Time To Bet on Geothermal
Why the Rise of Geothermal Could Undermine the Case for Small Modular Nuclear Reactors
Key Points:
Small Modular Nuclear Reactors (SMRs) and Enhanced Geothermal Systems (EGS) are competing technologies in the race to provide firm, dispatchable, and zero-carbon electricity.
The race to First-of-a-Kind (FOAK) deployments is crucial for both technologies, with EGS currently leading, potentially reaching commercial deployment up to five years ahead of SMRs.
SMRs face challenges with an immature supply chain and regulatory hurdles, while EGS benefits from a simpler, more mature supply chain and lower regulatory barriers.
The cancellation of the NuScale SMR project highlights the 'all or nothing' risk profile of SMRs, in contrast to the phased, lower-risk development approach of EGS projects.
EGS is likely to dominate, but policy and industry structures could still influence the future role of SMRs in the energy mix.
In the global pursuit of clean and reliable energy, Small Modular Nuclear Reactors (SMRs) and Enhanced Geothermal Systems (EGS) stand out as promising technologies.
SMRs mark a shift from conventional nuclear power plants. These reactors will be smaller, with outputs typically between 1 to 300 megawatts. Their compactness is theorized to not only enhance safety but also to offer cost benefits through modular construction and scalability.
EGS will expand the potential of geothermal energy by creating artificial reservoirs to extract heat from the Earth. This process potentially allows for geothermal deployment in a broader range of geographical locations compared to traditional geothermal systems.
Both technologies share the same mission; to provide round-the-clock, dispatchable, zero-carbon electricity. As they offer similar benefits, a competition between SMRs and EGS for the future share of electricity generation is on the horizon. Which technology will dominate? To answer this question, let’s explore their developmental progress, potential for cost reduction, the hurdles faced by these technologies, and the prospects of each becoming a mainstay in the energy landscape.
The Race to FOAK
Reaching the First-of-a-Kind milestone is crucial for new technologies, proving their viability and transitioning from concept to reality. This process allows for learning and refinement, putting the technology on the learning curve to reduce costs for future units. EGS is currently ahead in this race, aiming for a 2024 launch, while the first SMR in the Western world is slated for 2029.
SMR FOAKs
With the cancellation of NuScale’s project with the Utah Associated Municipal Power Systems (UAMPS), the GE Hitachi BWRX-300 has become the frontrunner for the first-of-a-kind SMR project in the Western world. Ontario Power Generation is developing a 300-MWe project with GE Hitachi in Ontario, with a commercial start date expected in 2029. Following closely behind is the Bill-Gates-backed TerraPower, developing its first-of-a-kind project for its 345-MWe Natrium reactor in Wyoming with the U.S.-based utility PacifiCorp, targeting a 2030 start date.
Globally, the first-of-a-kind SMR might come online first in China and Russia. The construction of the Chinese 125-MWe ACP100 in Changjiang is well underway, with the reactor now installed on the site and commercial operation expected in 2026. Rosatom is also advancing with the construction of the 300-MWe BREST-300 in Seversk, Russia, with commercial operation expected in the same year. However, these models are unlikely to be deployed in the Western world.
EGS FOAKs
2023 has been an exciting year for the EGS industry, with significant progress in North America and Europe. In the US, Fervo Energy conducted a full-scale well test at its pilot site in Northern Nevada in July. The wells were drilled over 2.3 kilometers deep and extended approximately 1 kilometer in length. The gross electricity output for the wells was assessed to be as high as 3.5 MWe. The unit will be connected to the grid to supply 24/7 power to Google under a power purchase agreement. The company has also begun its drilling campaign in Utah to provide up to 400 MWe of electricity in multiple phases starting in 2026.
In Germany, Eavor Technologies is building four units of its closed-loop EGS technology to provide 8.2 MW of round-the-clock electricity and 64 MW of heat for district heating. Drilling began in July. The wells will be approximately 4.5 km deep and extend about 3.2 km in length. The company plans to connect the first unit by summer 2024 and all four units by 2027.
In the UK, Geothermal Engineering has already completed drilling a 5.3km production well and a 2.4km injection well for the UK’s first geothermal power plant. It is now in the process of designing and constructing the power plant unit to provide 3 MWe of round-the-clock electricity from late 2024.
Cost Reduction Potential
Cost reductions are vital for any new technology. Technology costs generally follow a cost reduction curve where costs decline as production volumes increase. The cost reduction rate might be higher for EGS than SMR due to likely faster knowledge diffusion, lower regulatory burden, and more mature supply chain.
EGS Cost Reduction
Knowledge diffusion is likely to be fast in the EGS supply chain. For example, drilling is the single biggest cost of an EGS project, accounting for more than half of the total capital costs. In the oil and gas industry, drilling is outsourced to drilling contractors such as Nabors Industries and Helmerich & Payne. The EGS industry is also likely to utilize drilling contractors. Since a drilling contractor can work for multiple EGS technology developers, reductions in drilling costs and improvements in drilling techniques can occur independently of the success of any particular EGS technology developers.
