Why the Nuclear Power Industry Looks Shaky

By Suman Chatterjee, The Motley Fool

We live in a world that is increasingly local. Therefore, crises like the earthquake and tsunami in Japan not only undermine one region's economic order, but also have a bearing on the global economic balance. What has happened in Japan is exceptional, but it does present a challenge to the rest of us: avoiding a second Fukushima.

For a regular investor, the most pressing concern is whether the Japanese nuclear incident would have any major impact on the U.S. nuclear industry.

A Take on the Industry
For the time being, nuclear power is the best alternative to fossil fuels energy, especially in comparison to costlier solar and wind energy sources. Moreover, solar and wind energy depend on the vagaries of nature. And needless to say, from an investor's point of view, the nuclear power industry was considered a goldmine to invest in until just recently.

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In February this year, President Obama called for $36 billion in federal loan guarantees for further nuclear power expansion. Considering nuclear energy's viability as an alternative energy source, Obama was not entirely incorrect when he made such a decision.

Fukushima, however, changed the way nuclear power is perceived -- once again. What impact it will have on the U.S. nuclear power industry in the long run is yet to be seen, but it has brought the viability of the nuclear power industry into question, just like it did after Chernobyl and Three Mile Island.

Although it would be unwise to assume that the U.S. government would cease production of nuclear power post-Fukushima, the incident will have an impact on the fast growth prospects of the nuclear industry in the country. Around 35% of the U.S. nuclear power plants are looking to renew their 20-year license, or currently waiting to file an application.

Money Matters
The U.S. government has initiated some strict measures to ensure the safety of the nuclear power plants, especially upgrading the production technology, stalling the license approval of new plants, and rechecking the viability of the existing plants.

Although the measures should be effective in avoiding a Fukushima-like rerun, they would prove to be detrimental to nuclear power production. Production delays, costly upgrades, and forced shutdowns would all weigh on the profit margins of the utility companies, if not result into outright losses. In addition, tax rates might be changed in the long run. For example, the government of Illinois has already hinted at higher tax rates to cover higher inspection costs for the nuclear plants. Illinois has more nuclear plants than any other U.S. state.

Moreover, credit default swaps on utility companies such as Exelon (EXC) , Entergy (ETR) , Progress Energy (PGN) , and First Energy (FE) have risen tens of basis points on an average. That just shows what the market thinks about the risk probability in this industry and the overall costs of operating within it. It may affect the stock prices of the corresponding companies as well.

There are a few other things that need to be considered. The nuclear industry is already a mature and capital-intensive industrial sector. In fact, the production costs, including man power, technology, and material resources, increased by 185% between 2000 and 2007.

Most nuclear plants' containment vessels are built on supplies from Japan Steel, the only company in the world that produces these vessels. Rising demand for nuclear power in emerging economies such as China and India can drive up the prices of such vessels, further increasing the production costs. This could affect the profitability of the utility companies in the long run.

What to Do?
To be honest, it is really difficult to gauge the impact of the Japanese nuclear crisis on the nuclear industry in the U.S., but it does not appear to be the right time to invest in this industry. Outside of the fact that it is still one of the major sources of power in the U.S., the whole outlook on the industry may change because of the Fukushima Daiichi accident.

Fool contributor Suman Chatterjee doesn't own shares of any of the companies mentioned in the article.

Exelon is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a covered strangle position on Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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