Financing Energy Transition – Are Small Modular Reactors Poised to Bridge the Gap?

Nuclear power. For many, the first thought that springs to mind is Fukushima, Chernobyl or even Three Mile Island, rather than nuclear as a piece in the energy transition puzzle. Yet, amidst an increasing urgence to decarbonize the global economy, nuclear power –  in particular small modular reactors (SMRs) – may be a solution to help deploy low-carbon electricity generation.

Following their recent paper on SMRs, Ivan Pavlovic, Energy Transition Specialist, and Eric Benoist, Tech & Data Research Specialist, share some insights into the potential uses of these specific reactors, and the key role to be played by the finance sector.

Ivan Pavlovic

Ivan Pavlovic

Energy Transition Specialist

Eric Benoist

Eric Benoist

Tech & Data Research Specialist

Before we dive into the specifics of SMRs, if the global economy is to achieve net zero by 2050 (per the Paris Agreement) and generate no – or negative – CO2 emissions throughout the second half of the century, what does this mean in terms of energy generation capacity?

Ivan Pavlovic: The International Energy Agency (IEA) estimates that global electricity demand will increase over 2.5x by 2050. In the next three decades, electricity demand can be expected to grow at a CAGR of 3.5%, which is considerably faster than the 2.5% CAGR from 2010 to 2020.

On the supply side, the replacement of existing thermal capacity and the satisfaction of new needs implies a 6.5x increase in electricity generation from low-carbon, renewable and nuclear sources between now and 2050, representing an unprecedented acceleration in the rate at which associated capacity is commissioned.

The renewed focus on nuclear comes as the world is trying to move from carbon intensive to low-carbon generation, while energy demand is on the increase.

So, not only will we have the challenge of shifting from carbon intensive to low-carbon generation, but demand will increase at the same time - hence, a renewed focus on the nuclear sector and its potential key role.

So, are we looking then at nuclear power generation playing a bigger role than renewable energy in the near term?

Eric Benoist: Nuclear power and renewable energy have a complementary relationship, and both will be required to achieve a successful energy transition.

To achieve a successful energy transition, Nuclear power and renewable energy will need to have a complementary relationship.

Nuclear power provides constant and dispatchable energy – meaning that production can be tailored to peaks and declines in demand and can help manage the intermittent nature of renewable energy generation. Nuclear power is also intrinsically less dependent on local natural conditions (with the exception of water for cooling in the case of riverside installations), and nuclear installations have a smaller physical footprint, which is of particular importance in densely populated countries.

Estimates from the IEA suggest that, to achieve Net Zero current nuclear capacity will have to increase by 2.2x (i.e. from 417GW in 2022 to 916GW in 2050[1] ).

Ivan Pavlovic: As the Paris Agreement deadlines loom, the need for prompt delivery of alternative energy solutions, combined with the various challenges in reviving the construction of conventional nuclear reactors – particularly in Europe – has driven a renewed interest in SMRs, which are an attractive proposition for power generation (vs conventional reactors). This is because SMRs have a few distinctive features relative to conventional nuclear reactors.

Firstly, SMRs are much smaller – with capacities generally reaching up to 300MWe (and up to 500MWe in a few exceptional cases) – meaning that they have a smaller physical footprint. Secondly, in terms of civil engineering, their design is much simpler than that of conventional reactors – which require very large containment buildings and use pharaonic quantities of materials and support elements. And thirdly, they are modular, which means that economies of scale can be achieved during the component manufacturing process, driving down costs. By nature, this modularity also offers the possibility of increasing the power of an installation through the addition of successive production 'layers' when structural demand increases.

SMRs have many advantages: they’re smaller, their design is simpler as far as civil engineering is concerned, and their modular nature offers the prospect of economies of scale in the manufacturing of equipment.

Ultimately, SMRs are more affordable (in absolute terms) than conventional reactors, construction time is generally shorter and less prone to delays and overruns (due to their less complex nature), and with smaller core inventories and improved passive safety systems, SMRs can be located much closer to their consumption centers.

Can SMRs meet the same needs as conventional reactors?

Eric Benoist: With the ability to supply electricity and/or heat, their greater scalability, and fewer challenges and constraints associated with their development, SMRs offer a very wide range of potential use cases.

Broadly speaking, we can group their potential use into three categories:

Reactors with a capacity of 200MW or greater can be deployed for “system” uses – for example, SMRs could supply district heating networks, replacing coal-based capacity. They could also be deployed in relatively isolated areas, or be used as substitutes for gas-fired plants to balance the grid and accompany the build-up in renewables.

They can also operate in a decentralised manner within closed circuits – a prime example of this would be a SMR supplying electricity and/or heat to a heavy industry site (such as a steelworks, cement works, chemical or petrochemical plant).

SMRs can be used to help transition from carbon intensive generation assets, such as coal-fired power plants that have already been shut down or are nearing the end of their life. And the benefits of such an approach are multiple: it allows for the use of existing infrastructure and resources (such as land, access to water for cooling circuits, electrical equipment, steam circuit components, etc.), the local workforce can be preserved (insofar as the skills to operate a coal-fired power plant are, for the most part, transferable to a SMR). This could lead to savings of 15% to 35% on the cost of construction of new capacity, as well as shorter completion times.

It sounds like we might expect to see quite a number of SMRs to be developed in the coming years – how will they be financed?

Eric Benoist: According to data from the International Atomic Energy Agency (IAEA) there are 83 SMR projects currently under development, in 18 countries – which represents an increase of 15% from 2020. But, there is still considerable technological diversity (water-cooled, high temperature, liquid-metal-cooled, molten salt) in the concepts under development – which clearly will have an impact on how they are financed.

Today, stakeholders in the nuclear sector (technology developers, governments, potential users) might face a number of challenges when it comes to securing financing. Technology developers, for example, are still largely reliant on private equity funding and government support policies.

That said, despite the wide variety of underlying systems and power generation approaches proposed, for most transactions, investors – both public and private – are essentially buying a long-term equity story, which unfortunately are beholden to the unpredictability of the market.

As SMRs develop, we could see a shift in financing to asset-based solutions, which could help the industry to mature.

Ivan Pavlovic: The emergence of SMRs though, could be accompanied by a paradigm shift in financing, with potential recourse to asset-based solutions (non-recourse debt, leasing) by opposition to the balance sheet of the developers/operators. For SMRs, it is entirely conceivable to develop financing solutions based on the cash flows generated by the assets, solutions which until now have been virtually non-existent for conventional nuclear reactors.

From an industrial standpoint, this is of crucial importance. The possible deployment of asset-based financing could play a key role in bringing about a maturing of the industry, particularly the industrialisation of component manufacturing through a proliferation of investments and increased competition between equipment suppliers, but also between project developers, and even between potential providers of capital.

[1] IEA (2023) op. cit.

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