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Exploring the Energy Sector: Insights From 2024’s Top Trends
In this podcast, Motley Fool analyst Nick Sciple joins host Ricky Mulvey to delve into the major energy events of the past year. Here’s what they discuss:
- Improvements in the US oil extraction process.
- Challenges for companies aiming to develop small nuclear reactors.
- Diminished interest from investors in renewable energy sources.
To access full episodes of all The Motley Fool’s free podcasts, visit our podcast center. For those new to investing, check out our beginner’s guide to stocks. A transcript of the discussion follows.
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This video was recorded on Dec. 07, 2024.
Nick Sciple: In the nuclear power sector, I see three key investment types. One is companies that own and operate current nuclear sites, which are similar to the utility firms we mentioned. The second involves supply chain players, like BWX Technology, which produces fuel components, and uranium producers, a segment experiencing potential shortages. Lastly, there are businesses developing new reactors. Personally, I’m focused on the first two categories, those with longstanding operations in the nuclear field.
Mary Long: I’m Mary Long, speaking with Nick Sciple, an analyst for Fool Canada and a keen observer of the energy market. As we approach year-end, we’re engaging various analysts to reflect on significant developments and predict trends for 2025. To start, my colleague Ricky Mulvey chatted with Nick about the energy industry, touching on AI’s growing energy cravings, the US’s enhanced oil extraction methods, rising interest in small nuclear reactors, and the waning investor enthusiasm for renewable technologies.
Ricky Mulvey: In this end-of-year review, we’re reflecting on industries, and energy stands out as a top performer among the S&P. Though it hasn’t made headlines like others, we have Nick Sciple here to share insights. Nick, what are the most striking energy stories of 2024?
Nick Sciple: Thanks for having me, Ricky. This year, the big headline revolves around artificial intelligence (AI) and its link to energy demand. As it stands, energy consumption in the US has barely budged over the last two decades, rising only about 5% since 2005. However, AI is set to change that with its surge in energy requirements. Training an AI model consumes energy equivalent to what 100 households use in a year. Some advanced AI data centers might consume as much power as entire cities. Projections suggest AI energy consumption might more than double by 2026 and possibly triple by 2030. Data centers could account for 6% of energy demand, up from 2% in 2022. Although this may seem small, it marks a significant step in energy demand, hinting at a larger trend ahead.
Ricky Mulvey: There appears to be a close link between economic growth and energy consumption in both developing and advanced economies. Current challenges for large tech firms include the readiness of the grid to support the energy needs required for AI. With the present infrastructure, can it handle those demands?
Nick Sciple: At this moment, no. Additional energy sources are necessary. Industry leaders, including Elon Musk and Sam Altman from OpenAI, have acknowledged this challenge. They, alongside numerous big tech companies, are working to secure the energy required for their future operations. Over the past 18 months, electric utilities have doubled their forecasts for the additional power needed in the next decade, increasing demand for diverse energy sources like nuclear and natural gas.
Ricky Mulvey: Energy firms have dominated many of this year’s best-performing stocks, with three—Vistra, Constellation, and GE Vernova—leading the charge. Vistra, in particular, stands out as a power generator capable of supplying energy to 20 million homes; it currently serves around five million. It’s noteworthy that a utility company holds the title of the S&P 500’s top performer. What has driven investors’ enthusiasm for Vistra lately?
Nick Sciple: You correctly pointed out Vistra and Constellation Energy, both of which are independent power producers operating in competitive energy markets. Recently, there has been heightened optimism regarding electricity demand, particularly for firms that already generate power. The value of existing nuclear assets, an area where both companies excel—Constellation leads in nuclear generation while Vistra ranks second—has surged. Licensing extensions for existing plants and subsidies from the Inflation Reduction Act have both aided these companies in maintaining and increasing nuclear power generation. The rise in energy demand has put these companies in a prime position to benefit, leading to significant increases in their stock prices.
Ricky Mulvey: You emphasized expectations in this context—the surge in stock performance isn’t solely based on immediate business results, but rather the potential future growth.
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U.S. Energy Efficiency Soars Amid Speculation Over Small Modular Reactors
Investors Bet on Nuclear Future Despite Challenges
Many energy companies are currently in a state of speculation, creating excitement among investors. But is this enthusiasm justified?
