Is Nuclear Power Too Risky for Your Portfolio?

As the world remembers the horrors of Chernobyl and Japan tries desperately to contain its own nuclear disaster, US investors are wondering whether or not nuclear power is a safe portfolio play. First, one needs to consider whether or not such an incident could happen here on American soil to an American company. The reality is such an incident has happened here before, and if experts are right, may happen here again. In 1979, the nuclear power plant at Three Mile Island had its own meltdown incident. Reactor Two at the plant had a faulty valve in its coolant system, leading to less coolant water to flow into the core. This caused temperatures to rise inside the core, causing the automatic computer system to kick in and shut down the nuclear chain reaction. Temperatures still rose, as there was residual heat emitting from the reactions already underway. Unfortunately, the water flow problem was only one way. Water flowed out of the core but not in, causing the temperature to continue rising. The Emergency Core Cooling System kicked in, providing a backup reservoir of coolant for the reactor. The operator, thinking the situation was under control (and unaware of the valve problem) shut down the backup system early. The core temperature rose again. Steam was released from the reactor core, reducing the temperature again; however, the faulty valve kept the steam and coolant flowing out of the core. Once again, temperatures rose, and once again, operators de-activated the backup system. By the time the hydrogen gas inside the core exploded several hours later, the situation had spiraled out of control. What kept the disaster from becoming deadly was the fact that the explosion did not destroy the containment building. If it had, the radioactive fallout could have spread across the East coast. It was two weeks before the core cooled down completely, the excess hydrogen was absorbed, and the situation was under control. Chernobyl, which melted down 25 years ago today, had a similar pattern of systemic and operator errors, but at a much more dire cost. In that incident, the operator errors were magnified by a poor plant design, which led to an explosion that breached the containment unit and spread radioactive waste across parts of the former Soviet Union and Europe. Engineers eventually built a cement sarcophagus around the structure. The material inside the structure, though decayed somewhat in 25 years, still possesses the ability to explode and release radioactive waste across the globe again. The sarcophagus itself has leaks, and both rainwater and animal life have found their way into the plant. Estimates of the number of dead from the incident vary from 64 (the official count of workers and emergency personnel who succumbed to radiation) to upward of one million. In the 25 years since Chernobyl, governments and experts have said that the industry learned lessons and made changes to ensure that such failures could never happen again. The West seems to have bought in, as nuclear power comprises almost 20% of the electricity produced in the United States. Thirty-two companies are licensed to operate nuclear power plants within the United States, and thirty-one states have at least one nuclear plant within their borders. Considering the need that the US economy has for energy, this suggests that perhaps the nuclear industry is safe and, at the very least, profitable. Then, a little over a month ago, a tsunami followed a 9.0 earthquake in Japan. The Fukushima Nuclear Power plant was knocked off line by the quake, and its backup generators were swamped by the giant wave. Unable to cool its six reactors, the plant suffered catastrophic meltdown, the extent of which may not be known for years. Tens of thousands of citizens have been evacuated from within 50 km of the site. They may never return. Given the possibility that such an incident could happen here, who can say that their money is safe while invested in energy stocks that utilize nuclear power? The one entity capable of making such a claim — the US government. In 1957, the Congress passed and President Eisenhower signed the Price-Anderson Nuclear Industries Indemnity Act, limiting the exposure to financial risk that companies operating nuclear plants face, while also providing compensation for anyone harmed by nuclear incident. In other words, if a plant were to blow up in America, the plants owners are backed by a combination of private insurance and government insurance. As of 2011, private insurance is required for the first $375 million per plant, with the fund created by the law backing up the rest of the claims. So, while the results of a nuclear meltdown at a US plant would be catastrophic to those living nearby, it appears the government and insurance industries have provided a guarantee that it would not be catastrophic to your portfolio.