Implications of the Japanese Nuclear Disaster_An ESG Perspective_Final

8/4/2019 Implications of the Japanese Nuclear Disaster_An ESG Perspective_Final

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ImplicationsoftheJapaneseNuclearDisaster:

AnESGResearchPerspective

byDouglasCoganandJeromeLePage

TheongoingnuclearpowercrisisinJapanwillhavelastingimplicationsforpower

generationaroundtheglobe.Amuchanticipatednuclearrenaissancecouldbe

curtailedastheworldabsorbslessonsfromtheworstnuclearaccidentsincethe

Chernobyldisaster25yearsago.

TheUnitedStates,with104operatingreactorsandthemostnuclearcapacity,and

Europe,with143reactorsin27countries,nowplanextensivereviewsoftheirnuclear

plantsanddisasterpreparedness.China,with11operatingreactors,hasalsosuspended

approvalofmorethantwodozennewreactors.Withthesedecisions,itappearsthat

perhapsaresetbuttonisbeingsetontheworldsnuclearexpansionplans.

Thismaygiveaboosttocompetinglowcarbongeneratingsources,suchasnaturalgas

andrenewableenergy.MSCIsGlobalAlternativeEnergyIndexrecordeda10.1percent

gaininthefirst10daysafterJapansnuclearcrisisbegan.Thiscompareswitha22.8

percentlossfortheMSCIJapanElectricUtilitiesIndexoverthesameperiod.Coalmay

alsogetashorttermlift,sincenuclearpowerisitschiefrivalinprovidingbaseload

powergeneration.

Stock

price

changes

after

Japan

nuclear

disasterMarch

11

(priceat

open)

March

21

(priceatclose)%

Change

TokyoElectricPowerCompany 25.00 16.00 36.0%

MSCIJapanElectricUtilitiesIndex 114.07 88.05 22.8

MSCIGlobalAlternativeEnergyIndex 85.74 94.37 10.1

Source:MSCISectorandThematicIndices

YetthespecterthattheJapanesenucleardisasterwillfullyderailglobalexpansionof

nuclearpowerseemsremote.Thisisduetotheuniquecircumstancesthatcontributed

totheaccidentattheFukushimaDaiichiplant,andthemomentumthatnuclearpower

hasbuiltelsewherearoundtheglobeinparttoaddressglobalwarming.Still,the

repercussionsofthisaccidentaresuretoputaddedfinancialpressureandregulatory

scrutinyonthishighcostenergyresource.


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MSCIESGResearchPerspectiveonNuclearPower

MSCIESGResearchhaslongstudiedandanalyzedthenuclearpowerindustry,bothfor

itsenvironmentalandsocialimpactandtoassessthesectorsinvestmentriskprofile.

Overthelast50years,thenuclearindustryhaspostedarelativelysafeperformance

record,exceptfortwonotableaccidentsatRussiasChernobylreactorin1986andthe

USThreeMileIslandsitein1979. ThedisasteratJapansFukushimaDaiichireactor,at

present,fallssomewhereinbetweenthesetwoindustrydefiningevents.

However,thecurrentcrisisinJapanisnotresolved.Inadditiontobringingthereactors

undercontrol,coolingwatermustberestoredtospentnuclearstoragepools,whichare

alsospreadingradiationtoadjacentareas.ThisbringsintofocusalongstandingAchilles

heelofthenuclearpowerindustry,withmanyreactorsitesaccumulatinghighly

radioactivewasteforfailuretobuildsafeandpermanentwasterepositorieselsewhere.

Accordingly,MSCIESGResearchhasdecidedtoreevaluateitsoutlookfornuclear

utilitiesandtheelectricpowersectorasthesituationinJapanplaysout.Wehave

alreadydowngradedourMSCIESGControversiesRatingofTokyoElectricPower

Company(TEPCO),basedonpoormanagementofthecrisisattheFukushimacomplex

thatextendsthecompanystroubledhistorywithnuclearpower.

AnupcomingMSCIESGIssueBriefwillfurtherexplainourTEPCOdowngradeandour

teamsongoingapproachtoanalyzingcompaniesinvolvedinthenuclearpower

industry.


3/8

SeismicShift?

Japans54operatingnuclearreactorsmakeittheworldsthirdlargestnuclearpower

generator,behindtheUnitedStatesandFrance.Itsnineinvestorownedelectricutilities

areamongmorethan50privatepowercompaniesworldwidethatownandoperate

nuclearpowerplants.However,amongthenuclearutilitiestrackedbyMSCIESG

Research,Japanhastheonlyoneswheretheentirecountryisinazoneofhighseismic

activity.Otherutilities,includinginCalifornia,operatenuclearplantsinproximityto

localfaultzones.Relicensingoftheseplants,aswellasotherproposedreactorsinhigh

seismicareas,nowfacegreaterregulatoryhurdles.

