Nuclear and gas in the EU taxonomy: what this means for the energy mix of tomorrow

Nuclear and gas in the EU taxonomy: what this means for the energy mix allianzgi.com of tomorrow November 2022 The energy crisis prompted by the war in Ukraine has led to a reappraisal of the energy transition and thrust two contentious sources of power – nuclear and gas – into the spotlight. Does their inclusion in the EU taxonomy of sustainable investments bring clarity to their future role in the energy mix? Key takeaways Jingying Han – N uclear and gas are now included under the EU taxonomy rules designed to bring clarity to Sustainability sustainable investments, having previously been excluded Analyst – A lready considered a green source of energy in other parts of the worlds, the use of nuclear power is expected to grow steadily over the coming decades – I n the absence of economic carbon capture solutions – which are crucial to its green credentials – gas is expected to be virtually phased out by 2050 Nuclear is already one of the largest non-fossil- What is the EU taxonomy? fuel single sources of energy globally (see Exhibit 1) and, under the International Energy Agency’s The EU taxonomy is a classification system (IEA) Net Zero by 2050 global roadmap its that sets out a list of environmentally proportion of the energy mix will rise over the sustainable economic activities, providing coming decades from 5% in 2020 to 11% by 2050. companies, investors and policymakers However, this is a scenario based on an ambitious with definitions of which economic plan rather than a forecast. activities can be considered environmentally sustainable. Gas, by contrast, looks set to play a reduced role. Unabated natural gas – that is, natural gas In July 2022, the European Parliament sourced from power stations that are not fitted rejected a motion opposing the inclusion with carbon capture, utilisation and storage of nuclear and natural gas as technology (CCUS) technology – would fall from environmentally sustainable activities. a current market share of 23% to 3% by 2050 under the IEA pathway. Similarly, natural gas with CCUS is expected not to constitute a significant proportion of the future energy market. Value. Shared.

Exhibit 1 – Global use of nuclear to rise and gas to fall by 2050 Energy supply (EJ) Market share (%) CAARG (%) 2019 2020 2030 2040 2050 2020 2030 2050 2020–2030 2020–2050 Total energy supply 612 587 547 535 543 100 100 100 –0.7 –0.3 Renewables 67 69 167 295 362 12 30 67 9.3 5.7 Solar 4 5 32 78 109 1 6 20 21.0 11.0 Wind 5 6 29 67 89 1 5 16 17.0 9.6 Hydro 15 16 21 27 30 3 4 6 2.9 2.2 Modern solid bioenergy 31 32 54 73 73 5 10 14 5.3 2.8 Modern liquid bioenergy 4 3 12 14 15 1 2 3 14.0 4.9 Modern gaseous bioenergy 2 2 5 10 14 0 1 3 10.0 6.4 Other renewables 4 5 13 24 32 1 2 6 11.0 6.7 Traditional use of biomass 25 25 - - - 4 - - n.a. n.a. Nuclear 30 29 41 54 61 5 8 11 3.5 2.4 Unabated natural gas 139 136 116 44 17 23 21 3 –1.6 –6.6 Natural gas with CCUS 0 1 13 31 43 0 2 8 37.0 16.0 Oil 190 173 137 79 42 29 25 8 –2.3 –4.6 of which non-energy use 28 27 32 31 29 5 6 5 1.4 0.2 Unabated cool 160 154 68 16 3 26 12 12 –7.9 12.0 Coal with CCUS 0 0 4 16 14 0 1 3 60.0 22.0 Source: IEA Net Zero by 2050 Why does nuclear power divide opinion? Nuclear set to play an important role in securing global energy supply Proponents of nuclear power point to various factors in its favour: Despite ongoing divisions among individual European countries, the EU position on nuclear is now more aligned – V ery low carbon emissions with taxonomies in other parts of the world, where it is – R eliable baseload energy source considered a green source of energy. That said, much of – T he flexibility of its power output nuclear means it is well nuclear energy’s future expansion will be in markets outside adapted for the grid Europe. – N o science-based evidence that nuclear power, under normal operations, causes greater harm to human health In many developed economies, there has been a push to than other sources of power extend the lifecycle of reactors beyond the length of time – S trict regulation of all waste from the nuclear power they were originally designed for (typically 40 years) instead generation process of building new plants. The main expansion of nuclear – Lo w price volatility. power is therefore expected to be in the Asia-Pacific region, which looks set to account for two-thirds of additional units However, critics point to several drawbacks of nuclear over the coming years (see Exhibit 2). Over the longer term, power: China and India alone are expected to operate over 140 nuclear power reactors according to some sources. – C onstructing new nuclear power plants is technologically challenging and complex, and there is a weak track Today, there are more than 400 nuclear power plants record of keeping costs down and building new plants on around the world generating 367 gigawatts (GW) of power, time with another 57 under construction and a further 89 – D espite their very low frequency, incidents associated planned. However, between 2025-40, many existing plants with nuclear power can be extremely serious will reach the end of their planned lifetimes and will need to – P lants need to be in areas with low vulnerability to be decommissioned. physical risks – R adioactive waste has a very long lifespan and can be The resulting loss in power supply will need to be replaced difficult to store safely or the closures delayed as on their own, the new plants due – U ranium mining can have a negative impact on the to be constructed will not be sufficient to meet the target of environment. net zero emissions by 2050. As it stands, nuclear capacity is projected to hit 582 GW by 2040 – well below the 730 GW 2 required in the net-zero emissions by 2050 scenario . 1 According to a report by the European Commission’s Joint Research Centre, technologically advanced reactors are believed to have the lowest public fatality rate of all electricity production technologies. 2 According to an IEA report published in November 2021 (https://www.iea.org/reports/nuclear-power)

