Can NuScale’s SMR Compete With Natural Gas?

In a watershed moment for the nuclear industry, NuScale’s small modular reactor became the first advanced nuclear reactor to be certified as safe by the Nuclear Regulatory Commission on August 28, after a two-and-a-half-year application process. Besides Oklo, NuScale is the only other company to have submitted a design application to the NRC, and it has a contract to build its first plant in Utah, to be completed around 2030.

NuScale and other advanced nuclear companies are hoping to transform the economics of nuclear energy. Proponents anticipate smaller reactors will be easier, faster, and cheaper to build since they can be manufactured off-site and have lower operating costs.

NuScale’s SMR will almost certainly be less expensive than traditional nuclear reactors, but to truly gain traction as a firm generation technology it must be able to compete with natural gas. This requires NuScale reactors to be built and, over time, that costs be brought down further through economies of scale and technological learning.

NuScale’s first batch of reactors must be attractive investments, whether for private investors or public entities like utilities and municipal governments. This depends greatly on the discount rate used by project developers; nuclear reactors are often poor short-term investments but good long-term ones since they have large upfront costs but long operating lives and relatively low operating costs — the opposite of natural gas.

Our analysis considers various scenarios of natural gas prices, NuScale construction costs and timelines, and discount rates to assess the potential for public and private funding. We estimate that, if built on time and on budget, NuScale would be cost-competitive with natural gas at a discount rate less than 5%. If advanced nuclear is given a production tax credit similar to that available for renewables, this would increase to 8.5% and represent a relatively attractive investment for private capital.

Assessing NuScale’s cost competitiveness

Typically, when utilities and municipalities are considering new electricity generation projects, options are compared based on their Levelized Cost of Electricity (LCOE). LCOE is a measure of a plant’s cost-per-unit-electricity (e.g. $/MWh), determined by calculating the plant’s total lifetime costs divided by the total electricity produced over its lifetime.

Besides assuming annual expenditures, electricity generation, and overnight capital cost, one crucial parameter when calculating LCOE is the discount rate. The discount rate reflects the fact that future gains are less valuable than current ones. Companies will typically value earnings next year around 10% less than earnings this year, discounting them at this rate. When applied over a longer period, high discount rates mean that earnings 30 years into the future are around 20 times less valuable than the same earnings today.

This logic makes sense for private companies, who focus on short timeframes and are judging between many different potentially high-return investments and where locking up capital for decades could carry a substantial opportunity cost. For governments and municipalities, however, who plan for much longer time horizons, such high discounting makes much less sense and can lead to counterproductive planning decisions. Public investments tend to use low discount rates – closer to 3%.

Before any NuScale plants have been built, we can calculate likely LCOE estimates to provide a preliminary analysis of their economic competitiveness with Combined Cycle Gas Turbine (CCGT) plants under a range of discount rates.

A few scenarios are considered (see Appendix for case assumptions). The NuScale base case assumes the cost of NuScale’s first plant as predicted on the company’s website and using available data. In contrast, the NuScale-Expensive case assumes the construction cost is 50% higher since, historically, most nuclear builds have been over time and budget. These are compared with three CCGT cases calculated using different natural gas price scenarios from the EIA’s 2020 Annual Energy Outlook. LCOE estimates of each facility based on discount rate are compared in Figure 1 below.

Assuming NuScale is correct in its cost estimate, a middle-of-the-road price for natural gas would make NuScale cost-competitive at discount rates less than 5%. Notably, such low discount rates would only be expected for publicly-funded utility projects and not for private investments.

If gas is expensive, however, then NuScale is a more cost-effective option than CCGT for discount rates under 7.5%, a discount rate likely attractive for both public and private investors. This rate drops to under 2.5% if natural gas is cheap, in which case, NuScale would almost certainly have to be publicly-funded.

There are many potential problem-areas for NuScale that could prove challenging to keep costs down. It is anticipated that the first modules will be more expensive to build due to lack of experience, before eventually reaching an equilibrium unit cost after enough construction experience has accumulated. It is not clear how many builds this will require. Some optimistic estimates suggest that equilibrium cost will be reached after fewer than a dozen or even a half-dozen units.

