SMR - NuScale Power: Leading The Small Modular Reactor Promise

Summary

• Energy demand is global and growing but at a cost to the environment.
• Nuclear energy might be more frightening than actually dangerous.
• The industry has a very spotty track record of project delays and cost overruns.
• Small Modular Reactors hold promise, and NuScale Power is leading in the regulatory process.
• SMR is early stage in an industry that faces many challenges, but the opportunity is also very big.

And Lord, we are especially thankful for nuclear power, the cleanest, safest energy source there is. Except for solar, which is just a pipe dream.

- Homer Simpson (in "Bart vs. Thanksgiving" written by George Meyer)

Investment Thesis

The world will continue to demand more energy as a result of a growing population that is also striving for higher standards of living. Recent geopolitical events, meanwhile, have highlighted the need to ensure that crucial energy is supplied domestically or by close allies.

Nuclear power scares many people. However, the fact is that it has provided a large portion of the world's total energy needs over the past six decades while causing far fewer deaths, both directly and indirectly, than fossil fuels have. Although nuclear energy has a better safety record and has the highest energy density of any other fuel, it has also been expensive due to regulations and the subject of massive cost overruns and project delays. Additional challenges revolve around the safety and security of producing, transporting, and storing radioactive materials. Despite these challenges, many countries are considering adding Small Modular Reactors ("SMRs") to their energy mix.

Among the many companies developing SMR technology, NuScale Power ( SMR ) has taken a leading position in both technological development and the regulatory approval process. Having said this, the company is still in the early stage and has yet to actually demonstrate that it can deliver safe, cost competitive energy in one of the most highly regulated industries on the planet.

The Challenge Of Climate Change

The world's total population is projected to continue growing for several decades, even as birth rates fall and the rate of growth moderates. Along with population growth, increasing per capita GDP leads to ever greater demand for energy as worldwide standards of living increase.

Meeting that growing demand will require a mix of energy sources with each having their pros and cons. The good news is that renewables such as wind and solar will likely grow at the fastest rate. The bad news is that this won't be enough to decrease fossil fuel consumption, only to slow its growth. The U.S. Energy Information Administration's International Energy Outlook 2021 predicts that energy-related carbon dioxide emissions will increase through 2050.

The even worse news is that even if this is not the case and carbon dioxide emissions begin to decline, adding any new greenhouse gases to the atmosphere will mean global temperatures will continue to rise for decades. This is because it takes many years for the earth's crust to reabsorb each year's emissions:

In summary, it is only after a few decades of reducing CO2 emissions that we would clearly see global temperatures starting to stabilize. By contrast, short-term reductions in CO2 emissions, such as during the COVID-19 pandemic, do not have detectable effects on either CO2 concentration or global temperature. Only sustained emissions reductions over decades would have a widespread effect across the climate system.

- Intergovernmental Panel on Climate Change/ Sixth Assessment Report

Fear Instinct ("It's scary!")

In the book Factfulness (Hans Rosling, with Anna Rosling Ronnlund and Ola Rosling, 2018), the authors argue that the majority of people act out of misinformed notions of the actual state of the world. They offer as an explanation of this behavior that people act instinctively and without knowledge of the actual facts in many situations.

Mention nuclear reactors to almost any adult and they are likely to conjure up thoughts of the three largest nuclear power plant accidents: Three Mile Island (1979), Chernobyl (1986), and Fukushima (2011).

The incident at Three Mile Island was the most serious commercial nuclear power plant accident ever in the U.S. and yet no deaths resulted from it, either directly or from radiation releases . Extensive testing and monitoring by various government agencies, the Commonwealth of Pennsylvania, and independent groups revealed that a radiation dose of only about 1 millirem (mrem) on average was experienced by the 2 million people in the area. For comparison, the average annual natural background radiation is 300 mrem . In fact, eating a lot of bananas or Brazil nuts can raise this by 10 mrem because potassium-40 is radioactive. In fact, the incident scared people enough that it led to tighter regulations and practices in the industry, ultimately making nuclear power plants safer.

