Europe Bets Big on Small Modular Reactors. Here's How NuScale Power and Oklo Will Benefit.

Small modular reactors, or SMRs, are essentially miniature nuclear power plants. They can be built faster than larger conventional nuclear facilities. And while typically more expensive on a per-megawatt basis, upfront capital investment can also be much lower than that of traditional nuclear plants.

While the concept of SMRs has been around for decades, only two SMR systems have ever been commercialized -- one in Russia, the other in China. Both of those systems are relatively small in generating capacity.

A new age for SMRs, however, is upon us. The AI industry needs more power quickly to support scaling trillions of dollars in data center infrastructure. Nuclear power can provide large amounts of stable baseload power with minimal refueling needs. And while SMRs are typically higher cost on a per-megawatt basis, the speed of construction of these smaller nuclear systems is highly attractive in today's environment.

The European Investment Bank -- the lending arm of the European Union -- is recognizing the potential of SMRs. On Sept. 4, the group announced a €40 million loan to Steady Energy, an SMR developer based in Finland. According to Reuters, "The loan is the first in a pipeline of SMR investments the EIB has planned."

While SMR stocks such as NuScale Power (NYSE:SMR) and Oklo Inc. (NYSE:OKLO) aren't directly involved in the deal, the announcement should be viewed positively by shareholders for one obvious reason.

Here's why government support helps Oklo and NuScale Power

As mentioned, the concept of SMRs has been around for decades, yet only two SMR systems have ever been commercialized worldwide.

Much of that limited historical adoption stems from a lack of demand to pay a premium for smaller reactors. Energy demand growth has long been stable and predictable, allowing utilities to play the long game and focus on lowering costs as much as possible. Now that AI companies are looking to spend billions on near-term energy infrastructure, more than 80 SMR projects are currently in some form of development globally.

Image source: Getty Images

But here's the problem: many of those projects remain in the conceptual or financing stage. Firm financial commitments across the SMR sector remain scarce. That's reasonable given the collapse of previous SMR deals in recent years due to rising cost estimates. The best thing for the SMR space in general, then, is to get more SMR systems online to prove both execution and economic feasibility.

This is why increased government support from European agencies and other countries is so important for NuScale and Oklo long term. More direct funding increases the odds that additional SMRs are successfully commercialized in the coming years, adding more real-world proof points for the technology. If commercialization occurs successfully across a number of projects, both Oklo and NuScale will likely have an easier time converting their customer pipeline into revenue-generating projects with firm financial commitments.

To be sure, this is a long-term tailwind. It could take years, or even a decade or more, for increased government funding to result in a meaningful number of operating SMR systems. But more capital and government interest should gradually help pipeline conversion for SMR developers including Oklo and NuScale.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool recommends NuScale Power. The Motley Fool has a disclosure policy.