KEY POINTS
- Legitimate demand exists for baseload power at remote mining/industrial sites and disconnected population centres. SMRs are a realistic cost-effective alternative, especially in regions with limited or no infrastructure;
- SMRs will face many of the same political, and safety concerns that plague their traditional counterparts, which will delay their rollout;
- Preliminary numbers suggest that capex per unit of power output for a SMR will be substantially higher than that of a large, conventional nuclear power plant; but that they may be slightly cheaper than off-shore wind turbines;
- Unconvinced that SMRs would be used in conjunction with renewables, primarily because they are not particularly efficient at being ramped up or down; and
- We think the biggest market for SMRs is to supplement output from existing conventional nuclear power plants, taking advantage of existing site approvals, safety and environmental regulations.
The small modular reactor (SMR) discussion recognises the widespread need for baseload power, with several commentators suggesting that they have the ability to eventually replace larger nuclear power plants. The fictional narrative is that nuclear power, in general, is expensive, and for the large part , uneconomic compared with alternatives, a view we earnestly disagree with and a topic we will discuss in more depth later. According to the IAEA[1], a small modular reactor (SMRs) is approximately a quarter the size of an average new reactor under construction, with a power capacity of up to 300MW. The most obvious modern examples are the small reactors (>200) found in over 160 ships[2]; the majority of these are being in submarines, but range from icebreakers to aircraft carriers.
Naval reactors are distinctively different from their civilian counterparts, designed to operate under dissimilar conditions, but not unlike traditional reactors, the fundamental basis for any SMR deployment will be reliant on their safety aspects:
- Historically, there has been a strong global safety record for all naval nuclear propulsion systems. Typically, these designs not only included active but also passive systems, with inbuilt redundancy, comprising of emergency cooling, and backup power supplies, whilst residing within a physically robust containment shell;
- Personnel responsible for operating and maintaining naval reactors undergo extensive training, adhering to strict qualification standards; with continual preparation in emergency response and radiation safety. Includes continual monitoring and maintenance, limited access, and rigorous regulatory oversight. It is presumed that any SMR deployment would also warrant such standards;
- SMR designs are significantly simpler than their larger conventional power plants. The inherent characteristics of the reactor include lower power and operating pressures, the benefit being that most designs do not require human intervention, external power, or force to shut down the systems. This, in turn, lowers the potential for unsafe releases of radioactivity;
- Current SMRs designs enable them to operate for up to 30 years without refuelling, compared with one to two years for a conventional nuclear plant;
- Have a substantially smaller land footprint[3]; and
- SMRs by their very nature of operation, generate substantially more radioactive waste[4] per unit of electricity than their conventional counterparts. Radioactive waste can, however, be reprocessed[5] at the end of their operational life.
We are aware of only two operational SMR facilities globally, a pilot reactor in China and Russia’s Akademik Lomonosov[6]. We believe the main reason why there are fewer SMR projects, is not because of any technical obstacles, but a lack of financial resources. In the UK, Rolls-Royce have has built nuclear reactors for the Royal Navy for >60-years, and in 2021, was granted £210m by the UK government toward the development of its SMR design, then another £157m in 2022 toward “advanced nuclear technologies”. In the US, TerraPower (part owned by Bill Gates) is also developing several SMR reactor designs, one of which, will be constructed onsite at a decommissioned coal facility in Wyoming as part of a demonstration programme. Other notable companies participating in this sector, include Westinghouse, NuScale[7], Terrestrial Energy, Moltex Energy, and GE Hitachi Nuclear Energy, among others.
The purported benefit of SMRs is inherently linked to the nature of their design, emphasising their smaller and modular characteristics:
- SMR has the potential to be manufactured in one place and then transported and/or assembled in another (e.g. Akademik Lomonosov), allowing it to be deployed in various remote regions (see Figure 6), with limited infrastructure; particularly in locations unsuitable for traditional nuclear power plants that are reliant upon on-site fabrication;
- If sufficient demand ever eventuated, it is conceivable that a production line could be established, realising economies-of-scale. Creating the situation that the initial investment costs would be lower, thereby increasing their economic attractiveness to a range of end users and utilities;
- One of the largest inhibitors (cost and time) to the establishment of nuclear power in Europe is “green tape” and its consequent legislative processes. SMRs benefit from standardised designs, which could, theoretically, streamline the licensing and regulatory approval process, dramatically reducing construction and deployment timelines;
- A modular standardised approach would allow greater flexibility in deployment scalability (i.e. with the capability to match short-term energy supply with end-use energy demanded); and
- In turn, this would also permit a more phased approach in deployment; allowing incremental increases in power-generative capacity over time, giving the provider the opportunity to match any growth in demand, further reducing financial risk to the utility.
Cost Benefit
It could be argued that conducting a detailed cost-benefit analysis is currently impractical, given the absence of publicly available operating SMRs. This has allowed some pundits to surmise that SMRs are more cost-effective than their conventional counterparts due to their smaller size and potential for modular construction. Though the actual costs will not be known for a considerable amount of time, NuScale, in a Q123 update on their “Class 3 Project Cost Estimate”, announced that the construction cost and target price estimates for the 462MW SMR rose by 75%, from $5.3 to $9.3Bn; raising the purported cost of power by 53%, from $58 to $89/MWh[9]. For direct comparison, we would remind that the average cost for nuclear power in the US in 2021 was $29.12MWh.
