SMR Business Case: Key Cost and Revenue Assumptions

This article outlines the cost and revenue assumptions that belong in a small modular reactor (SMR) business case, and it explains how each assumption drives financial viability. You will learn what to include for capital costs, operating costs, fuel, decommissioning, and revenue streams, plus how to stress-test these inputs.

Formula

The levelized cost of electricity (LCOE) is the most common metric for comparing generation costs. The formula used here is:

LCOE = (Capital recovery factor × Overnight capital cost × 1000) / (8760 × Capacity factor) + (Fixed O&M × 1000) / (8760 × Capacity factor) + Fuel cost

Where:

• Overnight capital cost ($/kW): total construction cost per kilowatt of capacity, excluding interest during construction.
• Capacity factor (%): average power output divided by maximum possible output over a year.
• Fixed O&M ($/kW-yr): annual fixed operation and maintenance cost per kilowatt.
• Fuel cost ($/MWh): fuel expense per megawatt-hour generated.
• Construction time (years): used to annualize capital cost with a 10% discount rate.

Worked Example

Using the defaults: construction time = 5 years, overnight capital cost = $6,000/kW, capacity factor = 90%, electricity price = $80/MWh, fixed O&M = $150/kW-yr, fuel cost = $8/MWh.

First, calculate the capital recovery factor (CRF) with a 10% discount rate over 5 years:

CRF = 0.1 × (1.1)^5 / ((1.1)^5 – 1) = 0.1 × 1.61051 / (1.61051 – 1) = 0.161051 / 0.61051 ≈ 0.2638

Then the capital component of LCOE:

Capital LCOE = (0.2638 × 6000 × 1000) / (8760 × 0.90) = 1,582,800 / 7,884 ≈ 200.8 $/MWh

Fixed O&M component:

O&M LCOE = (150 × 1000) / (8760 × 0.90) = 150,000 / 7,884 ≈ 19.0 $/MWh

Add fuel cost: 200.8 + 19.0 + 8 = 227.8 $/MWh

Annual revenue per kW: 80 × 0.90 × 8.76 = 630.7 $/kW-yr

Annual margin per kW: 630.7 – (19.0 × 8.76 + 8 × 0.90 × 8.76) = 630.7 – (166.4 + 63.1) = 401.2 $/kW-yr

The calculator rounds LCOE to 228 $/MWh, matching the manual calculation.

Background: Why SMR Business Cases Differ

Small modular reactors are nuclear fission reactors with a nameplate capacity typically below 300 MW(e) per unit. Unlike conventional gigawatt-scale plants, SMRs are designed for factory fabrication and modular assembly, which could reduce construction time and capital cost. However, the business case still hinges on assumptions about cost, revenue, and risk. Because SMRs are not yet deployed at scale in most countries, there is limited empirical data, so analysts rely on modeled estimates and vendor-provided figures. This makes the choice of assumptions particularly consequential.

Cost Assumptions: Capital, O&M, Fuel, and Decommissioning

The main cost categories in an SMR business case are:

• Overnight capital cost (OCC): includes reactor equipment, construction, engineering, and project management. For SMRs, vendor estimates often range from $3,000 to $6,000 per kW, but first-of-a-kind units can be higher. Include a contingency factor (e.g., 10–20%) and owner’s costs.
• Interest during construction (IDC): the cost of financing during the build period. This depends on construction duration, drawdown schedule, and weighted average cost of capital (WACC). A longer construction time raises IDC significantly.
• Operation and maintenance (O&M): fixed O&M (per kW-year) covers staff, maintenance, and overheads; variable O&M (per MWh) covers consumables and waste handling. SMRs may have lower staffing per unit due to simplified design, but multiple units share site infrastructure.
• Fuel cycle cost: includes uranium purchase, enrichment, fabrication, and spent fuel management. This is often expressed per MWh, typically in the range of $5–$10/MWh for light-water SMRs.
• Decommissioning and waste fund: set aside annually during operation to cover eventual plant dismantling and waste disposal. The amount depends on regulatory requirements and discount rate.
• Grid connection and site infrastructure: transmission lines, cooling towers, and site preparation are often excluded from OCC and must be added separately.

Revenue Assumptions: Electricity, Heat, and Other Products

The primary revenue source for an SMR is electricity sales. The key assumptions are:

• Electricity price ($/MWh): based on market forecasts, power purchase agreements (PPAs), or regulated tariffs. For merchant plants, use a forward price curve and consider price volatility.
• Capacity factor (%): the expected average output. SMRs are often designed for baseload operation, so 85–95% is typical, but this can be lower if the plant follows load or integrates with renewables.
• Capacity payments or ancillary services: some markets pay for firm capacity or grid services like voltage support. These can add 5–20% to revenue.
• Cogeneration (heat): SMRs can supply district heating, industrial steam, or hydrogen production. Revenue from heat is usually contracted separately and can improve the business case.
• Hydrogen production: high-temperature SMRs can produce hydrogen at a cost that competes with electrolysis, but the hydrogen price is uncertain and depends on carbon policies.