10LargestNuclearPowerProducingNations

Country Capacityin

Megawatts(2008)

%ofElectricity

Supply(2008)

France

61,443

77.1%

Ukraine 13,045 46.7

Sweden 10,002 42.6

SouthKorea 18,716 39.0

Japan 43,692 24.0

Germany 20,844 23.5

UnitedStates 97,603 19.3

Russia 19,897 15.7

Canada 10,306 14.4

UnitedKingdom 12,728 13.1

Source: InternationalEnergyAgency.Electricitysupplyisgenerationfromnuclearpower.

Despitethe9.0magnitudeearthquakethatstrucktheFukushimacomplexonMarch

11thefifthlargestquakeinrecordedhistorythatplantssafetywasnot

compromisedbyseismicactivityalone.Itwasthe30foottsunamithatfollowed,

swampingundergrounddieselgenerators,whichprecipitatedthecrisis.Whenbackup

batterypoweredgeneratorsalsodraineddown,coolingsystemswerenolongerableto

circulatewateraroundtheplantsthreeoperatingreactorsandsixspentfuelstorage

pools.Thissetoffachainreactionofexplosions,firesandradiationleaksinthisstill

unfoldingtragedy.

WithradiationnowexposingTokyoswatersupply,themainpriorityattheFukushima

complexremainsrestoringpowertoitssixreactors.Duetodamagecausedbythe

earthquake,andadecisiontointroducecorrosiveseawatertoavoidfullcorereactor

meltdowns,criticalequipmentmustberepaired.Thiswilladddays,orevenweeks,to

bringthesitefullyundercontrol.Decontaminationofthesurroundingareawilltake

years,orevendecades.


4/8

MoreScrutinyforReactorsNearFaultLines

InresponsetoJapansnuclearcrisis,morethanahalfdozenothernations,includingthe

UnitedStates,Germany,ChinaandIndia,haveannouncedreviewsoftheabilityoftheir

nuclearplantstowithstandearthquakes,tsunamisandothernaturaldisasters.

InCalifornia,theSanOnofreplantownedbyEdisonInternationalandtheDiabloCanyonplantownedbyPacificGas&Electricareunderparticularscrutiny,given

theirproximitytothePacificcoastlineandactivefaultzones.

AmerensCallawayNuclearPlantandExelonsClintonPowerStationarelocatedadjacenttotheNewMadridFaultintheMississippiRiverValley;thisfault

producedfourearthquakesin1811and1812estimatedatmagnitude7.0.

EntergysIndianPointPlant,35milesnorthofNewYorkCity,alsorestsaboveanancientfaultline,andwillundergoaspecialsafetyreviewattherequestofGov.

AndrewCuomo.

Elsewherearoundtheglobe,mostnuclearplantsaresitedinseismicallystableareas

andaredesignedtowithstandmaximumforcesprojectedfrompossibleearthquakes.

Still,theFukushimadisasterwillpromptnewinvestigations,includingatcontroversial

sitesinhighseismicareaswherenewreactorcomplexeshavebeenproposed. For

example:

OneplannedreactorinJordanattheRedSeaportofAqabaisonamajorfaultline.

Turkey,whichiscrossedbynumerousgeologicalfaults,hastwonuclearplantsunderdevelopment.

IranscontroversialBushehrnuclearplantalsoisinafaultzone.Concernswiththisplantincludethatitcouldprocessuraniumforanuclearweaponsprogram.

TheIranianplantunloadeditsnuclearfuelinFebruaryaftertheStuxnet

computerworminfecteditsreactorsystems.

Local

community

groups

have

also

raised

concerns

about

proposed

nuclear

plantsinactiveseismiczonesinChina,India,Brazil,Bulgaria,Romaniaand

elsewhere.


5/8

China,IndiaPoisedforNuclearBoom

FastgrowingeconomiesinAsiaarespurringtheworldsmostambitiousnuclear

programs.Chinawhereelectricitydemandhasbeengrowingat12percentayear

has11operatingreactors,butthegovernmentplanstoaddatleast25more,andsome

arealreadyunderconstruction.InlateFebruary,justweeksbeforetheJapanesecrisis

began,Chinasministryofenvironmentalprotectionannouncedregulationsprohibiting

nuclearconstructionnearearthquakezonesormajorcities.Followingthedisaster,the

Chinesegovernmentaddedsteppedupinspectionsatitsexistingplants,andsaiditwas

suspendingnewreactorapprovals.

