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There’s a new reason why I like Rolls-Royce shares

When a share price collapses, a buying opportunity can be created. Last year, shares in Rolls-Royce (LSE: RR) fell by a third. To some, this made the company’s shares seem tempting. If you’re one of those contrarian types who sees opportunity when a share price drops sharply and are still considering buying into Rolls-Royce, I’d like to suggest that there’s another reason other than just a low price to invest in the company.

I’d go further still and would suggest investors looking for companies with partial solutions to the challenge of combating climate change should consider this share. This may seem like a surprising assertion, so let me explain why.

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Rolls-Royce is leading a UK consortium to develop what are known as small modular reactors (SMRs). These are small nuclear power plants that are around 10% of the size of traditional nuclear reactors.

The problem with traditional nuclear power relates to reactor size and may not apply to the reactors the firm is helping develop. It means there are limited economies of scale resulting from the construction on the traditional variety. The appeal of small modular reactors lies with the word modular.

Why modular?

Renewable energies, such as wind turbines and solar farms, have seen their costs fall enormously — the cost of solar PV modular has fallen by 95% since 2008, for example, according to data from Bloomberg and the New Economics Foundation. Wind and solar prices have fallen sharply because they’re subject to what’s called a learning rate, every increase in their total installed base leads to a fall in their cost. Electricity costs generated by nuclear power stations, by contrast, seem to increase over time.

Small modular reactors, on the other hand, are likely to benefit from significant economies of scale. Rolls-Royce itself emphasises this and talks about using off-site modular construction, making the modular units at scale. 

Another benefit of small modular reactors is that because of the way they operate, with high fuel burn-up rates, they often entail much less waste than traditional reactors.

Nuclear power and renewables are not natural bedfellows. Because of the intermittent supply of renewables (no solar power when it’s dark, no wind power when it’s still), an ideal complementary technology would be one in which the energy supply can be easily turned up and down when needed. Traditional nuclear energy doesn’t really fit this bill as it tends to supply energy at a constant rate and has high set-up costs.

But small-scale reactors could be more useful here. The war against climate change will entail many battles, and such small-scale reactors may play a key role in some of them.

If you believe that climate change poses a big risk to us all, but also think there’s opportunity in investing in companies that are engaged in the front line of this battle, then a superficial glance might suggest that Rolls-Royce, more famous for its aircraft engines, is not an obvious candidate. But I’d advise looking deeper. Finding opportunities that are not obvious could be an extremely profitable investment strategy.

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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.