A Word of Caution on NuScale Power Before You Buy the Dip

There's an old investing rule, popularized by investing legend Peter Lynch, to invest in what you know. It's deceptively simple advice: The better you understand a business, the better equipped you are to recognize its opportunities.

Likewise, greater knowledge of a business improves your ability to recognize things that could potentially go wrong. That second part is especially important.

When it comes to NuScale Power (NYSE: SMR), there's one thing investors should probably know before buying the dip: what its small modular reactors (SMRs) could actually cost to operate. This isn't, to be sure, a question investors can answer with much certainty today, mainly because NuScale doesn't have a commercial reactor in operation.

That said, a newly released study, which has not yet gone through peer review, offers a sobering estimate. And if the findings hold up, the operating costs for NuScale's reactors could pose a much bigger problem to its business than previously thought.

The costs of SMRs could be much higher than they look

The study, which was written by researchers at the University of Colorado Boulder, examined the economics of several leading SMR designs, including NuScale's and Oklo's, to support a pretty surprising point. The "cost problem" with SMRs might not be limited to how much these small reactors cost to build. The bigger problem, so argue the researchers, could be how much they cost to operate.

Indeed, the researchers estimated fuel costs for NuScale's SMR to be $17.42 per megawatt hour (MWh), variable operations and maintenance costs to be $3.55 per MWh, and fixed operations and maintenance costs to be $72.26 per MWh. Add those up, and you're looking at more than $93 per MWh.

That's a major problem when electricity in the historical markets studied by the researchers sold for an average of about $42 to $45 per MWh. And here's another troubling part: The researchers found that NuScale's operating costs could be so high that even if the company somehow built reactors for free, the reactors might still not pay for themselves within their expected lifetime of 60 years.

Obviously, no one is going to build a reactor for NuScale for free, which is what makes the study's findings so striking. In other words, NuScale is going to have to show investors two things: one, it can build SMR plants cheaply; and two, that it can operate them cheaply too. That's quite a lot to ask investors.

Image source: Getty Images.

NuScale's canceled project offers some perspective

NuScale hasn't sold a reactor yet, which is why the economics of operating them remains unknown. It has two ongoing SMR projects, one with a Romanian utilities company, and the other with the Tennessee Valley Authority. If either project gets the green light, the final construction could offer concrete data on NuScale's actual costs.

There was, however, another project. This was the Carbon Free Power Project, which was planned with the Utah Associated Municipal Power Systems. Costs ballooned beyond reasonable control, from an estimated $4.2 billion in 2018 to $9.3 billion in 2023. It was canceled in November 2023.

Of course, that doesn't mean NuScale is doomed to repeat this disastrous outcome. But it does show why investors must be careful about SMR stocks today. Until NuScale proves otherwise, construction and operating costs are two massive albatrosses hanging from its neck. For now, "invest in what you know" might mean waiting a bit before you know enough to invest.

Steven Porrello has positions in NuScale Power and Oklo. The Motley Fool recommends NuScale Power. The Motley Fool has a disclosure policy.