SMRs and the Public Sector
Emerging technologies in the energy-generating resource space are inherently risky. Naturally, when we think about boundary-pushing advances in the energy industry, we should expect private investors to be reluctant to take on the burden of ushering these new technologies in. The case for small modular nuclear reactors (SMRs) is instructive for why the public sector should take the lead in nurturing their development.
NuScale, the Oregon-based firm that pioneered the SMR, has announced plans to lay off about a third of its workforce after the dissolution of its agreement with a consortium of public utilities to purchase electricity from its first reactor at the Idaho National Laboratory. NuScale reports that unexpected increases in the price of materials caused by supply chain pressures and higher than expected interest rates raised project costs and caused further development delays. To make the project financially viable, NuScale asked its utility partners in Utah last spring to agree to buy 80% of the project’s electrical output at a cost of 89$/KWh, up from the 59$/KWh and 26% in the original agreement. But, by the fall, when the utility consortium (UAMPS) realized it couldn’t stomach the cost of a new purchase commitment, NuScale had no choice but to terminate its project and, soon after, announce layoffs.
Some may read this story and think: this is just the market working things out for itself, showing that small scale nuclear power is not financially viable in a world of falling prices for renewable energy. However, it’s worth pausing and considering whether it is a desirable outcome for a potentially critical technology to be strangled in its cradle due to short-term market volatility, and whether the government could have taken additional measures to prevent NuScale’s failure.
Advanced new nuclear reactors, like NuScale’s SMR, have emerged as strong candidates for providing the kind of firm dispatchable carbon-free power that can accommodate even the most ambitious plans for our transition to a carbon free national grid. While SMRs cannot currently compete with the Levelized Costs of Energy (LCOE) offered by variable/renewable energy resources—the average cost of energy over an energy project’s lifetime—this one-to-one comparison is not appropriate from the point of view of the entire grid. SMRs have the potential to fill a very specific niche in the energy mix. SMRs could provide carbon-free energy without intermittency. This kind of “clean firm” generation supplements lower-cost, variable energy resources.
This is true not only when the sun isn’t shining or wind isn’t blowing, but also during periods of high renewable activity. It also provides renewables more flexibility to meet critical needs elsewhere and eases ramping and balancing challenges during peak periods; simply put, SMR advances would let all zero-emissions options go further to meet consumer or industrial load. If perfected, SMRs can provide such resources without the costs, risks, and waste of traditional nuclear power. However, improving a technological breakthrough takes years of trial and error and SMRs are still in their infancy. Interrupting that decades-long research and development process solely on account of cost risk that states have borne and can bear for other technologies needlessly forfeits the opportunity to develop a crucial grid resource.
When policymakers do not intervene to protect capital-intensive, unproven technologies due to technological skepticism, they forgo the cost savings that can be achieved had that technology been allowed to mature. They also forgo opportunities to learn from the experimental process; failures or stumbles aren’t regrettable if they point the path toward alternative investment priorities. Once upon a time, wind, solar, and battery storage energy sources were all unproven, highly expensive technologies, too. But policymakers decided ahead of time that they could be valuable technologies, and proceeded to help get them going with direct federal funding, tax incentives, and other rebates and subsidies. The results were spectacular: renewables went from expensive and unproven to low-cost and mundane within decades. Grid managers used this process to learn where renewables work well and where they don’t. To make sure renewables truly meet their cost-reducing potential, we should prioritize the advancement of multiple kinds of clean, firm energy such as advanced nuclear, SMRs, or geothermal, to ensure our country’s energy grid meets our electricity demand.
Developing this kind of advanced technology is risky. Any number of things can go wrong in an environment of heavy experimentation, high stakes, and an unpredictable set of emerging challenges, particularly when the solving of one challenge creates another. However, accepting that risk is the cost of pursuing such development. Here, we face a basic fact: governments are simply better at bearing those risks than firms facing strict fiduciary management standards. A private investor, or, here, a consortium of public utilities acting as offtakers, shouldn’t and can’t be obliged to eat the immense risk NuScale takes by being the first mover in a new sector. (It doesn’t mean private firms need not be involved in development, but that they need help and direction to meet the public’s objectives.) This is precisely where the federal government should step in, to move that significant development risk off those utilities’ balance sheets so that the engineering feat itself of designing a successful reactor may proceed apace. To be sure, the Department of Energy already offered UAMPS and NuScale a $1.3 billion cost-sharing agreement in 2020 to keep NuScale’s final generation costs around $55/MWh—but clearly this agreement was not enough of a buffer. The government could do more.
Assuming that a benevolent planner is reading this, here’s how I would approach the NuScale issue so that it never happens again:
A government financial entity convenes a meeting with the consortium and NuScale to organize a new funding package that keeps the deal together and reviews current and expected costs through the completion of the project.
The consortium parties and the federal government negotiate a new cost-sharing agreement that is in line with the jointly held expectations of costs that the parties to the consortium agreed on prior to NuScale’s price shock.
The government agrees to assume the incremental costs associated with the project, assuring NuScale the necessary cashflow to maintain operations, while assuring the project consortium partners of a stable cost outlook. Here’s how it might work. Although the original operating agreement was inked on the presumption that NuScale can deliver energy at, say, prices around $50-60/KWh, higher costs will likely push this price upward. The government should pay NuScale the difference between this planned delivery price and its final generation cost (the price “delta”). In industry parlance this kind of cost insurance is known as a “contract for difference”: it ensures that NuScale’s utility partners receive energy at their preset fixed price and that NuScale can cover any extra development costs incurred while building its SMR, eliminating the acute risks that both parties face from price volatility. Now NuScale can build its asset and its utility offtakers get the energy they were promised. See Figure 1 below for a depiction of how this contract for difference sits on the three parties’ balance sheets, and figures 2 and 3 for a depiction of how the arrangement looks in practice corresponding to Periods 0 and 1 in Figure 1.
NuScale cancels plans for downsizing and restores its plan to build an SMR; the carbon-free power project continues as planned.
The government, the utility offtakers, and NuScale continue to meet to discuss project development. Perhaps NuScale needs more active state assistance to resolve various kinds of risks faced by the project, or wants to target more ambitious outcomes. The government could promise to engage in further types of assistance and risk sharing as the project evolves—maybe by financing more units, facilitating guaranteed demand from other off-takers, and appropriating resources for transmission or fueling issues—all to create new opportunities to advance, test, install, and utilize SMR technology so that their goal-oriented work produces lessons that each SMR project after this one can utilize.
Figure 1. How a Contract for Difference would sit on the parties’ balance sheets.
Anything marked within parentheses is a contingent asset or liability; they are unrealized promises of future cashflows.
It’s important to remember what we are trying to achieve: creating opportunities not only to test but to utilize nascent technology, to help integrate it with our existing energy systems, all for the reward of firm, dispatchable baseload generating resources that support increasingly renewable grids and industrial decarbonization. It’s important to have an energy development regime that enables some boundary-pushing so that we can reach our goal on the fastest timeline possible.
Figures 2 and 3. How CPE envisions a Contract for Difference can be used to save a project, and how the Contract for Difference helps ensure the project’s completion.
Whether through a public nuclear developer or through a private developer supported by and closely coordinating with public institutions, it’s going to have to be the public sector that steps up to be the anchor institution that makes achieving these goals possible. To do so, the public sector may have to play a variety of roles: developer, consumer, aggregator, financier, recruiter, insurer, or coordinator. There is no predetermined perfect combination of roles as various projects will have different barriers to overcome. But we ought to try to find out what works.