The future of power is small modular reactors: development and financing overview

April 2025  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2025 Issue

Amid rising energy demand from data centres and other high-intensity sectors, small modular reactors (SMRs) are emerging as a promising alternative to traditional nuclear power.

This article examines some key development and financing considerations, including inherent risks and financing sources, of SMR projects, while also providing an overview of the evolving US nuclear landscape and recent modular initiatives.

Development of nuclear power in the US began as an offshoot of the Manhattan Project, with the first nuclear reactor to produce electricity doing so in 1951 at the National Reactor Testing Station in Idaho. The first US commercial nuclear reactor, a 60 megawatt electrical (Mwe) net capacity pressurised water reactor (PWR), came online in December 1957, in Shippingport, Pennsylvania.

In parallel, General Electric developed the boiling water reactor (BWR), and all commercial reactors in the US today are either PWR or BWR. Successive generations of reactors saw improvements in operations, safety, efficiency and size. By the turn of the 21st century, nuclear plants had achieved average capacity factors of over 90 percent and Southern Company’s Plant Vogtle Units 3 and 4 introduced passive safety features like automatic cooling shutdown without operator intervention.

Nuclear power continued to grow until the Three Mile Island accident in 1979, which, along with high interest rates and the rise of inexpensive natural gas, made large, capital-intensive nuclear projects unpopular and financially risky.

Prior to Vogtle Unit 3, the last nuclear reactor to start in the US was Watts Bar Unit 2 in Tennessee. Construction on Watts Bar 2 began in 1973 but was suspended in 1985. Work resumed in 2007, and the reactor began operations in 2016. The Vogtle Units suffered from similar issues encountered by nuclear plants in the late 1970s and 1980s following the Three Mile Island incident, namely delays and cost overruns.

Construction of the Vogtle Units began in 2009. Originally expected to cost $14bn and to be completed in 2016/17, the project took seven years longer and cost $16bn more than originally planned. A similar twin-reactor project in South Carolina was cancelled in 2017 after spending billions in development.

In response to these challenges, the domestic nuclear industry and US government have increasingly turned attention to SMRs as a potential next-generation solution. As the name would suggest, SMRs are designed to be much smaller and more modular than traditional gigawatt-scale plants. Components or entire reactor modules can be factory-fabricated using standardised designs and shipped to sites, avoiding the custom on-site builds that have plagued large reactor projects.

Additionally, SMRs will benefit from incorporating current safeguards and security requirements and the modular aspect of SMRs, and ability to add or reduce reactors, should also permit capacity to match demand over time, making it less risky to finance and more scalable over the long term.

The last several years have seen rapid progress in SMR development, partly motivated by the increasing demand for large carbon-free base load generation. The US is entering a phase of growth fuelled by new industries and electrification trends. Energy-intensive computing is a major factor: the rapid expansion of cloud computing, artificial intelligence (AI) processing and data centres is significantly increasing power needs.

Data centres and AI clusters require reliable, 24/7 power in massive quantities – exactly the kind of load that nuclear plants can supply. SMRs can scale with demand growth. Beyond electricity, SMRs can meet demands in industrial markets. Some SMR designs produce high-temperature heat that can be used for hydrogen production, chemical processing, desalination or district heating.

As industries seek to cut CO2 emissions, they are considering replacing fossil-fuel boilers with nuclear heat. SMRs, being right-sizeable for many industrial facilities, can be built on-site or nearby to provide steam and power in a cogeneration setup. Co-location of energy sources and sinks provides additional security of power supply and bypasses the need to rely on distant generation and congested grid interconnection processes.

However, co-location also introduces ‘project on project risk’ where the success or failure of one project impacts the outcome of another related project. For example, if the SMR suffers construction delays or fails to perform, the data centre lacks its anticipated power source (and vice versa). Mitigating project-on-project risk involves careful coordination and contractual safeguards. Joint development agreements or anchor tenancy arrangements can tie the fate of the co-located projects together in a controlled way (such as the SMR developer also taking an equity stake in the co-located data centre to increase the prospect that it remains committed to the power offtake).

Some highlights of the latest developments in SMRs include those outlined below.

TerraPower. Founded by Bill Gates, and awarded approximately $2bn under the Department of Energy’s Advanced Reactor Demonstration Program, TerraPower is currently building a 345MWe sodium-cooled fast reactor with an innovative molten salt energy storage system. In March 2024, TerraPower submitted a construction permit application to the Nuclear Regulatory Commission (NRC) for the demonstration plant, with expected operation by 2030 at a retired coal plant in Kemmerer, Wyoming, and received approval for a construction and operating licence from the Wyoming Industrial Siting Council in January 2025 (which permit covers all construction and operating activities on the plant that are not under NRC jurisdiction).

X-energy. The other awardee (approximately $1.2bn) of the ARDP alongside TerraPower, X-energy is currently developing a high-temperature gas-cooled reactor that uses TRISO pebble fuel (tristructural-isotropic fuel particles encased in hard ceramic). The reactor’s high-temperature output (over 500C) can be used for efficient electricity generation or industrial process heat, making it attractive for decarbonising industries like chemical production. Each module produces about 80Mwe, and is intended to be installed in four-pack units (320Mwe total)​. X-energy has announced its proposal to deploy its ARDP reactor at a Dow Chemical site in Seadrift, Texas to provide both power and steam for industrial use. The project is expected to reduce Seadrift’s site emissions by approximately 440,000 million tons of carbon dioxide equivalent per year.

