Implications of the Japanese nuclear disaster: An ESG research perspective

Financial pressure and public scrutiny on companies who build and operate nuclear plants.

Along with its tragic human and environmental toll, the ongoing nuclear crisis in Japan could also curtail a much-anticipated global “nuclear renaissance.”

The United States, with 104 operating reactors and the most nuclear capacity, and Europe, with 143 reactors in 27 countries, now plan extensive reviews of their nuclear plants and disaster preparedness. China, with 11 operating reactors, has also suspended approval of more than two dozen planned reactors.

This may give a boost to competing low-carbon generating sources, such as natural gas and renewable energy. MSCI’s Global Alternative Energy Index recorded a 10.1 percent gain in the first 10 days after Japan’s nuclear crisis began. This compares with a 22.8 percent loss for the MSCI Japan Electric Utilities Index over the same period. Coal may also get a short-term lift, since nuclear power is its chief rival in providing base-load power generation.

The following are stock price changes after the Japan nuclear disaster based on March 11 (price at open), March 21 (price at close), % change
Tokyo Electric Power Company: 25.00, 16.00, -36.0%
MSCI Japan Electric Utilities Index 114.07, 88.05, -22.8%
MSCI Global Alternative Energy Index 85.74, 94.37, 10.1%

Shares in Tokyo Electric Power have continued to tumble – falling by over 20% more this week (28 March – April 1) – as the Japanese government reportedly considers privatisation.

Yet it is unlikely that the Japanese nuclear disaster will halt the global expansion of nuclear power. This is due to the unique circumstances that contributed to the accident at the Fukushima Daiichi plant, and the momentum that nuclear power has built elsewhere around the globe — in part, to address global warming.The repercussions of this accident will certainly put added financial pressure and public scrutiny on companies who build and operate nuclear plants. MSCI ESG Research has long studied and analyzed the nuclear power industry, both for its environmental and social impact and to assess the sector’s investment risk profile. Over the last 50 years, the nuclear industry has posted a relatively safe performance record, except for two notable accidents at Russia’s Chernobyl reactor in 1986 and the US Three Mile Island site in 1979. The disaster at Japan’s Fukushima Daiichi reactor, at present, falls somewhere in-between these two industry-defining events.

While the crisis at the Fukushima reactor complex is far from over, and could get worse, it has already highlighted some critical challenges facing the global nuclear power industry:

• Seismic concerns: Nuclear plant operators in active earthquake fault and tsunami zones will need to demonstrate to regulatory authorities and the greater public that their safety procedures are sufficient, and if they need to be upgraded, that they can continue to run their reactors safely in a “black swan” worst-case event. In addition, “stress tests” of existing nuclear plants in Europe, North America and Asia will need to be thorough and transparent to convince a wavering public that modern nuclear facilities are safer than the 40-year old Fukushima plant.

• Safety zones: Community disaster preparedness must also be part of this ongoing review process. The U.S. government now is in the awkward position of advocating a 50-mile evacuation zone around the Fukushima complex in Japan, while requiring only a 10-mile evacuation zone around U.S. nuclear plants. This is a particular challenge for plants near major cities, such as Entergy’s Indian Point reactor upstream

from New York City.

• Spent storage: Fukushima has demonstrated that on-site storage of spent nuclear fuel rods may pose as much of a safety hazard as the reactors themselves. Spent fuel rods cannot be safely removed from a plant for a number of years, so the design and maintenance of on-site storage is crucial. However, at many plants in the U.S. and Japan, even spent rods that could be removed remain on site, due to limited nuclear fuel recycling capacity, and political resistance to the creation of off-site nuclear waste repositories. Resolving this impasse is a job that has been put off for decades.

• Nuclear economics: Finally, the Fukushima crisis will compel a new, hard look at the basic economics of nuclear power. The stricken reactors will never come back on-line, and decommissioning these plants will cost billions of dollars and take decades. The surrounding area also will have to be decontaminated. A million people who live within a 50-mile radius of the plant will likely see a sustained decline in property values, and crop sales in this largely agricultural region may never recover. It is not surprising that Tokyo Electric Power’s stock price has dropped by one-third since March 11.

The following are the recent share price moves of the 10 Largest nuclear power producing companies
Company, Capacity in Megawatts (2009), % of Electricity Capacity (2009), Price Change since March 11

Electricite de France (1.) 70,6131, 51.8%, -4.3%
Korea Electric Power 17,706, 24.1, -2.1%
Tokyo Electric Power 17,308, 26.4, -36.0%
Exelon (US) 16,898, 68.0, -6.7%
E.ON (Germany) 11,305, 15.5, -6.2%
Entergy (US) 10,116, 35.6, -10.9%
Kansai Electric Power (Japan) 9,520, 28.0, -6.6%
RWE (Germany) 6,295, 14.0, -6.6%
GDF Suez SA (France) 6,292, 11.0, -6.4%
Dominion Resources (US) 5,768, 22.9, -2.4%
*See notesMSCI ESG Research regards the Japanese nuclear power plant disaster as a major setback for the nuclear power industry. However, it may not prevent the industry from growing in the long term, albeit at a more tempered pace and with greater regulatory scrutiny. Reaction among investors seems to bear out this view, at least so far.

Nuclear power is a significant source of power generation — providing nearly 15 percent of global electricity needs — and is central to a strategy for reducing greenhouse gas emissions. Economic and environmental damage from global warming could be far greater than even a major nuclear power accident.

Consider that Japanese coastal communities wiped out by the March 11 tsunami could be covered by a sea level rise of up to six feet by 2100. Rising seas due to global warming would threaten all coastal cities around the globe — and last for centuries.

Nuclear power’s greatest long-term challenge may yet be its ability to generate competitively priced electricity. Many reactors under construction are facing billions of dollars of cost overruns. More government subsidies will be needed to attract investment capital to sustain global nuclear expansion. The public will need to be convinced that government and industry assessments about its cost and safety are credible and objective. Japan’s nuclear disaster compounds the challenges facing this already controversial and high-risk industry.
Douglas G. Cogan is Vice President and Director of Climate Risk Management for MSCI ESG Research. Jerome Le Page is a Research Associate who specializes in the electric utilities sector for MSCI ESG Research.

*Source: MSCI ESG Research. Nuclear capacity is percentage of total installed capacity. Stock price changes are as of closing on March 21.
1. EDF nuclear capacity includes power plants in the United Kingdom and joint ownership in the United States.