Exelon's Byron Nuclear Generating Station. Photograph by Christopher Peterson (Photo credit:... [+]
This is a tough time to be in the nuclear power business, according to the analysts at Morningstar, but prospects are brightest for Exelon.
"Morningstar analysts believe that existing nuclear operations are essential to energy supply stability in the developed world," Morningstar spokesman Nadine Youssef told me in an email this morning. "But new nuclear construction in the West is so expensive and politically charged that Morningstar thinks the ‘nuclear renaissance’ is on hold indefinitely."
That means no new nukes are likely to come online—beyond the five under construction in South Carolina, Georgia, and Tennessee—to challenge existing power generators. Meanwhile, federal clean-air regulations are expected to shutter coal plants. And if natural gas and electricity prices rise as Morningstar predicts—30 percent in the next few years—Exelon is best positioned to generate revenue from existing plants.
"Despite shrinking returns recently, we think Exelon’s wide moat remains intact because nuclear power remains the lowest-cost source of carbon-free, reliable electricity in all of its regions," according to Morningstar's "Utilities Observer" report for November.
Exelon is the only nuclear utility in the world to receive Morningstar's "wide moat" rating. The economic moat is Morningstar's measure of how likely a company is to keep competitors at bay for an extended period.
"Renewables pose a threat, especially in Illinois and upstate New York, but the inconsistency of renewable generation means grid operators rely heavily on nuclear plants to provide around-the-clock grid stability. Coal plant retirements in response to final and proposed emissions regulations would strengthen Exelon’s competitive advantage."
Exelon is the world's largest nuclear utility, with 14 plants in five states. It has suffered from falling power prices nationwide, driven mostly by cheap shale gas, cutting its 2013 dividend to shareholders by 41 percent.
Entergy, the next largest nuclear power generator in the U.S., has four regulated plants in the Southeast, which caps its returns in that region, and it faces a political battle to relicense its Indian Point plant near Manhattan. In Morningstar's terms, those assets have a narrow moat.
"Like Exelon, Entergy has considerable upside if power prices recover and Environmental Protection Agency regulations tighten on coal plants. But the firm faces contentious relicensing negotiations in New York," the report says.
Prospects are no better for nuclear firms overseas.
"Electricite de France (EDF) will be a major beneficiary of a gradually improving regulatory regime in France and of any development upside in the U.K. but remains a stable narrow-moat firm. E.On (EOAN) and RWE’s (RWE) narrow economic moats suffered from Germany’s nuclear exit. Deteriorating nuclear generation fundamentals led us to downgrade the moats and moat trends for Enel (ENEL) and GDF Suez (GSZ) to no moat and negative moat trends."
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