Furthermore, EGS regulatory barriers are relatively easier to overcome as they largely bureaucratic in nature, such as securing various permits and environmental assessments. Delays can arise from a lack of regulatory personnel and expertise in the relevant jurisdictions. These issues can be resolved through coordinated and/or centralized permitting processes.
EGS also has a relatively simple supply chain. Delivering a commercial EGS project will probably require six main parties: a developer, a financier, a drilling company, an OEM for an organic Rankine cycle (ORC) turbine, an EPC contractor, and an offtaker. Of these, the last five are already mature entities operating in other sectors. For instance, drilling companies are well-established service providers to oil & gas companies. There are over 30 manufacturers of ORC systems with an installed capacity of nearly 5 GW globally for various heat-to-electricity applications. Given the maturity of the existing supply chain components, it is likely that EGS deployment could scale relatively quickly once the FOAK units have been built to demonstrate commercial viability to lenders and offtakers.
SMR Cost Reduction
In contrast, knowledge diffusion for SMR is likely to be slow. Reactor plant equipment and building structures account for the majority of SMR capital costs. The reactor design is proprietary to each technology developer, and the structure of the building design varies with the reactor design. This means that learnings and cost reductions will be more design-specific. An SMR industry would need to quickly consolidate around one or two designs, similar to aircraft manufacturing with an Airbus-Boeing duopoly, to realize rapid cost reductions. Due to the winner-takes-all nature, industry-wide knowledge diffusion is likely to be much slower in the SMR industry compared to EGS.
Furthermore, SMR regulatory barriers are likely to be costly as they concern safety, where debates around any changes are not necessarily rational or scientific. In the US, utilities must apply for construction and operating licenses for each nuclear site. For example, the approval process for a combined license for the Vogtle nuclear plant in 2008 took four years to complete. Since no SMR has been built yet, it is unclear how long the licensing will take. A high regulatory burden and lengthy lead time increase development and licensing costs. A lower build rate slows cost reductions.
Last but not least, the SMR supply chain is relatively immature. SMR designs require new parts/components/materials that are not already used for traditional nuclear reactors. Potential new suppliers would have to undergo a nuclear vendor certification process. This process takes time and money, and vendors will want to see clear demand before starting it. A shortage of certified vendors could delay construction and increase costs. The US offshore wind industry is an example where the lack of installation vessels compliant with the Jones Act has already caused project delays and cancellations.
For the fuel, many SMR designs require high-assay low-enriched uranium (HALEU) fuel. The US is currently developing a domestic supply of HALEU through the $700 million HALEU Availability Program. Nonetheless, the current lack of a domestic HALEU supply in the US is already causing a 2-year delay to the service date for the first Natrium SMR project.
EGS Embeds De-Risking Whereas SMR Requires All-In
Financial risk profiles can make or break a project. The 'First-of-a-Kind' (FOAK) valley of death in climate tech is a phenomenon where new technologies die at the FOAK stage due to a lack of funding to build the FOAK unit. To this end, the nature of EGS project development makes it less risky compared to SMR.
First, the resource exploration stage of EGS project development materially de-risks the project going into the drilling and construction stage. During this stage, a project developer incurs costs for exploration drilling to identify the availability of geothermal resources for commercial electricity production. Once resource availability is proven, the project risk declines materially and the developer proceeds to advance the successful exploration site to the construction stage. This two-stage process allows EGS projects to attract differentiated capital (private equity during the exploration stage, equity + bank lending during construction), and also provides more cost certainty to offtakers.
Second, EGS's smaller capacity per unit provides optionality to offtakers, allowing projects to be structured in phases. Fervo’s Cape Station project is an example where the project is developed in phases, with the first phase of up to 150 MW being constructed first before ramping up to full 400 MW capacity at later stages.
No such opportunities exist for SMR projects. It's either all in or nothing. The recent cancellation of the NuScale SMR project for the Utah Associated Municipal Power Systems (UAMPS) is a case in point, where insufficient power subscription due to increasing costs led to the project's total cancellation.
Conclusion
Enhanced geothermal and small modular nuclear are two technologies that provide similar products: round-the-clock clean dispatchable electricity anywhere. The success of one technology is likely to eat into the market share of the other.
EGS is edging ahead across the three dimensions examined:
First-of-a-kind EGS units are set to arrive up to 5 years earlier than first-of-a-kind SMRs in the Western world. A 5-year head start allows the EGS industry ample time to address technical challenges and reduce technology costs.
Once the FOAK unit is built, EGS is also likely to have a faster learning rate than SMR because of the industry structure, lower regulatory burden, and a simpler supply chain.
EGS has a lower financial risk profile than SMR, likely making it a more attractive choice for deployment.
This does not mean that SMRs have no role to play in the energy mix. Policy choices and industry structure could favor SMRs over EGS in certain jurisdictions. But beyond those, the role of SMRs might be more limited than currently envisaged.