Not All Energy Demand Meets Expectations
Nick Sciple: The sustainability of this excitement hinges on whether long-term energy demand actually develops as anticipated. While advances in AI hold promise, we may also see improved efficiency or fewer data centers than expected. Nuclear assets remain highly valuable, but these companies operate in a volatile commodity market. Their current performance reflects the importance of existing energy assets, yet it’s unlikely that utility companies will record extraordinary gains in a stable market.
U.S. Oil Production Sets New Records
Ricky Mulvey: Let’s focus on oil for a moment. U.S. crude oil production recently hit an impressive record of about 13 million barrels per day, according to Bloomberg, surpassing Saudi Arabia’s output by approximately 50%. Notably, this achievement has been made with only a third of the drilling rigs used a decade ago. Nick, how did the U.S. become so much more efficient in oil extraction?
Technology Drives Increased Oil Efficiency
Nick Sciple: The surge in U.S. oil efficiency is mainly due to technological advancements and innovations. Over the past 15 years, since the shale revolution, companies have been motivated by changing market conditions to enhance productivity. Techniques such as longer drill laterals, improved fracking fluid, multi-well fracking, and greater automation have contributed to this efficiency. While we may eventually hit a limit, U.S. production has consistently risen despite earlier predictions of peak shale.
Long-Term Trends in Oil Production Costs
Ricky Mulvey: Even as oil remains in limited supply, extraction costs have decreased. Do you think we can expect this trend to continue long-term?
Nick Sciple: Growth cannot persist indefinitely; the available oil will eventually be depleted. Nevertheless, the shale revolution has solidified the U.S.’s role as a key energy producer, altering the balance of power in oil markets. Although OPEC remains influential, the significance of U.S. energy security today is far greater than it was two decades ago. While ongoing growth is unlikely to be perpetual, the U.S.’s status as a major oil producer appears stable for now.
The Rise of Small Modular Reactor Companies
Ricky Mulvey: Moving to nuclear energy, there has been considerable investor interest. Shares of companies like NuScale and Oklo have performed exceptionally well, especially within the small modular reactor (SMR) sector. Oklo’s stock has surged nearly 100% over the past year, and NuScale (tickered SMR) has increased by over 700%. However, both companies currently lack operational SMRs. Nick, what challenges do they face in bringing these technologies to fruition by the end of 2024?
Regulatory Hurdles Loom for SMRs
Nick Sciple: The challenges facing these companies are multifaceted, including regulatory issues, permitting, labor shortages, and cost considerations. NuScale is the only company with an approved small modular reactor design, but delays arose when cost estimates exceeded initial projections by over 50%. As a result, many of these capital-intensive projects remain theoretical. While they may appear straightforward and low-cost on paper, practical deployment often encounters significant obstacles.
Historical Context of Nuclear Project Delays
The history of nuclear power projects is fraught with delays. For example, the Vogtle Unit 3 and 4 reactors experienced years of setbacks before completion. Originally slated for completion in 2012, these projects ultimately cost over $30 billion—twice the initial estimate. Given the challenges that Oklo and NuScale face, it’s uncertain whether they can successfully launch their reactors.
Future of Small Modular Reactors in the U.S.
Ricky Mulvey: With backing from notable investors like Sam Altman, could small modular reactors eventually be used to power data centers, even if they exceed budget? Do you envision any operational small modular reactors in the U.S. within the next three to five years?
Nick Sciple: It’s unlikely that commercial reactors will be operational in that timeframe; however, one prototype, the Department of Defense’s Project Pele microreactor, is currently under construction and is expected to be completed by 2026. Initial deployments of small modular reactors might arise in Canada, specifically with Ontario Power Generation’s BWRX-300 project. While optimism is warranted, the path to commercial viability for these technologies is still fraught with challenges.
Big Tech’s Growing Interest in Nuclear Energy: Opportunities and Challenges Ahead
Construction Set to Begin on New Nuclear Reactor by GE Hitachi
The new reactor being built by GE Hitachi, a subsidiary of GE Vernova, is making progress. Pre-construction work is already in progress, with plans for construction to start next year. The aim is to have the plant operational by late 2028 or early 2029, keeping it within the anticipated 3 to 5-year timeline. Oklo has expressed intentions to have a commercial reactor ready by 2027, but whether that will materialize remains uncertain due to various market challenges.
