US Proposes Cost-Sharing Pact for Small Nuclear Reactor Designs, a Credit Positive

US Proposes Cost-Sharing Pact for Small Nuclear Reactor Designs, a Credit Positive

On 20 January, the US Department of Energy (DOE) proposed a cost-sharing financing agreement with private industry to support the design and licensing of small modular nuclear reactors (SMRs) whose output does not exceed 300 megawatts. The commercialization of SMRs, a new product with global market potential, would be credit positive for US nuclear manufacturers, and would have less obvious but nonetheless positive implications for US nuclear utilities.

Impact on manufacturers. At approximately one-fourth the size of conventional reactors, SMRs have many important advantages. Among them is that their basic design comes from the US naval reactor program, which has a long track record of safety, and that they primarily are constructed in factories rather than at construction sites, reducing costs and the likelihood of cost overruns. SMRs can be transportable and deployed in remote locations, and under certain circumstances can be sent back to the manufacturer for maintenance.

Whereas the forged components of the newest conventional reactors, such as the Westinghouse AP-1000, require manufacturing technology that is currently available only in Korea and Japan, US nuclear manufacturers have the capability to construct SMRs at US factories. The most obvious initial customers would be overseas utilities that depend on diesel generation, or for industrial and military use in remote locations. Manufacturers that might benefit include The Babcock & Wilcox Company (Ba1 stable) and General Electric Company (Aa2 stable).

Impact on utilities. We do not expect many US utilities to be early SMR customers owing to currently low natural gas prices and nuclear development and overhead costs. Abundant shale gas in the US makes all other power generation technologies comparatively expensive. The pre-construction development costs and requirements of small nuclear units would be similar to those of large ones in terms of siting and approvals. In addition, nuclear safety regulations currently require a level of staffing and safety procedures that do not take into account plant size.

Still, US regulated utilities would benefit from having an alternative and scalable nuclear option. Indeed, we have already articulated the challenges to US utilities that arise from building new-generation nuclear plants, including the sheer size of the units in terms of capacity, construction cost (more than $5 billion for a unit of about 1,100 megawatts), lead time (over 10 years), and the impact on reserve margins and rates charged for power. SMRs would make it easier for utilities to match their capacity additions to their expected needs (which are difficult to predict 10 years out).

Utilities may be able to lower development costs by expanding sites where they already have nuclear plants (where land, water, transmission lines, security equipment and evacuation plans are already in place). Another benefit of SMRs is they would decrease reliance on natural gas, which is currently cheap but is subject to extreme price volatility that can be painful for utilities’ customers. Lastly, if the US government enacts carbon dioxide regulations, SMRs offer utilities another option for low-emissions base load generation.

Potential SMR beneficiaries include Florida Power and Light (A2 stable), which is already highly dependent on natural gas, Progress Energy Florida (A3 stable), MidAmerican Energy (Baa1 stable), Virginia Electric and Power Company (A3 stable), Duke Energy Carolinas (A3 stable), and the operating subsidiaries of Entergy Corp. (Baa3 stable). Commercialization of SMRs might also benefit unregulated power companies such as Exelon Generation (Baa1 review for downgrade), PSEG Power (Baa1 stable), and NRG Energy (Ba3 stable).

Commercialization can only happen if the US Nuclear Regulatory Commission (NRC) provides an operating license, which will not happen until it determines that the small reactor designs and operating procedures are safe. The DOE’s draft Funding Opportunity Announcement (FOA) will solicit industry input in advance of a full FOA, which aims to support first-in-kind engineering, design certification and licensing. We expect the full FOA to finance up to two SMR designs with the goal of deploying the reactors by 2022.