How to Choose Assumptions: Use Ranges, Not Point Estimates

Because SMR costs are uncertain, a robust business case uses a range for each assumption, not a single number. Start with vendor estimates, then adjust for first-of-a-kind vs. nth-of-a-kind learning. For example, the first SMR unit may cost 30–50% more than the Nth unit. Use a sensitivity analysis to see which assumptions affect the LCOE most. Typically, capital cost and capacity factor are the most sensitive. Also consider the discount rate: a higher WACC (e.g., 12% vs. 8%) significantly raises LCOE. Run a Monte Carlo simulation if possible, assigning probability distributions to key inputs.

Common Problems and Misconceptions

A frequent error is ignoring the cost of financing when comparing SMRs to natural gas. Another is assuming a capacity factor of 100%, which is unrealistic. Also, some analysts omit decommissioning costs because they occur decades later, but they must be included on a net present value basis. A misconception is that SMRs are always cheaper than large reactors; in reality, the per-kW cost may be higher, but the smaller absolute investment reduces financial risk and allows incremental deployment. Another mistake is using a single electricity price without considering time-of-day variations or market saturation if many SMRs are built.

Comparing SMRs to Other Generation

When comparing SMRs to natural gas combined cycle, the LCOE of gas is often lower (around $40–$60/MWh) but is subject to fuel price volatility. Renewables like solar and wind have LCOE below $40/MWh but require storage or backup for firm power. SMRs offer low-carbon, dispatchable power, but the LCOE is higher, often $100–$200/MWh for first units. The business case may still be positive if carbon prices are high, or if the SMR provides heat that replaces fossil fuels. For remote or off-grid locations, SMRs can compete with diesel, which can cost $150–$300/MWh.

Safety and Regulatory Assumptions

Safety is not a direct cost line, but it influences the business case through licensing timelines, insurance, and public acceptance. Include a realistic assumption for the time and cost of obtaining a license from the nuclear regulator. This can be 2–5 years and tens of millions of dollars. Also include the cost of liability insurance, which may be capped by law in some countries. The design’s safety features (passive cooling, lower core inventory) can reduce emergency planning zones and potentially lower insurance costs, but these benefits are not yet proven at scale.

Frequently Asked Questions

What is the typical LCOE for an SMR?

Modeled estimates for first-of-a-kind SMRs range from $100 to $200 per MWh, depending on capital cost, discount rate, and capacity factor. Nth-of-a-kind units could drop to $60–$100/MWh with learning, but no commercial SMR has yet reported actual LCOE data.

How does construction time affect the business case?

Longer construction increases interest during construction, raising the total capital cost. For example, a 5-year build at 10% WACC adds about 15% to the overnight cost. SMRs are supposed to shorten construction to 3–4 years, which reduces this burden.

What is the difference between overnight capital cost and total capital cost?

Overnight capital cost excludes financing costs during construction. Total capital cost includes interest during construction, escalation, and owner’s costs. The total is typically 10–30% higher than overnight.

Can SMRs make money from heat or hydrogen?

Yes, if there is a customer willing to pay for heat or hydrogen. The revenue per MWh of heat is lower than electricity, but the overall plant efficiency improves. Hydrogen prices need to be above $3/kg for many SMR designs to be competitive.

What discount rate should I use?

Use a rate that reflects the project’s risk. For regulated utilities, 5–7% is common; for merchant plants, 8–12%. Higher risk (first-of-a-kind) justifies a higher rate, which increases LCOE.

Are there hidden costs like grid upgrades?

Yes, grid connection and transmission upgrades are often excluded from LCOE. For remote SMRs, these can be significant. Include them in the project’s total capital expenditure.

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in t | Construction time | years | 5 | 1
in c | Overnight capital cost | $/kW | 6000 | 0
in p | Capacity factor | % | 90 | 0
in e | Electricity price | $/MWh | 80 | 0
in o | Fixed O&M cost | $/kW-yr | 150 | 0
in f | Fuel cost | $/MWh | 8 | 0
out lcoe | Levelized cost of electricity | $/MWh | (c*1000*0.1*(1+0.1)^t)/(((1+0.1)^t-1)*8760*p/100) + o*1000/(8760*p/100) + f | 0
out rev | Annual revenue per kW | $/kW-yr | e*p/100*8.76 | 0
out margin | Annual margin per kW | $/kW-yr | rev - (o*1000/(8760*p/100)*8.76 + f*p/100*8.76) | 0