The Resurgence of 'The Nuclear Option': Another way to play the AI Theme
4min read This is the age of transformation, with emerging technology solutions threatening to drive accelerating change and reshape the very foundation of economics, industry, society, and even what it means to be human.
AI is obviously the most significant factor in this narrative, and it's weaving itself into our daily lives at an unbelievable pace. The more this process progresses, the harder it will be to steer the ship. But this isn't all effortless, lightspeed linear reasoning, and how access to that resource shifts the game-theoretic landscape across many industries.
It's also about energy consumption.
Experts in the space talk about exponential growth in the demand for "Compute". But underlying that curve is another one: the potential for an exponential rise in demand for energy.
Major tech companies like Microsoft and Google have reportedly doubled their energy consumption in recent years to support their expanding AI operations. This escalating energy requirement is not just a technological concern but also presents a significant investment opportunity, particularly in the nuclear energy sector.
The Energy Demands of AI and Data Centers
AI models don't work without huge energy and computational inputs. And the numbers are growing, with new and more powerful models constantly under development in a world hungry to access them.
The International Energy Agency (IEA) estimates that electricity consumption by data centers could double from 2022 to 2026, reaching levels comparable to Japan's entire electricity needs. This surge can only happen if we can come up with a way to power it – a reliable and substantial energy supply.
This has even prompted tech giants to explore new investments into alternative energy sources.
Nuclear Fission Energy: A Viable Solution
Nuclear energy – the black sheep of the power industry – is experiencing a global revival. We have been living for decades in a cultural bubble that fears and disdains this source, but it may be the only option if Nuclear Fusion Energy can't be scaled up fast enough to fill the hole left by fossil fuels as we transition away over the next two decades.
It offers a high-output, low-carbon alternative that can meet the massive energy demands of modern technology without exacerbating climate change. Here in the U.S., nuclear power already takes up about 19% of the nation's electricity sourcing pie chart and accounts for nearly half of U.S. clean energy production.
Recent developments highlight the growing interest in nuclear power:
- Microsoft's Partnership with Constellation Energy: Microsoft has entered into a power-purchase agreement with Constellation Energy to supply its data centers with nuclear-generated electricity. This deal includes the reactivation of a nuclear reactor at Three Mile Island. Following the announcement, Constellation Energy's stock price saw a significant uptick, reflecting investor confidence.
- Bill Gates and TerraPower: Bill Gates is investing $1 billion in a Wyoming-based nuclear power plant through his company, TerraPower. The U.S. Department of Energy is matching this investment, underscoring governmental support for nuclear initiatives. Gates has emphasized the necessity of such projects to meet the escalating power demands driven by AI.
Global Momentum for Nuclear Projects
The resurgence of nuclear energy isn't just a U.S. story, either. China and Russia, among others, are getting heavily involved in the space, with huge new nuclear infrastructure investments coming into place. Together, these three countries account for more than half of the nuclear projects currently in the design phase around the world.
But don't overlook the EU: In Europe, multiple countries—including the United Kingdom, France, and Sweden—are diving into the same pool to dial down on their dependency on fossil fuels and better line up reality with their respective climate agendas.
Investment Strategies in Nuclear Energy
1. Investing in Nuclear Energy ETFs: Exchange-traded funds (ETFs) focused on nuclear energy provide direct exposure to the industry. Funds like the VanEck Uranium & Nuclear Energy ETF (NLR), Global X Uranium ETF (URA), and Sprott Uranium Miners ETF (URNM) concentrate on companies involved in uranium mining and nuclear energy production. While these funds offer targeted exposure, they can be more volatile due to their narrow focus and the mid-cap nature of many constituent companies.
2. Diversifying with Clean Energy ETFs: For a broader investment approach, clean energy ETFs include a mix of renewable energy sources such as solar, wind, hydro, and nuclear. This strategy dilutes exposure to any single energy type but benefits from the overall growth of the renewable energy sector.
3. Broad Utilities Sector ETFs: Investors seeking stability might consider utilities sector ETFs, which encompass a wide range of energy providers, including those in nuclear power. While this approach offers less concentrated exposure to nuclear energy, it provides diversification and may reduce volatility.
When choosing an investment vehicle, consider the following:
- Risk Tolerance: Pure-play nuclear ETFs can be more volatile but offer higher growth potential. Broader ETFs may provide more stability.
- Portfolio Composition: Assess your current holdings to determine how a nuclear energy investment fits within your overall strategy. Consider whether you need more value-oriented or growth-focused assets.
- Time Horizon: Nuclear projects are long-term endeavors due to the substantial capital investment and time required for development. Investors should be prepared for a prolonged investment period to realize potential returns.
Conclusion
There are many ways to prepare portfolios for the emergence of AI as a global history-making force. But one that may be most overlooked in terms of its ties to this theme is the potential for society to forced out of its narrow-minded bubble of disdain and accept nuclear fission energy back into the fold as a primary energy source of the future.
If you think about it, this is a relatively simple choice to outline: Will humanity, by and large, decide to not go whole hog into the AI era because we are worried about a nuclear power plant disaster? Or will AI end up being the enticing carrot that finally gets us over the hump and back to believing in our ability to harness nature's power by improving our science and engineering capabilities?
The answer isn't hard to forecast given what we have seen of humans throughout history. And that answer gets even easier when one considers that this very same technology (AI) stands to improve our ability to manage nuclear fission power sourcing with significantly reduced risks.
Moreover, the increasing energy demands of AI and the global initiative to reduce carbon emissions are catalyzing a renaissance in nuclear energy. This shift presents a unique long-term investment opportunity.
After reviewing the options, the VanEck Uranium & Nuclear Energy ETF (NLR) stands out as perhaps the best pure-play vehicle for accessing this opportunity. However, a deeper diver into individual stocks in the space may yield even more promise, but without the benefit of diversification.