The Leader of NextEra Energy Expresses Reservations Regarding the Readiness of Advanced Nuclear Power for Mainstage Implementation
NuScale Power (representing the SMR segment with a 0.4% market share) is aiming to lead a potential revolution in the nuclear power sector. The hope is there, but not everyone shares this optimism, particularly a seasoned utility industry professional who thinks the prospects for small-scale modular nuclear reactors (SMRs) might not be as bright as some investors believe, given NuScale Power's notable surge in popularity (a 400% increase in stock value over the past year!). Here's how investors need to approach NuScale Power.
NuScale Power is a high-risk venture
It's crucial to acknowledge from the outset that NuScale Power is not for the risk-averse. Firstly, you must have faith in the prolonged potential of nuclear energy. Secondly, you must accept the unproven nature of this method for generating nuclear power. Lastly, you should be prepared to back a company faced with financial losses as it works to develop its unproven strategy. Only investors with an adventurous spirit ought to be looking into NuScale Power.
The main story here is that NuScale Power intends to create a business based on manufacturing small-scale modular nuclear reactors (SMRs) from scratch. Although theoretically promising, this technology remains untested and unproven. However, the rewards are substantial if it can be made viable. For instance, constructing small reactors could be easier and more affordable compared to large nuclear reactors. Small reactors would probably also be safer than their larger counterparts. Due to their modular design, they could be placed more easily where they are needed.
Making the leap from concept to full-blown product is neither simple nor cheap. It becomes even more challenging when you factor in the strict regulation concerning nuclear energy companies. These challenges are exactly what NextEra Energy (NEE 2.72%) CEO John Ketchum alluded to when raising doubts about small scale modular nuclear reactors during his company's third-quarter 2024 earnings call.
Potential opportunities in the later part of this decade
To clarify, Ketchum does not view small scale reactors as a dead end. On the contrary, he emphasized that NextEra Energy keeps close tabs on the technology. However, he doesn't believe it will significantly impact the energy market before the end of this upcoming decade. This implies that the technology requires more development and fine-tuning over a period of another 10 to 15 years before it becomes commercially viable. NuScale Power thinks it can bring its technology to market by the end of this current decade, but that's still years off the mark.
It's perfectly reasonable to be skeptical about SMR technology, and Ketchum also pointed out that only a few SMR companies have the resources to see their projects through. Where a company falters during "the next several years," it's unlikely to survive the following decade filled with substantial investments needed to bring small-scale nuclear reactors to market.
With NuScale Power benefiting from the backing of financially sound construction company Fluor, it freely admits in its 10-K filing that it will continue to be in a deficit for several more years. Consequently, Ketchum's somewhat bleak outlook oughtn't to come as a surprise, especially for investors in NuScale Power.
NextEra's CEO also underscored another challenge: the high price tag associated with small-scale modular nuclear reactors, given their new technology status. This is common among new technologies, as building the initial prototype tends to be costly. Costs begin to decline only as production scales up, which can only occur after a prototype has been tested and a manufacturing facility has been established.
Despite these challenges, NuScale Power boasts about securing key approvals from the U.S. Nuclear Regulatory Commission (further approvals are still pending, with the next one due around mid-2025) and commencing the development of its manufacturing capabilities, so it can release modules by the end of this decade. Although this is a remarkable head start, investors should consider that NuScale Power is still at the very beginning of a long and winding journey.
Ketchum's viewpoints are grounded in reality
Ketchum is not suggesting that small-scale modular nuclear reactors, like those NuScale Power is attempting to build, are a non-starter. Instead, he stresses that his company requires energy solutions presently and that emerging nuclear technologies are unlikely to contribute meaningfully in the short term due to their developmental stage. The implications for NuScale Power investors are likely that NuScale Power still has a long road ahead, especially in terms of finance and time, before it can sustain itself over the long term.
CLARIFICATION: This article was updated to clarify that the CEO of NextEra Energy was not exclusively discussing NuScale Power or its technology and was, instead, expressing broader reservations about small modular nuclear reactors.
Investors should be aware of the financial challenges that NuScale Power is facing, as the company continues to operate at a deficit due to the high costs associated with developing small-scale modular nuclear reactors and establishing manufacturing capabilities. Despite securing key approvals and making progress, investors should expect a long and complex journey before the technology becomes commercially viable.
Given the unproven nature of small-scale modular nuclear reactors and the strict regulations surrounding nuclear energy companies, investors must approach NuScale Power with a high degree of caution. While the potential rewards of the technology are significant, the risks are equally high, and not everyone shares the optimism of investors.