The Chernobyl disaster was the first of two ever Level 7 (the most serious level) nuclear accidents on the International Nuclear Event Scale. The accident occurred during a failed test of the ability of the plant's steam turbine to pump cooling water in the event of a power outage from the grid the plant was connected to. The resulting core meltdown, explosion, and week-long fires released enormous amounts of radioactive material across Ukraine, Belarus, Russia, and other parts of Europe. The number of deaths resulting from the disaster is a matter of often hotly disputed counts. Approximately 30 workers were killed by the explosion and severe radiation. The United Nations Scientific Committee on the Effects of Atomic Radiation (UNSCEAR) put the total at 45, including 15 who died of thyroid cancer. Estimates of deaths from long-term effects of radiation exposure are all over the map. Anti-nuclear groups such as Greenpeace estimate the increased deaths at over 200,000 while the International Atomic Energy Agency put the increase closer to 4,000 . Most reports also discuss other long-term physical, emotional, and socio-economic impacts of both direct exposure and the resulting mass evacuations. No matter which figures you believe are more accurate, there is absolutely no doubt that Chernobyl was a truly horrendous disaster. Russia's invasion of Ukraine and attacks on Chernobyl and other power plants have once again highlighted the danger posed by bombing reactors or cutting off power to cooling pumps.

The other Level 7 incident occurred at the Fukushima Dai-ichi nuclear power plant in Japan. A 9.0 magnitude earthquake off the coast of Japan caused the plant to automatically shut down, but it also lost power from the grid to run the cooling systems. Diesel generators at the site provided power until a 45-foot-high tsunami hit and damaged the generators and backup batteries. Eventually, the backups failed and the cores began to melt. Technicians at the site pumped seawater into the reactors and bled out radioactive gas, but the extreme pressures caused leaks and built-up hydrogen exploded in three of the reactors, leading to a larger release of radioactive material into both the air and ocean. Despite the severity of the event, there were no immediate deaths from radiation exposure. In 2018, a worker from the plant died of lung cancer which was linked to radiation exposure. However, it is estimated that the evacuation of over 160,000 people from the area led to about 2,000 deaths in addition to approximately 18,000-19,000 killed by the tsunami. Meanwhile, the United Nations has concluded that the radiation released will not result in any discernible increase in cancer rates . As a result of the Fukushima tragedy, the U.S. Nuclear Regulatory Commission took additional measures to ensure that existing plants were able to respond to such natural disasters as earthquakes and severe flooding.

These three catastrophes were very real and terrible events for everyone involved. The very idea of another such accident naturally evokes a fear response. It is almost hard not to be fearful of nuclear energy. But how dangerous is it really? If humans are going to continue increasing the amount of energy consumed worldwide, how does nuclear fission compare with the alternatives?

How (Relatively) Dangerous Is Nuclear?

Nuclear power generation has been around since the 1960s. There are currently 426 reactors in operation worldwide with a capacity to generate 381.451 GWe , estimated to be about 10% of total worldwide electrical production. The bulk of them is 32 to 42 years old.

The 92 reactors currently in operation in the U.S. are the largest fleet in any country by both number of reactors and generating capacity. Nuclear has accounted for a relatively constant 18% to 20% of U.S. electric generation in the past 30 years.

Proponents of nuclear energy point out this massive amount of generation means that historically, nuclear power has been as safe as renewables in terms of deaths per TWh of electricity produced. This comes as a surprise to many people because, of course, the tragic accidents in the industry received 24/7 news coverage. Stories about the lack of incidents for most of the past 60 years of nuclear generation just aren't interesting, although it has safely supplied a lot of the world's energy.

I'm not downplaying the horrible accidents that occurred, nor saying that another one can't happen. But fossil fuel consumption has harmed and killed millions of people through air pollution. Add to that the health problems and deaths which occur from mining and extraction. Finally, the difficult to quantify cost and loss of lives from greenhouse gas emissions due to accelerating climate change:

While the U.S. has been cutting coal consumption, the world is burning it at a near-record pace of about 8 billion metric tons . In 2021, global coal-fired generation reached an all-time high and accounted for over one-third of total electrical generation. Meanwhile, nuclear energy in advanced economies has stalled except for in China and Russia .

Nuclear's Role In The Energy Mix

I am not of the opinion that nuclear energy should be the only option for meeting the growing energy demand, but that it should be included in the mix.

In addition to the U.S. (the current largest producer of nuclear power), I've chosen two European countries, France and Germany, to highlight how nuclear has been viewed by other countries in their energy strategy.

As shown above, France has the highest proportion of nuclear in its electric generation mix at about 70% and the 56 state-owned reactors are the most in any country after the U.S. But now it seems that France has actually over-relied on nuclear plants. A combination of maintenance issues and reduced cooling water supplies has resulted in the shutdown of half of the country's reactors , causing a supply crisis with prices spiking from 70 euros to over 1,000 euros per megawatt hour.

