London, 18 March 2011

UK Power: The events in Japan are likely to have shifted the public’s perception of nuclear energy. It is still very early to say exactly how this will affect the UK power sector. However, Matrix Corporate Capital LLP think the potential for change should not be downplayed.

"Our speculative analysis of a number of global policy responses shows that the impact on the gas market, in particular, could be significant," according to Matrix research analyst Adam Forsyth. "While many governments may have little practical alternative but to stick with nuclear for the time being, at the very least, we think it safe to say that the long-term policy impact is unlikely to lead to lower gas prices. As a result, we remain positive on Drax and Scottish and Southern, which we think will benefit from higher gas and electricity prices. Centrica’s exposure is more mixed, but we see a modest negative in the longer term. International Power is also less affected, but could be a see a modest positive, we believe."

Key Points

• With the story still unfolding, we don’t want to leap to conclusions, but we think it is safe to say the first four reactors at Japan’s Fukushima Daiichi nuclear plant are not going to return to service. Three other Japanese nuclear plants have reportedly suffered incidents in the quake or tsunami and are currently shut down. The German government has also shut down seven of its oldest reactors for three months.

• To replace this amount of generation with gas-fired plant would require just under 13bcm of natural gas per annum, we estimate, equivalent to 0.4% of current gas consumption and just over 5% of traded LNG. With LNG key to marginal supply in the UK, prices have already responded with the first year-ahead contract up 9%.

• The question now is whether there is more to come. This will depend on policy responses globally. We think there are four broad factors that might influence policy globally in the medium and longer term: reactor type, age, location and national politics.

• Type. The Fukushima reactors were boiling water reactors, the second-most common type, accounting for 22% of world operating capacity, after the pressurised water reactor (66%). Both these reactors are water cooled. UK operating reactors, with the exception of Sizewell B, are gas-cooled reactors (GCR), which arguably, would not be suffering the kind of issues being seen at Fukushima, but that’s for the current investigations to conclude.

• Age. Germany’s decision to close some reactors has been based on age. While newer reactors incorporate lessons from previous incidents, older reactors can be updated and added to retrospectively.

• Location. The obvious question here is, “is the reactor in an earthquake zone?” There is a lot of media comment about the wisdom of putting nuclear plant in such a location, and it may now be difficult to convince the public that nuclear is at all sensible.

• Politics. We think the politics of the host country are important. Much of the potential impetus for policy change is likely to come from the public reaction to the crisis. In countries where governments are responsive to public mood, we will potentially see greater effects on policy decisions.

"If further nuclear capacity was to be closed the most immediate and available source of replacement electrical generation equipment worldwide is gas-fired generation. Coal is also available, but is often less flexible, so more likely to already be fully utilised.

"Based on the existing nuclear fleet, we have tried to quantify the impact on world gas markets under various scenarios. The LNG market is key to UK prices. As production from the UK continental shelf declines, LNG is filling the gap. A market tightening could constrain LNG supply, putting upward pressure on prices. With gas-fired power stations normally the marginal source of generation capacity in the UK, this is likely to result in higher electricity prices."

Ends --

Click here for the full Matrix research note (6 pages)

Adam Forsyth