Nuclear fusion will cause trend changes in multiple assets if current work is successful.
Unlike traditional nuclear fission using uranium or plutonium, nuclear fusion uses high-speed hydrogen isotopes to overcome the electrostatic force that naturally repels atoms with like charges and consequently returns energy in high quantities. Nuclear fusion firms and projects, such as General Fusion and ITER, are privately or government-financed and are not yet confirmed as economically viable. However, ordinary investors are still capable of capitalising from the industry's growth as current ventures come closer to completion.
Elements of nuclear power
The general idea behind nuclear power is unlocking 'binding energy', representing the excess mass (mass defect) lost when the stability of atoms increase after fission or fusion. Note mass and energy are equivalent and connected through the following equation that first appeared in Einstein's theory of special relativity.
This difference in mass exists because the mass of the individual nucleons (e.g. electrons, protons and neutrons) is greater than the mass of the original isotope(s). Fission is commercially operable because an atom can undergo nuclear fission through destabilisation via a neutron travelling at a specific velocity using a lower amount of energy than the binding energy captured. On the contrary, for atoms to fuse an environment similar to the sun needs to be replicated and this needs more energy than to trigger the fission process. Scientists are currently trialling magnetic and inertial confinement technologies to simulate temperatures up to 100mn degrees celsius.
Given the elemental structure of uranium and hydrogen isotopes and their products following fission and fusion, fusion has the potential to unlock ten times the binding energy released in fission. The binding energy is collected and heats a fluid, the emitted steam is then used to drive a turbine thus generating electricity for millions of households and workplaces and offering a new range of sustainable energy products.
Fusion has many benefits including the reduced risk to human life; there is no possibility of a chain reaction similar to what occurred in Chernobyl in 1986 because engineers can cool the reactor chamber in seconds and prevent further high-speed collisions and avoid a meltdown. Neither long-lived radioactive waste nor carbon dioxide is generated. Overriding risks for fusion are time horizons, economic feasibility and opportunity costs of capital. Maintenance, commission and regulatory costs also degrade the profitability of fusion reactors.
Fusion is self-sustainable through the use of tritium breeding. Deuterium and tritium are hydrogen isotopes used in the fusion process, deuterium is abundant in water but tritium has natural scarcity. Tritium breeding uses a high-speed neutron, a product of fusion, and reacts with lithium to create a reliable source. Further innovations involving superconduction, materials with no resistance, are also dependent on fusion development and can increase electric motor efficiency and develop cancer treatment systems. Widespread uses make fusion an attractive long-term investment via raw material speculation or through established energy oligopolies that have already invested in fusion. However, it is difficult to invest in projects with little capital without exposure to further systematic risks.
De-energised by incumbents
Bringing nuclear fusion to market, despite its risks, will give a low-risk eternal energy source. Surprisingly, most funding has come from governments, albeit peaking in the 1970s, smaller private investors and HNWIs that have little competition. Few institutional investors have allocated funds to nuclear fusion projects because of the risks attached and profit impairment if unsuccessful; fusion power plants have no other use. Until confirmation that current projects have been successful scepticism remains high.
Institutions are experiencing conflicting incentives regarding fusion investments too. Managers prioritise short term objectives to impress shareholders and tend not to quickly deviate from their traditional revenue-generation techniques. Moreover, nuclear fusion will undermine non-renewable energy growth. Oil rigs, gas pipelines and nuclear fission reactors would slowly be decommissioned. Devaluing assets would wipe billions from the valuations of floating firms hitting fund managers and wider public investments. Furthermore, it is not in the interest of certain governments to develop fusion power, oil primary product dependency is a serious problem for less-developed OPEC+ participants. Declining oil sales cause lower tax revenues, currency depreciation and a substantial increase in living costs.
Positively, nuclear fusion would trigger a human capital allocation if proved viable with firms recruiting labour to assemble nuclear fusion reactors and manage new projects. Conversely, for consumers, tacit collusion, non-contestability and high initial average/sunk costs (e.g. reactor planning and construction) are likely to be resounding features that will contribute to the continuation of high consumer energy prices. However, newer firms are anticipated to be more willing to reduce prices to drive out incumbents; economies of scale will aid this tactic. A diversified renewable energy sector led by nuclear fusion would accelerate the phasing out of non-renewables. Nevertheless, incumbents have not yet maximised the potential of oil and gas facilities so are unwilling to divest. Running down oil and gas reserves is not an alternative to investing in nuclear fusion. Instead, it is in the mutual interest of the firm and its stakeholders to allocate capital into fusion projects to reduce negative externalities and potentially benefit from a mammoth return on capital employed.
Available assets
Investing now will expose investors to many additional risks independent of nuclear fusion's progression. Ideas have surfaced involving a diversified publicly available 'megafund' including several risky private firms all using different confinement technologies and targeting unassociated uses as mentioned previously. Regulating the accumulated capital and leverage would ringfence the fund if found unprofitable and prevent wider contagion into other asset classes.
Once conflicting incentives are overcome this paves the way for successful investments in public markets. An unfathomable demand dropoff for oil, gas, uranium, and plutonium would occur if nuclear fusion was commercialised and spreads between short and long-dated futures contracts would collapse - only demand from smaller emerging markets with older infrastructure would remain. Renewable energy firms would be buoyed by a sentiment shift with an increasing reliance on their businesses to generate power, increasing their free cash flows. Hydrogen prices would heighten through derived demand for deuterium. However, fusion (and arguably hydrogen) power is the only renewable that does not rely on the weather or tides, generating electricity for 24 hours per day. The volatility of non-fusion renewable energy equities and fixed-income assets are therefore likely to be more subdued.
New fusion firms will have to complete multiple due diligence checks to trade on public markets which often takes years. Meanwhile, fund managers aim to beat benchmark indices that are heavily weighted with non-renewable energy firms. Thus, there are grounds to avoid investing heavily in the benchmark, passive funds or any energy stocks to prevent losses especially as the end of the recovery approaches and underweighting energy equities is increasingly recommended. However, acquisitions are likely to occur by incumbents to create synergies with their own experienced managers and established production lines (e.g. conventional turbines) which could appreciate their stock prices. There is a reasonable probability that currently reluctant firms to allocate funds to nuclear fusion will become the leaders in the industry in the future through their market power.
Optimistic forecasts suggest viable fusion projects could arrive by 2025, leaving decades for incumbents to meet net-zero emission targets. Many argue these goals could be achieved faster and will not create the drive needed to overcome adverse effects of climate change.
Overall, the risk-reward profile of fusion is currently not in high demand and therefore progress will remain slow from lack of investment. Although, as reactors and spinoff innovations become operational popularity will undoubtedly rise causing a broader shift into renewables along with high volatility in fossil fuel prices and energy stocks. After the initial shock, a sustainable source of electricity with huge net benefits can be established which will stimulate economic activity, cheapen travel costs and improve individuals' health.
תגובות