NuScale Stock: Costs Are Problematic (NYSE:SMR)

NuScale (NYSE:SMR) is a leading company developing Small Modular (Nuclear) Reactors – SMR. It leads the field in the US in moving toward formal approval of its first US SMR. Perhaps surprisingly the company is hedging its bets about the US and is engaged in both Poland and Romania with hopes of getting the go-ahead for implementing its technology there. There are a lot of questions surrounding SMR technology, which seek to address the problems of conventional reactor projects invariably blowing out both in terms of complexity and cost. This is especially true after introduction of new safety measures following the 2011 Fukushima nuclear disaster in Japan. I covered a number of these issues in an article in May 2022, where I asked the question whether 2030 would be soon enough to enable SMR technology to take off. I covered the history of NuScale’s Nasdaq listing in my earlier article and Chris Wallendal has recently provided a more detailed account of the general nuclear environment and NuScale’s business plans. Here I revisit NuScale to update new developments. The emerging energy environment seems to me to be clear about the need for low carbon power generation, but it’s also becoming more focused on the competitive cost structure for the various low carbon technology options. I conclude that NuScale is going to be increasingly challenged by cheaper and faster to implement low carbon power solutions. This has implications for the success of the NuScale business. It might be a time to observe how this is going to play out.

Q3 2022 earnings call

While the Q3 earnings call was in November, and hence is somewhat dated, I think it’s worth looking at some highlights from that call before addressing some very recent issues that have arisen in relation to NuScale’s first proposed US project with UAMPS (Utah Associated Municipal Power Systems, which has 50 members from Utah, Arizona, California, Idaho, Nevada, New Mexico and Wyoming ).

I like earnings call transcripts because you get the senior management’s unfiltered views about their business. The Q3 report was very upbeat, but specific details remained mostly elusive. Effectively the three customers identified (Polish copper silver producer KGHM, in Romania RoPower Nuclear SA – a subsidiary of Romania’s State Nuclear Power Corporation – and in the US, UAMPS) are all enthusiastic and spending money advancing plans. However I didn’t get the impression that definitive manufacture plans are in place for any of the proposals. The NuScale VOYGR SMR technology is the first SMR technology that has US design approval, but reading the “up” report it sounded like the technology is on the way to being installed all over the world. I think sophisticated investors may be more sanguine about where NuScale is up to with getting its technology established. For example the Japanese Government has funded a feasibility study and supply chain survey for potential deployment in Ghana…. why not Japan? The discussion about cost competitiveness was unconvincing as CEO John Hopkins focused on scalability. The point is that my understanding is that nuclear is too expensive when it operates at maximum capacity. Expecting it to be able to modulate power production in partnership with renewable energy always seems to mean substantial increases in cost of power (see below).

The Q3 report addressed 5 near-term objectives to complete by year end. The objectives are:

1. Secure next committed customer

It seems that Hopkins regards the Polish or Romanian sites (they aren’t already committed customers) as likely next customers. The Q3 report provided additional color about the proposed Polish and Romanian projects, but these were supply chain or education-focused. It’s clear that there’s not sufficient financial commitment to claim either of these opportunities as customers. The US UAMPS project is discussed as a definite delivery in 2030, which is a bit ahead of the early 2024 date for a combined license application that is planned to be submitted to the US Nuclear Regulatory Commission. The expected date for approval is mid-2026. Until that happens all bets could be off, as is clear in a recent update discussed below.

2. Issue long lead materials specifications for the upper reactor pressure vessel

This objective seems to be well advanced.

3. Complete the reactor building design

This has been completed.

4. Complete the Standard Design Plan – SDP

Vendors have submitted 12,000 deliverables, but I didn’t get a sense as to how complete the list of deliverables is and whether this objective has been completed.

5. Submit a standard design approval application to US Nuclear Regulatory Commission for the VOYGR-6 module power plant for the UAMPS proposal

This refers to NuScale’s 77MW technology and is not to be confused with the 50MW technology which already has standard design approval from the NRC. In a fine play on words it seems that the 50 MW design can actually deliver 77 MW, so I think this means that the objective has been achieved. Actually the detail looks like there are some needed changes and it isn’t clear that they have been attended to.

Finances

Q3 net loss of $49.6 million was $22.5 million more than the net loss in Q3 2021. The net cash position was $318.6 million. The company projects a capex light business model. With almost $50 million net loss in Q3, it seems that the spend is all about plant design, licensing efforts and a big spend on advertising and marketing. This is a company that presents material that needs to be thought about. The Q3 presentation has lots of information that makes one reflect on as there is much to indicate that the company has achieved more than it actually has. An example on slide seven states “NuScale VOGYR SMR power plants operate with proven, approved, conventional LWR fuel.” It took a few moments before I realized that NuScale does not have multiple power plants, nor does it have even a single operating plant. The design technology is approved but build of an actual plant is still years away.

NuScale updates Standard Design

NuScale started 2023 with an update to its 2020 approval by the NRC. Basically it’s about getting more power from the same configuration in relation to its VOYGR-6 (462 MW, 6 module configuration). The plans fit within NuScale’s previous timeline for market release.

The release seemed to be changing the focus from a 12 module to a 6 module unit of the 77Mwe system based on increased efficiency of the 77MWe system. I had the impression that NuScale had already gained approval of the different module systems, but the fine print of the release seems to indicate that previously a 12 module unit was what has been approved and now approval for a 6 module unit is sought.