GE Hitachi and the BWRX-300. GE Hitachi Nuclear Energy has developed the BWRX-300, a 300MWe small modular reactor that is essentially a scaled-down, simplified BWR. The Tennessee Valley Authority (TVA) is pursuing deployment of a BWRX-300 reactor, along with Ontario Power Generation in Canada, which is on the path to be operational by 2029. TVA recently announced its intention to seek an $800m grant from the Department of Energy (DOE) to deploy the BWRX-300 reactor at Oak Ridge, Tennessee.

As SMRs become more popular and common, below are issues to consider from a development, project management and documentation perspective in deploying SMRs.

First, engineering, procurement and construction (EPC). The allocation of risk to cost overruns or project delays is expected to be highly negotiated given the history of traditional nuclear development and nascent nature of SMRs. Regulatory and political risks may be highlighted. Fixed price turnkey EPCs with guarantees may be challenging to secure without paying a significant premium. For example, Westinghouse filed for bankruptcy in large part due to its guaranteed fixed price contracts to construct the Vogtle Units. However, price certainty may be required to gain utility commission approvals to the extent such projects are expected to be financed by retail customers via rate base.

Second, offtake. Like a traditional power project, securing offtake may be critical to financing the deployment of SMRs without utility ownership (which would guarantee cost recovery via the rate base). Given the lack of operating history of SMRs, performance guarantees and damages for failure to deliver are expected to be highly negotiated. Any performance guarantees made to an offtaker should be backed by the EPC contractor or module technology provider, as a matter of risk management. However, if early SMR demonstrations are successful, with capacity factors similar to that of traditional nuclear plants, it is conceivable that SMRs could be built without long-term offtakes and be financed via commitments to capacity markets.

Third, operation and maintenance. Once an SMR is built, it needs to continue to be in compliance with NRC licensing rules. As compared to operators of traditional gas-fired generating plants, qualified nuclear operators are limited, particularly in the face of the ageing nuclear workforce. The plant operator – the licence holder – has a non-delegable duty to maintain safety and compliance. Securing capacity for such services ahead of time is critical.

Lastly, insurance. Emerging insurance products for SMR projects increasingly integrate comprehensive coverages such as contractors’ all risks, delay in start-up and other key liability policies to address the diverse risks during construction and operation. These policies seek to mitigate uncertainties by safeguarding against construction delays, cost overruns and unforeseen liabilities.

Given the amount of government incentives available for SMRs, we expect the financing stack for SMR projects going forward to consist of a mix of government incentives and private capital.

The Energy Policy Act of 2005 provides a production tax credit of $18/MWh (1.8 cents/kWh) for the first eight years of operation of new reactors, up to 6000MW of capacity nationally​. The only eligible plants as of today are Vogtle Units 3 and 4, leaving significant capacity for SMRs to take advantage of this credit.

Additionally, SMRs should be eligible for technology-neutral clean tax credits beginning in 2025 under the 2022 Inflation Reduction Act (IRA). SMRs may elect the production tax credit (section 45Y) or investment tax credit (ITC) (section 48E), with the value depending on various additional qualifiers, with the most critical meeting the prevailing wages and apprenticeship requirement (PW&A): 1.5 cents/kWh for PTC (subject to inflation adjustment) and 30 percent of qualified investment for ITC, if PW&A requirements are satisfied without any additional adders. Tax credits under the IRA are also monetisable, as they can be sold to third parties. The tax credit transfer market has grown rapidly since the enactment of the IRA.

Under the Innovative Energy Loan Guarantee Program, the DOE can provide federal backing for loans to projects that employ innovative technologies (such as advanced nuclear reactors) and reduce greenhouse gas emissions. The DOE provided up to $12bn in loan guarantees to Vogtle Units 3 and 4.

To obtain a DOE loan guarantee, an SMR project must meet rigorous criteria. It must be innovative and must reduce carbon emissions relative to baseline power generation. The borrower must also demonstrate a reasonable prospect of repayment, meaning the project’s economics should be sound with creditworthy contracts or customers in place. This encourages SMR projects to secure long-term power purchase agreements or other revenue stability measures before finalising financing.

Traditional project finance (non-recourse debt that is repaid from project revenues) for nuclear projects is uncommon due to the high risk profile. Significant DOE support often increases lender comfort. However, DOE grants, loans and loan guarantees often require a first lien in favour of the DOE on project assets and do not easily allow pari passu security positions with other lenders, which complicates co-financing.

A possible approach is to structure private capital as mezzanine debt or junior tranches from private sources to fill gaps, albeit at higher interest rates. Finally, if a developer defaults, a lender cannot simply take over and operate an SMR without NRC approval, though it may be possible to mitigate this issue by designating a standby operator.

In summary, while the future of power might indeed be SMRs, it will need to be built on the back of innovative deployment strategies and financing solutions as much as on advanced reactor technology itself. With strong partnerships between the public and private sectors, the remaining hurdles of cost, risk and regulation can be managed.

As multiple demonstration SMRs move forward in the next few years, the lessons learned in co-location and financing will pave the way for broader commercial rollout. If successful, SMRs could become a cornerstone of a clean, reliable energy future, providing versatile power generation that helps meet climate goals while bolstering grid resilience and economic development. The path to that future is taking shape now – one small reactor at a time.

 

John Tormey and Paul de Bernier are partners and Jimmie Zhang is an associate at Mayer Brown LLP. Mr Tormey can be contacted on +1 (202) 263 3223 or by email: jtormey@mayerbrown.com. Mr de Bernier can be contacted on +1 (213) 229 9542 or by email: pdebernier@mayerbrown.com. Mr Zhang can be contacted on +1 (202) 263 9542 or by email: jimmie.zhang@mayerbrown.com.

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BY

John Tormey, Paul de Bernier and Jimmie Zhang

Mayer Brown LLP

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