I’ll start with a disclosure. I’m still long on NuScale in my personal portfolio and have no intention of changing that position in the near future. I believe that the company has a good product and excellent potential for growth. The image above with Jose Reyes and me is from a visit I paid to the NuScale test loop in October 2014.
Yesterday (Nov 8, 2023), an expected shoe dropped. NuScale and UAMPS (Utah Association of Municipal Power Systems) announced that they had decided to abandon their Carbon Free Power Project. The press release stated, “Despite significant efforts by both parties to advance the CFPP, it appears unlikely that the project will have enough subscription to continue toward deployment.”
A chorus of commentary has erupted on social media. Some are cheers from the usual suspects who have never met a nuclear reactor that they like. Others are from people who ardently support different designs that range from different water reactors to gas-cooled, molten salt or liquid metal reactors that don’t use water cooling and moderation.
Some believe that the decision proves that NuScale Power Modules are hopelessly uneconomic and that the CFPP cancellation proves that NuScale is on shaky grounds as a company. Self-admitted short sellers are doing everything they can to undermine investor confidence so that the company stock price falls quickly and profitably for those betting on that behavior.
My conclusions from the project cancellation are different. There is no doubt that a smooth first-of-a-kind demonstration of a 6-12 unit NuScale power plant would have been better for the company’s prospects in the short term. That result would have also helped to increase interest in new nuclear power projects and would have increased investor FOMO (fear of missing out.)
As a venture capitalist helping to manage a fund that is focused on advanced nuclear energy as a major, undervalued tool for the energy transition from high carbon fossil fuel combustion to ultra low carbon energy sources, that result would have been a welcome reinforcement of our investment thesis.
Competitive headwinds fighting Carbon Free Power Project
During the past few years, however, the prospects for success for the CFPP have repeatedly dimmed to the point where its cancellation was readily foreseeable. The initial 12-unit power plant was scaled down to a 6-unit facility. Individual members of the UAMPS association pulled out as it became ever clearer that a new, first of a kind nuclear plant built in the remote Idaho desert would produce power that was measurably more expensive than the low priced mix of coal, natural gas, hydro and wind they were used to.
That cost disadvantage only grew as it became less and less likely that there would ever be a price on carbon in the states UAMPS serves. Rising interest rates also reduced the economic viability of capital-intensive power plants compared to established, depreciated plants burning cheap local coal, low capital cost plants burning natural gas from nearby places like North Dakota or onshore wind located in sparsely-populated windy plains near mountain ranges.
As coal demand falls throughout the US as a result of changing air pollution regulations, increased production from natural gas, solar and wind and continued excellent performance by existing nuclear plants, coal prices soften. The long term prospect is that they will remain affordable and perhaps decline considerably, especially in places that are close to established mines. UAMPS member power systems have ready access to local coal sources.
The UAMPS-served areas are close to productive oil shale formations that contain substantial quantities of associated natural gas. Sometimes North Dakota gas is almost given away – even in the dead of winter – because it is an annoying byproduct of oil production. Associated gas is still flared – burned without serving any customers – for safety reasons. Regulators are increasingly enacting rules that discourage the practice. There are also financial incentive programs that encourage operators to find customers that will pay something.
UAMPS members also benefit from their favorable wind locations. They have wide open spaces and good wind associated with nearby mountains. On-shore wind turbines are well proven and numerous developers have cost effective processes and experienced installation teams. The Inflation Reduction Act provides long term certainty for clean energy subsidies, ensuring that the power prices are consumer friendly. It also opens new avenues for non profit utilities to directly benefit from tax credit programs. A nuclear power project like the CFPP would be eligible for the same subsidy level as other clean energy sources but the tax credit programs in the IRA start paying real money only after projects are completed. A wind project can be finished in just a year or two in places where there isn’t much opposition. Earlier monetary flows are more valuable than later flows.
Even if they are led by people who would like to decarbonize, municipal power systems have a mandate to provide the most cost-effective power possible within the given constraints. They have access to relatively low cost, tax exempt debt, but bond issues needed to access that debt capability are often tenaciously debated, political choices. The interest rates paid may be lower than commercial rates, but rates for new debt are still linked to those paid in the rest of the borrowing market. Rising rates affect all borrowers.