Military Reactors and Existing Facilities: A Glimpse into the Future
While skepticism lingers around the timelines for new projects, two plants are currently under construction. One is the military-focused Project Pele, and the other is in Canada, both expected to enter the market by 2028. Although optimism exists for these projects, companies without operational reactors face a longer road ahead to meet these ambitious timelines.
Big Tech Players Dive into Nuclear Partnerships
Major tech companies are increasingly investing in nuclear energy in two primary ways: securing energy from existing nuclear plants and exploring the construction of new reactors. For instance, Amazon has made a significant deal worth $650 million with Talen Energy to source nuclear power from its existing facilities. Additionally, Amazon has a partnership with Dominion Energy that explores deploying small modular reactors in Virginia, while also investing in the small modular reactor company X-energy.
Google has also committed to investing in small modular reactor technology through Kairos Power, and this week, Meta put out a request for proposals to develop 1-4 gigawatts of new nuclear capacity in the U.S. by the 2030s. As they seek to meet their carbon neutrality goals, these companies have recognized the necessity of reliable, around-the-clock nuclear power to meet their massive energy demands, particularly in data centers that support AI technologies. The competition has intensified with all these players vying for a nuclear future.
The Energy Landscape: Where Will Big Tech Turn Next?
While the potential for new nuclear power remains, challenges exist. Should Big Tech find its nuclear ambitions unmet, companies may turn to a combination of renewable energy sources and natural gas. As of now, 2024 is poised to be a significant year for new natural gas generation announcements in the U.S., with over 200 gas projects at various stages of development. The electricity demand is high, and relying solely on new nuclear facilities or renewables won’t suffice to meet this need.
Investing in Nuclear Energy: Where to Put Your Money?
Navigating the nuclear sector can be complex. Nick Sciple, who previously highlighted BWX Technologies for its role in supplying fuel for U.S. Navy submarines, suggests three investment avenues in the nuclear space. First, companies that operate existing nuclear sites—traditional utility firms such as those mentioned earlier. Second, organizations involved in the supply chain, including uranium producers. Lastly, those working on new reactor development. Sciple emphasizes that investing in established businesses with proven operational success is wise, pointing out BWX Technologies as a low-risk option that is at the forefront of innovative projects and military contracts.
Conclusion: A Historical Perspective on Nuclear Innovation
Historically, U.S. military initiatives have spurred significant advancements in nuclear technology. BWX Technologies has positioned itself at the forefront of this evolution, engaging in projects that could lead to the implementation of micro reactors in the coming years. The journey toward a nuclear-powered future is filled with challenges, but opportunities abound for those willing to navigate the landscape thoughtfully.
BWX Technologies Positions Itself as a Leader in the Small Modular Reactor Market
BWX Technologies is strategically navigating the small modular reactor (SMR) landscape while also expanding its medical isotope business.
Micro reactors like BWX Technologies’ offerings are being positioned as merchant suppliers, allowing them to cater to a variety of SMR design companies. A prime example is the BWRX 300 reactor, which is currently under construction at the Darlington site in Ontario. BWX is actively generating revenue as they construct the reactor pressure vessel, showcasing their integral role in the market. Given their capabilities, BWX Technologies is uniquely positioned to take advantage of opportunities among small reactor designs being developed in North America. They stand as the sole manufacturer of large nuclear reactor components, placing them in a strong position to capture significant business regardless of which small modular reactors ultimately succeed. Additionally, BWX has a thriving medical division focused on rapidly growing nuclear radioisotope production.
Aklo has also made an investment in BWX. While various companies are exploring opportunities in the SMR space, BWX Technologies is already generating revenue and is poised to continue doing so as demand expands over the next decade. This suggests that BWX presents a quality investment that carries less risk compared to some speculative reactor companies.
Ricky Mulvey: With their plans in place and demand for their reactors, Nick, where is the Project Pele reactor headed? It was ordered by the Department of Defense, correct?
Nick Sciple: Absolutely. The Project Pele reactor will be constructed at the Idaho National Laboratory, one of the few critical nuclear labs in the U.S. The reactor will be tested there, and if successful, could be deployed at remote military bases to solve logistical challenges. In fact, it’s estimated that around 50% of casualties in Iraq and Afghanistan were linked to transporting fuel supplies, so implementing a small nuclear reactor could save lives and improve efficiency at these bases. The military potential here is quite significant.