NuScale’s low-cost plan seems, also, to rely on modularity and factory fabrication. However, at present, there is no public contract for the fabrication factory. Further, factory fabrication could be a risky play, since any design errors will be distributed to all the reactors that are produced. Perhaps this is why no factory contract has been made yet. After demonstrating technology’s reliability with their first few contracts, it is more likely that NuScale can raise the substantial amounts of additional capital to build their reactor fabrication facility.

If the NuScale build is 1.5x more expensive than anticipated, even with high gas prices, it is only cheaper at discount rates less than 5%. At reference gas prices, an expensive NuScale build is only competitive at discount rates of 2% or less, and at low gas prices, it is not expected to be competitive.

In other words, if NuScale cannot build its plants around their expected budget, private investment in their SMRs is unlikely even with high natural gas prices. Thus, there is significant pressure on NuScale to build its plants at as low of a cost as possible.

However, climate policy could change NuScale’s economic outlook, as policies subsidizing carbon-free nuclear generators or taxing carbon-intensive natural gas plants may help NuScale become more competitive. Figure 2 shows the required subsidy ($/MWh) or CO2 tax ($/Ton) for NuScale plants to reach economic parity with CCGT plants.

Figure 2 shows that if a NuScale plant costs the anticipated amount, then subsidies are more necessary at higher discount rates to achieve cost parity. These subsidies are $30/MWh or less, which is comparable to what is currently discussed in legislatures around the US. For comparison, New York currently has an emissions credit of $17.48/MWh for its nuclear plants, and New Jersey is implementing a credit of $4/MWh. Renewables can receive a production tax credit (PTC) up to $25/MWh from the federal government. With a subsidy on this scale, NuScale plants are more economical than CCGT plants even for discount rates over 10%, which would attract a significant amount of private investment and could lead to widespread adoption of nuclear energy. In the future, decarbonization will only become more valuable, and subsidies are expected to increase to the predicted levels.

If NuScale builds cost 1.5x more than anticipated, carbon subsidies will be required in almost all scenarios in order to achieve cost parity with CCGT.

In summary, NuScale is most likely to garner both public and private investment if natural gas prices are high, if lower discount rates are used, and if low-carbon energy is subsidized. Otherwise, it will need to be publically funded. However, if the company fails to build its reactors on time and on budget, it will struggle to find funding, private or public. This has historically been an issue for the nuclear industry, so the next decade will be a proving-time for NuScale’s new reactor technology. In any case, it is exciting for the industry to see a new nuclear technology finally reaching the market for the first time in decades.

Appendix

1. 1) The NuScale plant with a 1.5x higher-than-anticipated construction cost
2. 2) Taken from Lazard’s 2019 LCOE report
3. 3) Taken from the EIA’s Capital Cost Estimates Report, 2016
4. 4) Three different scenarios (Low gas supply, reference case, and high gas supply) are used to calculate and model fuel cost, from EIA’s 2020 Annual Energy Outlook

The Capacity is the amount of electricity generated by the plant. The Overnight Cost is the upfront investment cost per unit of capacity. The Capacity Factor is the proportion of the time that the plant operates at full power. Both NuScale and conventional nuclear are expected to pay the same amount for fuel ($8.71/MWh), fixed O&M ($115/kW/yr), and variable O&M ($0.75/MWh). In reality, NuScale is expected to pay slightly more for fuel and slightly less for O&M, though quantified estimates are unavailable. An additional scenario is included for an expensive NuScale build, where construction costs are 50% higher than expected, or $5,400/kW of capacity. Natural gas fuel costs are taken from the Energy Information Administration’s Annual Energy Outlook (AEO). In the AEO, natural gas prices are predicted under a reference scenario, a high oil and gas supply scenario, and a low oil and gas supply scenario for the next 30 years.

The operational lifetime of each plant can also vary. For conventional nuclear reactors, initial licensing is for 40 years of operation, with an optional 20 year extension from the NRC. NuScale plants are expected to operate for 60 years. We model the LCOE of both conventional and NuScale plants with 60-year lifetimes, recognizing that plants with lifetimes shorter than this will have higher LCOE. The lifetime of the CCGT plant is assumed to be 30 years (Sargent and Lundy, 2017).

Main image credit: Third Way & Gensler, Nuclear Reimagined. See the rest of the series here.