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Is Green Financing for Nuclear the Next Frontier in the Energy Transition?

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About a year ago, Canada’s Bruce Power issued the world’s first ever nuclear green bond with nuclear use of proceeds, accomplishing something no other nuclear provider had ever done. It was a watershed moment, changing how nuclear power can be categorized and financed, and creating a new catalyst for sustainable debt finance.

The greenness of the C$500 million in green bonds was approved by the independent third-party assessor Cicero Shades of Green, and the bond was issued under a framework that was designed to guide future issues of green bonds.

Nuclear power is moving increasingly into the spotlight as a potentially critical element to any pathway to a net zero world by 2050. To be sure, while questions around its risks remain part of the discussion, including the mining of uranium, the absence of consensus around the different solutions to long term nuclear spent fuel storage and the potential for catastrophic accidents, its proponents emphasize its high baseload power with near-zero emissions, limited land footprint and a life-cycle safety record that competes with any other low-carbon solution, especially amid technological advances.

According to the World Nuclear Association (WNA), nuclear energy now provides about 10 percent of the world's electricity from about 440 power reactors, and 50 more reactors are under construction, representing about 15 percent of the existing capacity. According to a report by the International Atomic Energy Agency (IAEA) on nuclear power generation, in 2018, 12 countries were using nuclear power for at least 30 percent of their national power generation and new nuclear markets will soon be added to the mix, with Bangladesh, Turkey, and Vietnam also making progress in nuclear power generation plant construction. The IEA’s Net Zero scenario published in 2021 forecast that nuclear would rise form 5% of total energy supplied in 2020 to 11% by 2050. A recent Pew Research survey showed acceptance of nuclear on the rise, with 50 percent of respondents favoring nuclear development in 2021, versus 43 percent in 2016.

The Bruce Power bond, which was a green financing of the extension of the safe life of existing assets rather than a new build, was a strong indicator of growing acceptance of nuclear in the sustainable debt market in the context of the drive to net zero.

The bond was six times oversubscribed, had half its uptake from among ESG investors and was followed barely nine months later with the issue of C$300 million in 10-year nuclear power green bonds by Ontario Power Generation (OPG), which also saw demand outstrip supply by a ratio of about six-to-one.

These are strong testaments to the shift in investor thinking amid market developments.

Since the Bruce Power financing, engagement from investors, dealers, regulators, and energy policy makers has gained momentum, driving the discussion on nuclear across the broader market. What’s clear is that growing uptake of nuclear financed by green instruments is now a “when” rather than an “if” conversation.

The inclusion of nuclear for both existing reactors and new builds, under certain conditions, by the EU Taxonomy in its Complementary Delegated Act in July 2022, further acknowledges the contribution of nuclear to net zero and alignment with energy policies in several jurisdictions.

As a case in point, the French utility EDF, a long-time issuer of green bonds, recently included nuclear, including new builds, in its revised green framework, implying a growing acceptance of nuclear energy as green, even in the European market.

Green is not Black and White

There is growing evidence to suggest that, indeed, the pendulum is beginning to swing in favor of nuclear, as governments in the United States and Canada include it in decarbonization pathways to net zero. More recently, the Canada Infrastructure Bank partnered with OPG, committing C$970 million towards Canada’s first small modular reactor. In the U.K., the Future Nuclear Enabling Fund will develop new nuclear energy projects and there is growing support from many European Union countries, but it’s not black and white.

The mounting urgency for the energy transition and the fight against climate change have been further underscored by the war in Ukraine, which has laid bare just how interconnected the global energy market is, and underscored the need for greater energy security, stability and affordability.

The conversation around financing nuclear under a green label is also shifting amid a reconciliation between what’s needed for the transition to net zero, what is science-based, the degree to which nuclear technology is accepted by society at large, and the potentially different focus of ESG investors.

Case by Case Basis

Bruce Power and OPG saw their green nuclear bond issues approved by Cicero Shades of Green, a third-party, independent organization that assesses environmental claims behind green debt, drawing on competence from the CICERO Center for International Climate Research, and is the fourth-largest green bond reviewer globally.

Cicero was clear, however, that green financing for nuclear must be considered on a case-by-case basis.

“While this should not be considered an open door for all nuclear green bonds, the specific conditions of Bruce Power’s green bond framework resulted in a favorable opinion from us,” Cicero said of the Bruce Power issuance.

When the European Union voted in July to allow certain nuclear and gas activities as of 2023, consensus only came after a series of reports supporting the viability of nuclear, including one by the EU Joint Research Centre that concluded that the technology was sustainable, doing no more harm than any other technology currently included in the taxonomy, including solar and wind.

SMRs: Next Frontier in Green Financing?

This series of developments may pave the way to adoption of other, emerging nuclear technologies, like SMRs, or small modular reactors, which align with the requirement of the EU Taxonomy that nuclear construction projects represent “the best available technology”.

SMRs are said to be safer, cheaper to build and, importantly, to have more versatile uses than their larger predecessors, meaning they can be built to specific use cases for industry; the technology is applicable to power generation and can generate the extreme temperatures needed to produce clean hydrogen, both of which will be in high demand as electric vehicle adoption takes off and the use of hydrogen evolves.

SMRs might be especially practical for countries with vast geographies, like Canada, where they can be manufactured off-site and then delivered to remote areas for final assembly. In fact, in March of this year, Canada’s Innovation, Science and Industry minister announced an investment of $27.2 million in Westinghouse Electric Canada Inc. toward the licensing of its eVinci microreactor. Another important testament to the growing interest in nuclear technology came in October, when talk of SMRs dominated conversations at the International Ministerial Conference on Nuclear Power in Washington.

SMR companies are also increasingly optimistic that the technology will catch on, buoyed in part as more investors consider it a real alternative. According to our internal research around private sector intelligence, for example, over the last three years there has been an uptick in investment in the SMR space, with investors buying into fewer but larger deals. In May, Nuscale Power Corporation, a provider of SMR technology, ran a SPAC IPO that has since traded above listing and outperformed indices even amid broader market slowdowns and is seen as further evidence of greater investor interest in the nuclear space. Even at these early stages, the market size is not unsubstantial, with roughly $6.4 billion invested across 26 SMR and SMR technology companies globally.

According to Research and Markets’ Nuclear Electricity Global Market Report 2021, the nuclear industry as a whole is forecast to grow to $2.7 trillion by 2025, from about $2.07 trillion in 2021.

No Crystal Ball

What we can say for sure, is that despite historical headwinds and diverse views from wider market participants, momentum is building behind green financing for nuclear.

“There has been almost a 180-degree shift in the sustainable finance discussion when it comes to the inclusion of nuclear energy,” Alec Cheng, vice president and Chief Controller and Accounting Officer at OPG, told a BMO Sustainability Leaders podcast just a few days after the European Union voted to allow nuclear energy to be labeled as a green investment.

As the global fight against climate change continues, there will be increasing pressure on sustainable and resilient sources of energy, and on adopting nuclear power as a green alternative.

“People are saying, ‘Ok, how can I have security and stability and dependability and resilience,’” said Jonathan Hackett, Head of Sustainable Finance at BMO Capital Markets and Co-head of the BMO Energy Transition Group. “Nuclear seems to be where a lot of people are increasingly landing.”

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Magali Gable Director, Sustainable Finance

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