Power Play: The Stocks Set To Surge With The UK’s New Energy Plan

Power Play: The Stocks Set To Surge With The UK’s New Energy Plan
Reda Farran, CFA

almost 2 years ago3 mins

  • Rolls-Royce – a leader in small modular reactors – and uranium-related stocks could be big beneficiaries of the new energy plan, which aims to triple the UK’s nuclear capacity.

  • Offshore wind developers and wind turbine manufacturers also stand to see a surge in revenue, as the UK targets a fivefold increase in offshore wind power capacity.

  • Companies involved in “green” hydrogen projects – like fuel cell and electrolyzer makers – also stand to gain from the plan.

Rolls-Royce – a leader in small modular reactors – and uranium-related stocks could be big beneficiaries of the new energy plan, which aims to triple the UK’s nuclear capacity.

Offshore wind developers and wind turbine manufacturers also stand to see a surge in revenue, as the UK targets a fivefold increase in offshore wind power capacity.

Companies involved in “green” hydrogen projects – like fuel cell and electrolyzer makers – also stand to gain from the plan.

Last week, the UK government unveiled a plan to shore up the country’s energy independence in the wake of the Russia-Ukraine conflict. Among other things, the plan calls for new nuclear and offshore wind buildouts, as well as more ambitious targets for “green” hydrogen. So let’s take a look at each of those areas – and the stocks that are poised to benefit.

Nuclear

The energy plan targets a tripling of nuclear power capacity to 24 gigawatts by 2050, with small modular reactors (SMRs) forming a key part of the nuclear project pipeline. SMRs are small nuclear reactors that can be built on production lines since their design is standardized and modular. That makes them a lot cheaper and quicker to produce than traditional large-scale reactors, which are notoriously complex and expensive. But here’s the catch: SMR technology is still under development and hasn’t gained formal regulatory approval yet.

In the UK, an industrial consortium led by Rolls-Royce is the frontrunner in developing the technology. And just last year, it raised a fresh £400 million to put its SMR design through the UK’s rigorous nuclear regulatory process. If approved, the consortium could end up as the only group allowed to build and sell SMRs at a time when the government is looking to accelerate the country’s nuclear power capacity. That could provide an earnings windfall to Rolls-Royce and help give its stock price a much-needed lift: it’s down by 65% over the past five years.

But needless to say, betting on a single company and a regulatory outcome is risky. So another (and arguably safer) way to turn the UK’s ambitious nuclear plans into an investment opportunity is to invest in uranium-related stocks. A tripling of nuclear power capacity in the UK and nuclear expansion elsewhere will naturally lead to a surge in demand for uranium, which is a nuclear plant’s “fuel”. The Global X Uranium ETF (ticker: URA, expense ratio: 0.69%) invests in a broad range of companies involved in mining uranium and making nuclear components.

Offshore wind

The energy plan is targeting a fivefold increase in offshore wind power capacity to 50 gigawatts by 2050, up from a previous goal of 40 gigawatts. That’s set to benefit two industries: offshore wind developers and wind turbine manufacturers.

On the former, Orsted is the world’s biggest offshore wind developer and has a large presence in the UK. Other big players include SSE Renewables and RWE.

Top offshore wind developers in the UK. Source: Wood Mackenzie
Top offshore wind developers in the UK. Source: Wood Mackenzie

On the latter, most of the existing offshore wind projects in the UK use wind turbines from either Vestas or Siemens Gamesa. Those companies’ successful operational histories mean developers will most likely stick to them in the future too.

Top 10 global wind turbine makers in 2021. Source: Bloomberg
Top 10 global wind turbine makers in 2021. Source: Bloomberg

Hydrogen

The new energy plan doubles the government’s previous hydrogen goal with a target of 10 gigawatts’ worth of projects by 2030, with at least half coming from “green” hydrogen.

See, hydrogen can become a key way to store energy in a world that’s increasingly dependent on inconsistent wind and solar power. Surplus electricity generated from these renewable sources can be used for electrolysis, where water molecules are split into hydrogen and oxygen atoms using electricity. The hydrogen produced (called “green” hydrogen since it’s produced using renewable sources) can then be stored and drawn upon to cleanly produce electricity using fuel cells when the sun isn’t shining and the wind isn’t blowing. And unlike conventional batteries, hydrogen can be stored for months without losing much power.

Now, there are different ways to invest in hydrogen. ITM Power, NEL, and Cummins all manufacture electrolyzers, and the latter also makes hydrogen fuel cells. It’s joined by the likes of Bloom Energy, Ballard Power Systems, Plug Power, Ceres Power, and Powercell. Word of caution though: many of these firms aren’t profitable yet. So use this list as a starting point of stocks to watch. Alternatively, consider the Global X Hydrogen ETF (ticker: HYDR, expense ratio: 0.50%), which invests in companies that “stand to benefit from the advancement of the global hydrogen industry”.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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