclear generation in the near term. Companies that might possibly benefit in the short term are vendors of binary cycle turbines (i.e. Ormat (ORA) and United Technologies (UTX)) to be used as bottoming cycles at existing plants.
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I agree wholeheartedly that conservation, either voluntary or through rolling blackouts, will be a big part of the solution.
I disagree with your suggestion that wind or solar can fill the gap. According to the Global Wind Energy Council, Germany has an installed base of 27.2 GW of wind power but only generated 37.3 TWh of electricity from wind in 2010. At 100% facility utilization, a nameplace capacity of 27.2 GW should produce 238 TWh and the Germans are not big on wasting facilities. The only possible explanation is that wind is so variable and so intermittent that operators can only expect a utilization efficiency of 15% to 20%, as opposed to 90% for nuclear.
Geographic dispersion and negative correlation of wind and solar is one of those wonderful ideas that will be tough to implement. The German plan talks about integrating German wind with Solar from the Sahara desert thousands of miles ot the south. Somehow I don’t have high hopes that Libya, Egypt and the other countries in North Africa will be happy to have their landscape covered with solar farms that principally benefit German industry.
Aside from those little bones of contention, we’re in complete agreement.
By your numbers, Japan’s wind and solar would fill the gap from units 1-4 at Fukushima Daiichi about 2-3x over.
Japan has a better solar resource than Germany, and probably a better wind resource, given the larger amount of coastline (I could not find a wind resource map of Japan to check.) They also have the “advantage” in terms of renewable power of having much higher electricity prices, making renewables relatively affordable. So installing 1/3 of Germany’s current installed based of wind and solar in 2-3 years does not seem out of the question at all, especially since the price of both has come down considerably since Germany installed them.
Geographical dispersion woks even within smaller areas.. .the study I linked to in the article was based solely on wind and solar within the state of Wisconsin (although it appears the link is broken now, but I know one of the authors if you’d like a copy.)
Finally, since you agree with me that EE will be a large part of the solution (although I don’t think rolling blackouts are going to remain part of the solution for long) the numbers needed for wind and solar are porbably only half as high as outlined in the article, maybe 10-12 GWh annually.
I appreciate the comprehensive analysis. Stock investing is very dynamic and complex as reflected in the fact that you have no positions to disclose, despite drawing some conclusions. I know you’ve held CPST and others in the past and you’ve indicated an interest in NGK. I assume the valuations aren’t to your liking and/or you are waiting for Japan’s approach to rebuilding to become clearer. Are you seriously considering any of the stocks mentioned?
The main reason I don’t have any positions to disclose is because I feel the market as a whole is overvalued. I’m waiting for a larger correction than the one we’ve had.
I currently have a limit order in to buy NGK, but ti does not look like it will execute anytime soon. After that the top of my wish-list are POWI ABB and SI. CPST has had a big run-up recently, I’m waiting for a large decline in that.
It looks like NGKIF is very thinly traded. Watching it, the price doesn’t change. I can find very little historical information on it. I wonder what might be a price with a margin of safety? I have the same question for ABB and POWI. I just found out that ABB is also a rail-related stock.
The NGKIF US ticker does not trade much, so you should look at the Japanese listing (5333:Tokyo) http://investing.businessweek.com/research/stocks/charts/charts.asp?ticker=5333:JP
You then need to convert JPY to USD to figure out what you should be paying. This morning Yen were 83.12Y/USD, so today’s close of 1492Y translates to $17.95.
It fell below 1000Y ($12.20) on the 15th, which is where I’ve been trying to buy it, but it looks like I missed my chance.