France's lost production could not have come at a worse time for Europe. Historically, France was a net exporter of electricity during the warmer summer months. Meanwhile, Germany (beginning under the government of Gerhard Schroeder who championed the Nord Stream 1 project and subsequently joined Russia's Gazprom) made the opposite decision to shutter all of its nuclear power plants, but in doing so became overly reliant on Russian natural gas which has been cut off following the invasion of Ukraine. Angela Merkel was initially willing to extend Germany's use of nuclear power but reversed her position after the Fukushima incident.

Most of Europe is now faced with the prospect of a very difficult winter with severely limited energy supplies. My opinion is that nuclear generation should be a part of the low-emissions mix, but not the only source.

Challenges For Nuclear

I do not have the space in this article to address all of the issues of nuclear fuel processing (and reprocessing), transportation, and storage. But to put it in perspective, the U.S. produces about 2,000 metric tons of nuclear waste each year while avoiding about 400 million metric tons of CO2 emissions. Because of the challenges in transporting and siting a centralized storage facility, spent fuel is currently stored at 70 sites in 35 states. The spent fuel still contains upward of 90% of its energy, but recycling (reprocessing) has its own issues, which may need to be reassessed as U.S. policy was primarily set in 1977 .

Cost has historically been a major issue for nuclear energy, especially because of the decade-plus time frame and enormous up-front cost to build a GWe+ reactor. Many "recent" (recent is in quotes because anything related to nuclear energy is measured in decades) reactor projects have run far over budget and schedules, to the point of bankrupting Westinghouse and leading to the largest municipal bond default in 1983 . Georgia Power's Vogtle Unit 3 is currently loading fuel for its startup, "only" six years late and $16 billion over budget. Prior to that, a new nuclear reactor has not entered service in the U.S. since 2016 , and that was the first in 20 years and also was plagued by delays and overruns which nearly bankrupted the Tennessee Valley Authority. As SA author Michael Fitzsimmons points out , even NuScale's pilot project with Utah Associated Municipal Power Systems (UAMPS) has suffered from similar budget issues and lost some partner communities .

Of course, the "elephant in the room" challenge for nuclear power is NIMBY (not in my backyard) attitudes, often driven by fear as discussed above. Based on the research I've done for this article, I think that I'd rather live near a next-generation nuclear power plant than near a coal-generating plant. Even hydropower suffers from similar challenges, such as the New England Clean Energy Connect project voted down in Maine last year.

SMRs

Small Modular Reactors (SMRs) scale down reactor vessels to under 300 MW(e) in an attempt to address the past issues of siting, building and operating large-scale nuclear power plants. By standardizing and factory mass-producing these smaller reactor units, they hope to mitigate the cost and time delays associated with custom building large reactors onsite.

They are designed for flexible baseload use by enabling multiple units to be installed with the option of expanding capacity as demand dictates. They are also designed to be simpler to operate with smaller staffing requirements, have fewer parts to maintain, and many can be safely shut down and cooled without connection to an external power source. You can read more about what SMRs are here .

Company Background

NuScale traces its roots to a Department of Energy funded project called the Multi-Application Small Light Water Reactor (MASLWR) in the early 2000s conducted by the Idaho National Laboratory with Oregon State University, including team member Dr. Jose Reyes. In 2007, OSU transferred rights to the technology and NuScale Power was created.

In 2011, the company ran into an existential crisis when its largest investor pleaded guilty to running a Ponzi scheme at a time when the company needed to raise additional funding. The company was saved when global engineering firm Fluor Corporation invested $30 million and became the majority owner of NuScale at a time when the Fukushima disaster had thrown the industry's future in doubt. Fluor also signed an agreement to provide engineering and construction services for future NuScale plants.

Since 2013, NuScale has received several DOE awards and financial assistance to develop its technology and to fund NuScale's first customer, the Utah Associated Municipal Power Systems' (UAMPS) Carbon Free Power Project (CFPP).

In May of this year, NuScale became a publicly traded company after the de-SPAC transaction with Spring Valley Acquisition Corp. The transaction provided the company with $380 million in proceeds, including $235 million from private investment in public equity ("PIPE") investors. Fluor remains the majority owner of NuScale, along with strategic investors, many of which are already working with the company:

• Doosan Enerbility (South Korean based power plant engineering)
• Samsung C&T Corporation (South Korean based engineering and construction)
• JGC Holdings Corporation (Japanese based engineering)
• IHI Corporation (Japanese based engineering)
• Japan Bank for International Cooperation
• Enercon Services, Inc. (U.S. based engineering and environmental)
• GS Energy (South Korean based energy)
• Sarens (Belgium based crane, heavy lifting, heavy transport)
• Sargent & Lundy (U.S. based power and energy services)

In another sign of support this June, the U.S. government committed $14 million toward a Front-End Engineering and Design study in Romania that could lead to a plant built there.