Munis have no access to capital markets where investors have more understanding and appetite for a certain amount of financial risk. It is highly unlikely that they could convince their customers to pay catalytic prices for power from new technology with significant room for growth.
in summary, economic conditions for the Carbon Free Power Project have been deteriorating for several years. The total expenditures associated with that project have not been publicly released, but the amount spent is nowhere near the amount of money that was earmarked. UAMPS only submitted an application for “Limited Work Authorization” to the NRC in August of 2023 and it has only been a few weeks since the NRC accepted that application for review. No dirt has been moved at the site, other than that needed to conduct environmental impact studies.
Update (added Feb 3, 2024): A November 2023 communication with a DOE spokesperson provided the following background information about the government costs for the Carbon Free Power Project.
The award for the Carbon Free Power Project is with CFPP, LLC (a single-purpose non-profit entity wholly owned by UAMPS), not with NuScale directly. That award provided a federal cost-share of $1.355 billion over 10 years to deploy and commercially operate a NuScale small modular reactor. Of the $1.355 billion, DOE has obligated only $232.8 million so far. Some of those funds are not yet spent, as they are reserved for expenses related to closing out the project. However, with this early termination of the CFPP award, DOE’s investment will be reduced from the current $232.8 million to approximately $50 million, primarily through transfer of valuable project assets to DOE’s ownership.
Separate from the award for the CFPP, DOE has provided a total of $579.7 million to NuScale for the development of their SMR technology. The determination by UAMPS and NuScale to terminate their agreement related to the CFPP does not impact DOE’s separate award with NuScale.
DOE spokesperson email to Rod Adams dated Nov 15, 2023
End Update
Where does NuScale go from here?
This commentary is not supported by any direct communication with NuScale. It is based on publicly available news and announcements.
The CFPP was an important project for NuScale, but it is not the only sale that the company is working on. UAMPS is not the only customer attracted by a passively cooled, light water reactor using established fuel forms, materials and chemistry refined through many decades of operation in large fleets of nuclear power plants.
NuScale’s power modules have been issued a design certification at a time when none of the alternative choices have submitted an application for review. Submission is needed to start a regulatory calendar that moves at an excruciatingly slow pace. Though we hope the next review will be quicker, it took more than six years from the time NuScale submitted its Design Certification Application until the 5-member commission issued the final document. (Dec 31, 2016 – Feb 21, 2023)
According to Fluor, which still holds its large stake in NuScale, 18 active and signed Memorandums of Understanding from 11 different countries were in effect at the end of 2021.
Though none have yet achieved the status of a signed contract, there have been public announcements of serious interest in Romania and other Eastern European countries. NuScale is one of the six finalists selected for the Great Britain Nuclear light water reactor SMR program. Standard Power announced its interest in using NuScale power plants for two data centers, one in Ohio and one in Pennsylvania.
In March, 2023, an early stage start up company named Blue Energy visited Houston, TX – arguably the energy capital of the United States – for CERAWeek. The founders gave a presentation on their concept for offshore power plants that combine NuScale power modules with proven technology from offshore oil and offshore wind. They shared some startling numbers about the cost reduction potential available for NuScale power modules when using the ocean for the ultimate heat sink instead of a giant man-made pool that must be protected from aircraft impact.
Blue Energy is “productizing” nuclear fission by manufacturing pre-certified light water small modular reactors in shipyards as fully-completed, transportable nuclear power plants that are leased to industrial facilities and countries seeking energy security, price stability, and turnkey decarbonization. We leverage existing oil & gas platform manufacturing infrastructure and a simplified plant design to shrink the construction schedule from 10 years to 24 months and the overnight capital cost from greater than $6,000/kW to less than $2,500/kW while putting nuclear on a learning curve down to $1/W.
CERAWeek presentation “Blue Energy | Offshore Nuclear Power” Mar 7, 2023
The news of the demise of the CFPP should not discourage nuclear energy advocates for very long. It’s not good news, but no one should expect 100% good news with new nuclear development. CFPP’s demise should not – but certainly will – provide PR fodder for those who have never met a nuclear project that they like. It should not – but certainly will – provide a reason for “I told you so” commentary among nuclear energy cheerleaders who are rooting for a different kind of nuclear power system.
I am neither a registered investment advisor nor a broker-dealer and I do not provide stock market recommendations. As a managing partner of Nucleation Capital, I invest solely in private equity. My personal public market portfolio, however, includes some SMR (NuScale’s NYSE ticker symbol) stock that I have no intention of selling.