India,with20nuclearreactorsalreadyinoperation,planstospendanestimated$150

billionaddingdozensofnewreactorsaroundthecountry. Itsforecastcallsfornuclear

powertosupplyaboutaquarterofthatcountryselectricityneedsby2050,atenfold

increase. FollowingtheJapanesenucleardisaster,IndianPrimeMinisterManmohan

SinghsaidhiscountrysDepartmentofAtomicEnergyplantswouldreviewallofits

plants,particularlywithaviewtoensuringthattheywouldbeabletowithstandthe

impactoflargenaturaldisasterssuchastsunamisandearthquakes.

Industry,GovernmentUnderstatedNuclearRisks

WhilethetragedyattheFukushimaplantispromptingreviewsofnuclearplants

disasterpreparednessaroundtheglobe,Japansowntrackrecorddoesnotinstill

confidence.Decadesoldcompanyandgovernmentdocumentsrevealthatearthquake

andtsunamiriskswererepeatedlyhiddenorunderstatedbythepublicandprivate

sector.

ThechairmanandpresidentofTokyoElectricPowerresignedin2002aftertheyadmittedthecompanyhadfalsifiedrepairreportsatitsnuclearplantsformore

thantwodecades.

AseismologyprofessorfromJapansKobeUniversityresignedfromagovernmentpanelonreactorsafetyin2006,sayingthereviewprocesswas

riggedandunscientific.

Then,in2007,apowerfulearthquakestruckanotherofTokyoElectricPowersnuclearcomplexesonJapanswestcoast,generatingthreetimesasmuch

seismicaccelerationasitwasdesignedtowithstand. Asmallleakofradioactive

water

reached

the

sea,

and

the

plant

was

shut

down

for

21

months

for

repairs.

WhilethedamagewasnotasseriousassustainedattheFukushimaDaiichi

complex,threeofthesevenreactorsatToykoElectricsKashiwazakiKariwa

facilitystillarentbackonline.


6/8

MoredetailsareavailableinournewGlobalCompactprofileandControversiesreport

onTepco.

CorporatemalfeasanceandlaxgovernmentoversightarenotuniquetoJapan.Yetthat

countrysdecisiontoplaceitsnuclearreactorsinzonesofhighseismicactivityhas

raisedthestakesofmanagingthishighriskenergyresource.TheFukushimadisasterhas

shakenpublicconfidenceinJapansnuclearplantoperatorsandgovernmentoverseers.

Ifthatconfidenceislostcompletely,so,too,willbeJapansplanstogreatlyexpandits

nuclearpowergeneration.

Ironically,JapanesenuclearreactormanufacturersincludingToshibaandHitachiare

alreadyworkingonplantdesignsthatcouldbetterwithstandanaturaldisaster.

Generation3reactorsrelymoreongravityandnaturalheattransfersystemsthatcan

coolareactorwithoutpowerorhumanintervention.Whilethesedesignsarenotfail

safe,theyarevastimprovementsoverthefirstgeneration(Mark1)boilingwater

reactorsthatGeneralElectricintroducedtothemarketinthe1960s.Allsixreactorsat

theFukushimacomplexarebasedonthisearlydesign,asare26otheroperating

reactorsaroundtheglobe.

ThePostFukushimaNuclearEra

WhilethecrisisattheFukushimareactorcomplexisfarfromover,ithasalready

highlightedsomecriticalchallengesnowfacingtheglobalnuclearpowerindustry:

Seismicmatters:Nuclearplantoperatorsinactiveearthquakefaultandtsunamizoneswillneedtodemonstratetoregulatoryauthoritiesandthegreaterpublicthat

theirsafetyproceduresaresufficient,andiftheyneedtobeupgraded,thattheycan

continuetoruntheirreactorssafelyinablackswanworstcaseevent.Inaddition,

stresstestsofexistingnuclearplantsinEurope,NorthAmericaandAsiawillneed

tobethoroughandtransparenttoconvinceawaveringpublicthatnuclearplants

aresafeandincorporatingbuiltinredundancies(likecloseloopedcoolingsystems)

thattheaging40yearoldFukushimaplantlacked.

Safetyzones:Communitydisasterpreparednessmustalsobepartofthisongoingreviewprocess.TheU.S.governmentnowisintheawkwardpositionofadvocatinga

50mileevacuationzonearoundtheFukushimacomplexinJapan,whilerequiring

only

a

10

mile

evacuation

zone

around

U.S.

nuclear

plants.

