Small Modular Reactors: Delayed Privatisation Financing Structure

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Small modular reactors offer significant potential advantages compared with traditional large nuclear power plants. These include the likelihood of shorter build times, simpler designs requiring fewer structures and components, greater flexibility of location, enhanced compatibility with smaller local load profiles, easier refuelling and maintenance schedules at multi-unit configurations, lower decommissioning and site restoration costs, and savings from repeat in-factory construction.

A further important benefit is the much smaller initial capital investment required for an SMR. This brings SMRs within the reach of a wider range of investors, including many who could not contemplate the huge upfront capital cost of larger plants, and should help to improve the terms on which finance is available.

However, SMRs are still at an early stage of development and have some of the characteristics of first of a kind (FOAK) plants. For example, during the initial phase, even if the fundamental reactor technology is not itself innovative, there remains a need to build and operate a prototype plant to shows that its design can capture the benefits of series production and operational efficiency, satisfy both regulators and licensing agencies, as well as being integrated into a developing supply chain.

Furthermore, even though the danger of serious construction delays should be less than for large scale plants, until a successful FOAK SMR plant has been successfully completed the risk of such delays is not entirely eliminated. If privately financed, this is translated into a cost of capital that may prohibit many projects from going ahead.

Experience shows that conventional project finance, which usually relies on cash flow generated by the project itself, has not worked well for new nuclear plants because of uncertainty about when revenue will start to be received and the track record of recent projects regarding cost overruns and delays. Attempting to mitigate this risk has been part of the reason for the high CfD strike price at Hinkley Point C.

As for the Regulated Asset Base model used to great effect in other industries by the UK government while this could work in theory its structure is complex and it has never yet been used to finance FOAK energy infrastructure.

This makes the “Delayed Privatisation” model, proposed in this report, in which government is directly involved in providing equity funding during the construction period, attractive. Under this model once the plant has been completed the government exits its holding and the project becomes wholly privately financed.

This report illustrates how Delayed Privatisation could work in practice for SMRs. Direct participation by government in the first phase of a project can be justified by the fact that SMRs are an emerging technology that if successfully developed will be an important tool in meeting climate and emission targets. In addition, there is an opportunity for the UK to establish a valuable supply chain in a sector of the nuclear energy industry where a substantial potential export market exists.

The New Nuclear Watch Institute believes that adopting a creative approach to financing SMRs could enable the UK to perform the kind of leading role which it enjoyed in the last century in relation to nuclear energy more generally. We recommend that consideration is therefore given to Delayed Privatisation alongside other alternative financing structures.

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