NuScale management claims that much of this rise was due to increased material input prices[10], which seems odd, given that raw material inputs only make up a relatively small (5-7%)[11] contribution to the overall construction cost, with far larger inputs including fabrication and the cost of financing due to rising inflation and interest rates. We believe there is a greater risk associated with an increasingly limited number of EPC (Engineering, Procurement, and Construction) providers and equipment manufacturers able to legally supply and construct a nuclear power plant, creating supply bottlenecks. With long lead items for key components, now taking more than six years.
The key point is that the financing and building of SMRs will still require substantial time and upfront investment.
Footnotes
[3] The compact size of SMRs could raise additional security concerns, potentially more vulnerable to theft or sabotage compared with a larger, traditional reactor.
[5] The larger issue for SMRs is the end-of-life disposal, even in the UK there are 21 former Royal Navy nuclear submarines awaiting decommissioning (seven in Rosyth and 14 in Devonport). The key challenge is increasing nuclear regulatory frameworks, adding to the complexity and cost of the dismantling process, delays and ironically, increasing the amount of nuclear waste created https://www.navylookout.com/project-to-dismantle-ex-royal-navy-nuclear-submarines-inches-forward/
[6] Russia’s Akademik Lomonosov, is the world’s first floating nuclear power plant that began commercial operation in May 2020, producing energy from two 35MW(e) SMRs.
[7] Claims its 12-module, 924MW plant design will have an LCOE of approximately $40–65/MWh, with the design eliminating reactor coolant pumps, large bore piping and other systems and components found in large conventional reactors, thereby reducing capex and opex. No working prototype yet.
[8] Although China has a larger navy than the US and retains the capability of nuclear propulsion, its Fujian class aircraft carriers are conventionally powered, primarily because they are confined by a ring of islands bordering the East and South China seas. Unlike the US which has 10 Nimitz-class nuclear-powered aircraft carriers able to travel freely around the globe.
[9] This type of cost inflation is not uncommon, according to BloombergNEF calculations, levelised cost of electricity for a subsidised US offshore wind project has increased almost 50% to $114.20MWh in 2023, from 2021 levels in nominal terms – without the reliability. https://about.bnef.com/blog/soaring-costs-stress-us-offshore-wind-companies-ruin-margins/
[10] According to UAMPS, producer price index in the past two years has raised the cost of fabricated steel plate by 54%; carbon steel piping by 106%; electrical equipment by 25%, fabricated structural steel by 70%; and copper wire and cable by 32%.
[11] https://fhr.nuc.berkeley.edu/wp-content/uploads/2014/10/05-001-A_Material_input.pdf Guesstimate, from another source (Comby B. (2007) comparing material inputs for a EPR nuclear reactor (~1,600MW), estimated ~36kt steel and ~180t of concrete, or 64t of steel and 272t concrete per TWh.
Disclosures
This document is provided for information purposes only and should not be regarded as an offer, solicitation, invitation, inducement or recommendation relating to the subscription, purchase or sale of any security or other financial instrument. This document does not constitute, and should not be interpreted as, investment advice. It is accordingly recommended that you should seek independent advice from a suitably qualified professional advisor before taking any decisions in relation to the investments detailed herein. All expressions of opinions and estimates constitute a judgement and, unless otherwise stated, are those of the author and the research department of Janus Analysis only, and are subject to change without notice. Janus Analysis is under no obligation to update the information contained herein. Whilst Janus Analysis has taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, Janus Analysis cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. This document is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to herein. No representation or warranty either expressed or implied is made, nor responsibility of any kind is accepted, by Janus Analysis or any of its respective directors, officers, employees or analysts either as to the accuracy or completeness of any information contained in this document nor should it be relied on as such. No liability whatsoever is accepted by Janus Analysis or any of its respective directors, officers, employees or analysts for any loss, whether direct or consequential, arising whether directly or indirectly as a result of the recipient acting on the content of this document, including, without limitation, lost profits arising from the use of this document or any of its contents.
This document is provided with the understanding that Janus Analysis is not acting in a fiduciary capacity and it is not a personal recommendation to you. Investing in securities entails risks. Past performance is not necessarily a guide to future performance. The value of and the income produced by products may fluctuate, so that an investor may get back less than he invested. Investments in the entities and/or the securities or other financial instruments referred to are not suitable for all investors and this document should not be relied upon in substitution for the exercise of independent judgment in relation to any such investment.
Janus Analysis may have issued other documents that are inconsistent with and reach different conclusions from, the information contained in this document. Those documents reflect the different assumptions, views and analytical methods of their authors. No director, officer or employee of Janus Analysis is on the board of directors of any company referenced herein and no one at any such referenced company is on the board of directors of Janus Analysis.
Analysts’ Certification
The analysts involved in the production of this document hereby certify that the views expressed in this document accurately reflect their personal views about the securities mentioned herein. The analysts point out that they may buy, sell or already have taken positions in the securities, and related financial instruments, mentioned in this document.