Costs increase for NuScale’s SMR

At the beginning of January a discussion paper from NuScale and UAMPS about revised cost estimates for the UAMPS project was developed. The takeaway is that there have been significant increases in the LCOE for the project and this gives UAMPS members an opportunity to withdraw from the project. The paper was about disclosing the facts and also seeking to develop a new way forward for the project. The increased costs over the past two years are documented both in terms of raw materials (eg carbon steel piping increased by 106%) and a 200 basis points increase in reference interest rate since July 2020.

IEEFA has a commentary on the new costings which claim that power produced from the NuScale SMR is not going to be competitive with renewable power. In mid 2021 the target price for power from the UAMPS project was pegged at $58/MWh ($2020) up slightly from $55/MWh in 2016. In January 2023 a 53% increase was disclosed to $89/MWh ($2022). Note that the actual cost to utilities participating is based on $2022, so authorities will pay significantly more than $89/MWh by the time the project is completed in 2030.

This price results after $4 billion of federal tax subsidies are included (including a $30/MWh break from the Inflation Reduction Act). The increased target price results from a 75% increase in estimated construction costs (from $5.3 to $9.3 billion). The actual cost (/MW) of the project now is similar to that of the recent two reactor Vogtle plant in Georgia. This makes dubious the argument that SMRs are cheaper technology than large scale nuclear reactors.

Note that 27 UAMPS members have the option to terminate the project and be reimbursed if subscription does not reach 370MW (of 462 MW available) by the end of 2023. A YouTube clip on the UAMPS Carbon Free Power Plant website indicates that UAMPS members have committed to purchase 116 MW of the available power and that additional Northwest utilities have entered letters of intent (no details given). I did not find an updated version of this information.

Don’t expect this to be the last word on cost for this emerging technology. For NuScale there remain additional hurdles in design, licensing with the NRC, construction and pre-operation testing.

Geothermal competition for the UAMPS project?

Things are changing in the energy sphere and reality (especially costs) are now a significant part of decisions about any new power project. Increasingly 24/7 renewables projects involving solar PV/wind/batteries, etc., are being competitively priced.

To give some idea about the kind of project that might give the NuScale UAMPS project competition, out of left field there’s a different proposal from Berkshire Hathaway Energy’s (BRK.A) (BRK.B) NV Energy involving two Nevada Geothermal projects (120 MW (Ormat Technologies (ORA)) and 20 MW), which are cheaper ($69 and $70/MWh), based on existing technology and could be delivered sooner than the NuScale project. The Geothermal projects are offered as 25 year fixed rate projects, while the NuScale project is still an evolving price as the project becomes better defined.

The geothermal projects are given to UAMPS members as the kind of alternative that has more clarity about cost and one which is available. UAMPS members have the opportunity now to exit the UAMPS SMR project …

What the market says

NuScale is still very early in its time as a Nasdaq-listed company. It listed at a share price of ~$10, then the company briefly experienced ~40% share price increase in August to be above $14 before it drifted back to ~$10 in mid October. Since then it has traded in a $10-$12 window, closing yesterday at $10.84. This implies that the market is waiting to see what happens.

Two Seeking Alpha authors have a buy rating in the last 30 days, with one hold. Wall Street analysis in the past 90 days is unclear, with two strong buy and 2 hold ratings. Seeking Alpha has a “hold” Quant rating which covers the full spectrum of “love it” and “hate it.” It’s interesting that since listing its Quant ratings are a bit all over the place (e.g good Valuation to very poor Valuation, Momentum excellent to average) over the past six months. Perhaps this isn’t surprising because the company is just listed and there are several key issues yet to be resolved. The company is still a year away from real clarity about its UAMPS project, and it is anyone’s guess what the Polish and Romanian interests mean.

Conclusion

One of the issues that I have with nuclear industry advocates, and this includes SMR companies, is that there is constant reference to the “fact” that decarbonization cannot be effectively completed without a major expansion of nuclear technology. NuScale starts its Q3 presentation with the statement “nuclear power is essential to meeting global decarbonization targets.” I think it’s becoming clear that this statement is not factual and indeed a central issue, as discussed here, is going to be cost comparison with other low carbon technologies. I’m doubtful that SMR technology is going to be competitive with the major advances and cost reductions (along with speed of implementation) that are happening with renewables technologies now.

My reading of the most recent documents from NuScale suggest to me that one needs to be careful to fully understand the actual situation when one considers investment in NuScale. I have little doubt that NuScale has brilliant technology and that it is ahead of its US peers in navigating a tortuous approvals path. The things that seem not yet locked in are the many details involved with actual construction and also locked in customers, even with the possibility of major subsidy resulting from the Inflation Reduction Act in the US. The recent information on the UAMPS customer is that cost escalation makes UAMPS able to walk away from the project now. There’s still not a fully committed customer and other technologies are making pitches for business. SMR technology is racing to get acceptance even as other options become more concrete. This is NuScale’s challenge.

I’m not a financial advisor but I follow closely the dramatic changes happening as the energy industry decarbonizes. I hope that my comments about NuScale and the emergence of SMR nuclear technology is helpful as you and your financial advisor consider investment in NuScale.