Ricky Mulvey: Turning to renewables, many renewable stocks have struggled recently, including the iShares Global Clean Energy ETF, which has remained nearly flat over the past five years. There’s been a noticeable downturn since the pandemic. How do you see the political landscape impacting companies like First Solar, which has been relying on clean energy subsidies for much of its operating income?
Nick Sciple: It’s tough to predict the political climate, especially given the current administration’s approach to negotiations. If clean energy incentives like those from the Inflation Reduction Act were to be removed, it could significantly impact renewable companies. For instance, First Solar could see its operating income drop by more than two-thirds without these subsidies. The renewable diesel market, along with electric vehicle tax credits, could also be affected. The elimination of subsidies might lead to some projects being abandoned, creating opportunities for others, but tying your investment strategy solely to government policies can be precarious.
Ricky Mulvey: Do you think the investment outlook for renewable energy companies remains robust?
Nick Sciple: Renewable energy continues to grow, with solar installations increasing by 25% and utility-scale solar by 30% in 2024. Notably, renewables represented about 90% of new electrical capacity. However, rising interest rates have made financing some projects less favorable, and potential subsidy cuts add another layer of complexity. My view is that while there are still attractive investment opportunities, many segments of the renewable market seem increasingly commoditized. If I were to invest in renewables now, I would consider companies like Brookfield Renewable Energy, which offers a diversified portfolio of renewable assets, rather than focusing solely on manufacturers of solar panels, which face more challenges.
Returning to the topic of potential subsidy or tariff changes, especially regarding solar, many Chinese imports drive the low-cost solar panel market. These dynamics are tricky, making it difficult to predict the broader implications.
Ricky Mulvey: Given the expansion of renewable energy, it appears that a fundamental issue remains: meeting consistent power demands. Nuclear energy effectively addresses this gap, but intermittent sources like solar and wind cannot always guarantee reliability. Are renewable energy companies addressing baseline power needs adequately?
Nick Sciple: Many companies are exploring battery storage solutions, partly incentivized by state policies, such as California’s rebate adjustments for projects incorporating battery storage. Nevertheless, integrating battery systems entails additional costs that need to be considered. It seems increasingly clear that a comprehensive energy strategy, incorporating various sources, is necessary to meet our energy demands effectively.
Renewable Energy’s Future: Insights and Expectations for 2025
The landscape of energy production is evolving, especially with the rise of renewables and battery storage technologies, which aim to replace traditional sources like natural gas and nuclear power. Despite the ongoing developments, optimism in the market appears to have shifted.
Nick Sciple Reflects on the Energy Market
In discussing where the energy sector is headed, Sciple explained that while renewables cannot supply 100% of baseload power consistently, there remains a promising future. The shift toward solar energy is expected to accelerate significantly over the next five to ten years. However, the market currently seems less optimistic than it was several years ago. Sciple remarked that previous projections may have been overly ambitious.
Major Energy Events to Watch in 2025
Sciple highlighted three significant storylines to follow as we approach 2025:
- OPEC’s Idle Capacity: A critical question looms over OPEC regarding its unused production capacity. As market conditions evolve, the cartel may decide to reactivate this idle capacity to boost sales, which could have widespread effects on global producers.
- LNG Canada Project: In 2025, the LNG Canada project is set to begin exporting liquefied natural gas. This marks a major milestone as it will be Canada’s first LNG project. With Canadian natural gas previously priced below benchmarks due to limited infrastructure, this development could increase prices and benefit local producers.
- BWX 300 Reactor Construction: The upcoming BWX 300 reactor in Canada is another key focus. Should it encounter cost overruns and delays similar to past nuclear projects, confidence in the nuclear sector may wane. However, Canada’s recent success in extending existing nuclear reactors’ lifespans at a lower cost and ahead of schedule offers hope for future projects.
Sciple concluded that many developments are unfolding in the energy sector, and unexpected stories are likely to emerge as we progress through 2025.
Closing Remarks from the Discussion
Ricky Mulvey thanked Sciple for his insights as they wrapped up the conversation on Motley Fool Money. In their discussion, it’s important to note that participants may hold interests in the mentioned stocks, and the Motley Fool may have formal recommendations based on their conversations. Mary Long reminded listeners that all personal finance advice adheres to Motley Fool’s editorial standards.
Disclosure: John Mackey and Randi Zuckerberg are board members of The Motley Fool. The Motley Fool holds positions in and recommends various companies, including Amazon and Microsoft.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