This

discrepancy

in

disasterplanningwillhavetobereconciled.AcaseinpointistheIndianPoint

reactor,incloseproximitytoNewYorkCityandmorethan10millionpeople.

Spentstorage:AnotherlessonfromFukushimaisthatonsitestorageofspentnuclearfuelrodsmayposeasmuchofasafetyhazardasameltdownofthereactors

themselves.Spentfuelrodscannotbesafelyremovedfromaplantforanumberof

years,sothedesignandmaintenanceofonsitestorageiscrucial.However,atmany


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plantsintheU.S.andJapan,evenspentrodsthatcouldberemovedremainonsite,

duetolimitednuclearfuelrecyclingcapacity,andpoliticalresistancetothecreation

ofoffsitenuclearwasterepositories.ResolvingthisimpasseisajobthatJapanand

theUnitedStateshaveputofffordecades.

Nucleareconomics: Finally,healthandsafetyissuesraisedbytheongoingJapanesenuclearcrisiswillcompelanew,hardlookatthebasiceconomicsofnuclearpower.

ThestrickenreactorsattheFukushimacomplexwillnevercomebackonline,and

decommissioningtheseplantswillcostbillionsofdollarsandtakedecades.The

surroundingareaalsowillhavetobedecontaminated.Amillionpeoplewholive

withina50mileradiusoftheplantwilllikelytoseeasustaineddeclineinproperty

values,duetoradioactiveexposure,aswillcropsalesinthislargelyagricultural

region.Withalloftheseconsequencesinmind,TokyoElectricPowersstockprice

hasdroppedbyonethirdsinceMarch11.

10LargestNuclearPowerProducingCompanies

Company Capacityin

Megawatts

(2009)

%ofElectricity

Capacity(2009)

PriceChange

sinceMarch11

ElectricitedeFrance 70,6131 51.8% 4.3%

KoreaElectricPower 17,706 24.1 2.1

TokyoElectricPower 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

KansaiElectricPower(Japan) 9,520 28.0 6.6

RWE(Germany) 6,295 14.0 6.6

GDFSuezSA(France) 6,292 11.0 6.4

DominionResources(US) 5,768 22.9 2.4

Source:MSCIESGResearch. Nuclearcapacityispercentageoftotalinstalledcapacity.Stockprice

changesareasofclosingonMarch21.

1. EDFnuclearcapacityincludespowerplantsintheUnitedKingdomandjointownershipintheUnited

States.


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Conclusion

MSCIESGResearchregardstheJapanesenuclearpowerplantdisasterasamajor

setbackforthenuclearpowerindustry.However,itmaynotpreventtheindustryfrom

growinginthelongterm,albeitatamoretemperedpaceandwithgreaterregulatory

scrutiny.Reactionamonginvestorsseemstobearoutthisview,atleastsofar.

Nuclearpowerisasignificantsourceofpowergenerationprovidingnearly15percent

ofglobalelectricityneedsandiscentraltoastrategyforreducinggreenhousegas

emissions. Economicandenvironmentaldamagefromglobalwarmingcouldbefar

greaterthanasinglenuclearpoweraccidentliketheonewearenowwitnessingin

Japan.

ConsiderthatJapanesecoastalcommunitieswipedoutbytheMarch11tsunamimay

yetagainbecoveredbysealevelriseofuptosixfeetby2100.Thedifferenceisthenew

floodingfromcarbonemissionswouldnotonlycoverthosecommunities,butalsoreach

allcoastalcitiesaroundtheglobeandlastforcenturies.

Nuclearpowersgreatestlongtermchallengemayyetbeitsabilitytogenerate

competitivelypricedelectricity.Manyreactorsunderconstructionarefacingbillionsof

dollarsofcostoverruns.Moregovernmentsubsidieswillbeneededtoattract

investmentcapitaltosustainglobalnuclearexpansion.Thepublicwillneedtobe

convincedthatgovernmentandindustryassessmentsaboutitscostandsafetyare

credibleandobjective. Japansnucleardisastercompoundsthechallengesfacingthis

alreadycontroversialandhighriskindustry.

DouglasG.CoganisVicePresidentandDirectorofClimateRiskManagementforMSCIESGResearch.Hehasanalyzednuclearpowerandelectricutilitiesformorethan25years.JeromeLePageisaResearchAssociatewhospecializesintheelectricutilitiessectorforMSCIESGResearch.

Documents

Implications of the Japanese Nuclear Disaster_An ESG Perspective_Final