Investor Essentials Daily

Data centers are going to need more energy, a lot more

October 24, 2024

The surge in data center investments has intensified the demand for reliable energy, with nuclear power emerging as a key solution due to its ability to provide stable, carbon-free energy. 

Centrus Energy (LEU) stands out as the only U.S. company licensed to produce high-assay low-enriched uranium (HALEU), essential for next-generation nuclear reactors, including small modular reactors (SMRs). 

With growing government support and $800 million in contracts, Centrus is well-positioned to meet increasing demand. 

However, nuclear energy’s negative public perception and political risks remain potential challenges.

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The surge in data center investments placed immense pressure on power infrastructure, as these facilities require vast amounts of energy to operate continuously and reliably.

Data centers consume a steady stream of electricity 24/7 to ensure uninterrupted operations for cloud services, AI processing, and more. This constant demand is pushing companies to seek stable and large-scale energy solutions.

Nuclear power is emerging as a key answer. With its ability to consistently generate massive amounts of carbon-free energy, nuclear energy is perfectly suited for powering data centers. 

Unlike other energy sources, nuclear plants provide uninterrupted power without fluctuations, making them ideal for meeting the energy needs of data centers while also supporting sustainability goals.

The U.S. government, recognizing the strategic importance of nuclear energy, is investing heavily in rebuilding domestic uranium enrichment capabilities. 

This comes at a time when the country is moving away from reliance on foreign sources of enriched uranium, particularly from Russia. 

Centrus Energy (LEU), with its established production capabilities, stands to benefit greatly from this shift.

Centrus is not just another player in the nuclear space. It is the only company in the U.S. with a license from the Nuclear Regulatory Commission (NRC) to produce high-assay low-enriched uranium (HALEU), which is required for the next generation of nuclear reactors, including small modular reactors (SMRs). 

These reactors are seen as the future of nuclear energy because of their smaller size, lower costs, and enhanced safety features. 

As these reactors come online, the demand for HALEU will increase, and Centrus is currently the sole domestic supplier capable of meeting that demand.

The company recently delivered its first batch of HALEU to the U.S. Department of Energy (DOE) ahead of schedule, solidifying its reputation as a reliable supplier. 

Centrus’ position in the market is fortified by a well-protected moat. Its ability to produce both LEU and HALEU gives it a significant competitive advantage, especially in a sector where the barriers to entry are extremely high. 

It is the only public company in the U.S. competing in this space, and its monopoly on HALEU production puts it in a unique position to benefit from the growing demand for nuclear fuel.

The DOE recently awarded Centrus $800 million in contracts, with the potential for even more through additional requests for proposals (RFPs). 

The contract ceiling for HALEU deconversion is a staggering $2.7 billion, and Centrus is expected to receive a significant portion of that. 

Despite these factors, the market is concerned about the nuclear’s negative public perception, which has historically been a challenge. Any nuclear incident, even if unrelated to Centrus, could affect the entire industry.

Additionally, political risk is always a factor, especially with a presidential election on the horizon. 

However, public sentiment toward nuclear energy is currently near all-time highs, and both major U.S. political parties have expressed support for expanding domestic nuclear energy production.

Centrus represents a unique opportunity in the nuclear sector. Its monopoly on HALEU production, government backing, and strategic importance to the U.S. nuclear fuel supply chain make it a compelling investment.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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