Deployment of SMRs: Key Market Trends for Consideration

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Any strategy for the successful deployment of small modular reactors (SMRs) must thoroughly consider the current trends affecting the burgeoning market for SMRs. In 2019, the three major trends shaping this market were the large number of SMR designs, interest in SMRs in both mature and emerging markets, and factors impacting SMR financing.

  1. Significant Number of Designs
    Over 50 different SMR designs are currently being marketed. As of today, only a small number of these designs are currently under construction. While some of the more established and licensed designs are based on light water reactor technology, SMR designs incorporating advanced reactor technology (e.g., gas, sodium, molten salt and lead cooled reactors) are also gaining ground. These advanced reactors offer potential opportunities for SMRs in markets other than power generation, such as heat production for district heating, desalination, hydrogen production, or industrial processes. SMRs could also be designed to produce power in conjunction with these other systems to address multiple market needs. Finally, several companies are developing microreactors—1-10MW designs ideally suited for particular markets such as remote areas and island nations.
  1. Expanding Markets
    Currently Canada is the biggest market for SMR licensing, demonstration and deployment. In 2019, Canadian National Laboratories continued evaluating potential SMR projects for the construction and operation of a demonstration SMR project at a site it manages. Some estimate the potential value for SMRs in Canada at $5.3B between 2025 and 2040. SMRs are also gaining traction in other mature nuclear power markets, such as the United States and the United Kingdom. Further, global interest in SMRs is growing. New markets that are planning or have expressed interest in SMRs include Saudi Arabia, Estonia, Ghana, Kenya, Indonesia and Poland. The global SMR market has been estimated to be valued at $150B between 2025 and 2040.
  1. Availability of Financing
    Financing for SMR development is currently provided primarily by angel investments or government funding (either in the form of a state-owned enterprise or through government grants). More than half of the SMR developers currently in the market are seeking new investments or funding. SMR project financing faces more difficulty than development financing, as project deployment has higher capital requirements, less direct government support, and faces risks such as cost uncertainty or potential changes in governmental policy. Like large nuclear power plants (LNPPs), traditional project financing is currently not available for SMRs. However, SMRs have several unique features which could facilitate financing, such as shorter lead times, lower capital and interest rate exposure, and lower completion risk. For example, for a multiunit SMR facility built on a staggered construction schedule, the risk of cost and schedule overruns for each unit should decrease with each successfully completed unit as the project team gains experience. Further, staggered deployment could allow for phased financing (allowing for greater access to capital) as well as refinancing upon the completion of each unit. Shorter lead times also reduce the risk of a major governmental policy or market change happening mid-construction.Lower construction risk could lead to a lower weighted average cost of capital (WACC), allowing access to a greater variety and sources of capital; the ability to refinance to shorter periods further lowers WACC. Further, the shorter lead time for some SMRs requires shorter outlays of capital, allowing for a faster return on equity and limiting interest rate exposure. Overall, these improved financing factors could lower interest during construction, facilitating lower tariffs and increasing the SMR-produced power’s attractiveness to offtakers.Market risk is another key factor impacting SMR financing but can be partly addressed through long-term power purchase agreements (PPAs) and government support. Authorizing government agencies to enter into long-term PPAs with SMR projects could help decrease market risk by ensuring projects secure a long-term customer. For example, the U.S. Department of Defense (DoD) is a major energy consumer. Allowing DoD to enter a contract for difference (CfD) agreement with an SMR project, whereby DoD would pay the difference between the strike price (reflecting the cost of the investment) and the market price of power would be a way government could help reduce market risk for a domestic SMR project.Additionally, expanding the market for SMR applications beyond electricity production could help limit market risk. Industrial consumers could be key customers of SMRs by utilizing SMRs for non-electric applications such as heavy manufacturing, process heat, hydrogen production, or desalination.Finally, other financing considerations include export credit agency financing (ECA), whereby a state-backed agency provides financing for an overseas project. ECA financing likely needs to be tied to a diverse supply chain. Another pathway is financing by a development financial institution (DFI) such as the World Bank, if DFIs are willing to revisit their position on providing financing to nuclear projects. Most DFIs do not currently offer finance for nuclear power projects. However, given the ability of SMRs to address climate change and sustainable development goals, now is an ideal time for DFIs to reconsider their position on nuclear financing.

We’ll be following the SMR market closely in 2020 to monitor these trends and note new developments.

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