NuScale's SMR Licensing and Technology

NuScale Power is one of the many companies pursuing SMR technologies and currently the only publicly traded pure play in the space. In 2020, they became the first and only company to receive a Standard Design Approval from the U.S. Nuclear Regulatory Commission ('NRC') for a 12-module plant of 50 MWe per module. According to the NRC website, there are three other companies in the "pre-application" process for SMRs, meaning that they have contacted staff regarding a potential application, in addition to NuScale's for its 77 MWe modules.

This important and difficult to achieve approval allows potential customers to submit it as a part of their own combined license applications to construct and operate a nuclear plant based on NuScale's technology. It is not a rubber stamp to build a plant as there are still site-specific challenges to consider. Safety and cost questions will remain until plants are actually built and put into operation. However, the approval by what is arguably the strongest nuclear regulator in the world may make it easier for NuScale to sell to foreign customers as well. Here is a list of the company's current projects . Note that these do not represent signed, binding contracts.

The company's regulatory lead comes in part by their approach of using existing light water reactor technology and conventional reactor fuel to reduce the development risk and testing that is required by some of the other approaches being pursued.

Each NuScale Power Module (NPM) is capable of generating 77 MWe. A typical power plant built with 12 modules would produce 924 MWe, enough to power 700,000 homes, or about the output of 2.9 million solar panels or 308 utility-scale wind turbines. NuScale's design allows for a 60-year operational lifetime.

Importantly, NuScale's passive cooling design eliminates the need for class 1E backup power, which is required for all existing U.S. nuclear power plants for emergency shutdown. The NPMs can automatically shut down and cool without any action by operators, without any external power source, and without additional water being pumped in.

Another milestone for plant viability and operating cost was recently achieved when the company announced last month that the NRC accepted the company's method for determining the potential size of the safety zone surrounding their reactors. Potentially, this will allow the "Emergency Planning Zone (EPZ)" around a plant to be the site boundary rather than the 10-mile radius of current nuclear plants. This would allow for plants to be sited closer to industrial customers for process heat off-take applications, desalination or green hydrogen production closer to users, and the use of closed coal-plants locations on the existing grid.

Business Model

In addition to selling NuScale Power Modules, the company will sell plant designs in 4-, 6-, or 12-module capacities and license its technology for utility and industrial customers. NuScale owns the patents and intellectual property, allowing it to pursue an asset-light business model. Partners, many of which are investors, will build the actual modules and construct the power plants. This means that the company will not have the capital expenditures associated with building its own factories and will not hold modules in its own inventory. It also means that the company will receive payments from end customers as they are building their plants, starting as early as 6 years before the Commercial Operation Date (COD).

The company will also sign service agreements with the end customers to help support their regulatory and licensing efforts, for startup and testing, initial staff training, and required nuclear equipment inspections. These revenues might begin as early as 8 years before COD. Other services, including fuel supply, operations and management, spare parts, etc. could last for the 60-year life of power plants and end with decommissioning support. The company is targeting $16 million of cash revenues for 2022, with significantly higher numbers generated as modules are delivered in greater number by the end of the decade:

With $350 million cash as of June and no debt, the company expects to be fully financed for its business plan. The current enterprise valuation of $2.6B (257.2M diluted shares x $11.40, less $350M net cash) is reasonable given the potential of this company if it captures just a very small portion of the world's nuclear power plant market. Its out-year projections of selling 100 modules per year only equate to 7,700 MWe out of the estimated need for over 7,080 GWe of installed nuclear power by 2050.

Conclusion

It is not an exaggeration to say that the world faces a growing energy deficit accompanied by still worsening environmental impacts from meeting the shortfall with incremental burning of fossil fuels. While renewable sources are rapidly growing, they are not enough to meet the demand and have their own limitations of intermittency and availability.

Nuclear power is safer than many people perceive it to be and should be considered in formulating a clean energy strategy. SMR technologies are being developed that have the promise to mitigate the problems of safety and cost associated with past generations of nuclear power plants. NuScale, by taking the approach of evolving existing reactor technology, is removing some of the technical risks and winning the regulatory race, giving the company a valuable moat and first-to-market advantage.

I consider this to be a speculative buy with high risk but a high potential reward. A near-term catalyst for the shares could come from signing one or more new customers to binding power plant contracts. Short interest is very high at over 20% of the outstanding shares, which could provide an additional short-term boost on any significant good news for the company.

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