How much power does 1 gigawatt provide? 3.125 mn 333 100 mn 1.3 mn 2000 Photovoltaic Utility-scale wind Light-emitting horses Chevy Corvette Z06 panels turbines diodes (LEDs) Horsepower engines Source: Office of Energy Efficiency and Renewable Energy, United States On the positive side, the expansion will involve the construction of more advanced reactors using improved fuel technology, thermal efficiency and safety features. The next wave of technology will play an important role in positioning nuclear power as a key component of the long-term energy mix. Exhibit 2 – Number of nuclear power reactors around the world as at the end of May 2022 Eastern North South West & Africa Asia China India Europe & America America Central Total Russia Europe Operable nuclear power reactors 2 144 51 23 53 113 5 119 436 Units under construction 0 38 19 8 7 2 2 8 57 Units planned 0 50 33 12 27 3 1 8 89 Source: World Nuclear Association, IAEA PRIS Major obstacles for gas to overcome Criteria for gas and nuclear power plants to be deemed eligible in the EU taxonomy As the world’s second-largest source of electricity, natural gas is a key component in the current energy mix. However, To be deemed eligible for inclusion in the taxonomy, its carbon credentials represent a significant headwind to its power plants need to meet several requirements. continued large-scale use – even though it has been officially recognised in the EU taxonomy. – N ew natural gas projects that receive their construction permit by 31 December 2030 must Although a new natural gas plant emits approximately have direct GHG emissions (known as Scope 1 50-60% less CO than a new coal plant, very few existing emissions) lower than 270gCO e/kWh, while 2 2 natural gas plants meet the stringent technical criteria to be projects beyond that date must have lifecycle considered green as set out by the EU taxonomy. If these emissions below 100gCO e/kWh. criteria are to be met, several challenges need to be 2 overcome, including the high cost of carbon capture and – E xisting gas plants must have plans to switch to dealing with gas leakages. renewable or low-carbon gases by the end of 2035 High-efficiency gas power plants and scalable, low-cost – F or nuclear plants to be included in the taxonomy carbon-capture technology will be key enablers for gas and parameters include: we will continue to monitor its progress. Despite the construction permits to be received by 2045; plants inclusion of gas in the taxonomy – which has been met with must switch to switch to accident-tolerant fuels by criticism – there are many obstacles for gas plants to 2025; and they must adhere to specific standards overcome to be in line with the taxonomy. for the disposal of radioactive waste (among other requirements). Debate set to continue The inclusion of nuclear power and gas in the EU taxonomy conditions set out in the taxonomy mean the gas industry rules has intensified discussions about how to approach the needs to overcome some big challenges if gas is to continue current energy crisis while continuing the transition to a playing a major role in energy supply. Whatever the sustainable future. While nuclear is likely to play an outcome, the debate about the green credentials of the two increasing role in the future energy mix, the prohibitive energy sources looks set to continue.

Allianz Global Investors is a leading active asset manager with over 600 investment professionals in over 20 offices worldwide and managing EUR 578 billion in assets. We invest for the long term and seek to generate value for clients every step of the way. We do this by being active – in how we partner with clients and anticipate their changing needs, and build solutions based on capabilities across public and private markets. Our focus on protecting and enhancing our clients’ assets leads naturally to a commitment to sustainability to drive positive change. Our goal is to elevate the investment experience for clients, whatever their location or objectives. Active is: Allianz Global Investors Data as at 30 June 2022. On 25 July 2022, AllianzGI completed the transfer of investment teams (including 87 Investment Professionals) and USD 101bn of assets they manage to Voya Investment Management as part of a strategic partnership. Two thirds of the assets continue to be managed on behalf of AllianzGI clients outside of the US. Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK). © 2022 Allianz Global Investors #2451893