Not Your Mother’s Nuclear Diplomacy: Is Foreign Co-Investment Key To Energy’s Future?

The case of NuScale Power, a privately held U.S. startup that has successfully developed a cleaner, nimbler small modular nuclear reactor (SMR) with help from foreign companies has led some policy observers to take a renewed look at certain provisions of the 1954 Atomic Energy Act.

These provisions, drafted when the Cold War was at full frost and well before the first nuclear reactor was ever produced, have made international investment in U.S. nuclear energy projects extremely difficult. But is it time for a new approach to foreign co-investment in these technologies?

A study of the NuScale case is part of a new and broad-ranging report on nuclear energy cooperation between the U.S. and its defense allies, authored by Dr. Matt Bowen of Columbia University’s Center for Global Energy Policy (CGEP). Dr. Bowen — a former senior advisor in the U.S. Department of Energy’s Office of Nonproliferation and Arms Control, discussed his findings in a recent, virtual panel discussion at CGEP.

NuScale

Founded in 2007, Oregon-based NuScale’s lead strategic investor is the multinational construction holding company Fluor Corporation. Minority investors include U.S. government nuclear power contractor ARES Corporation, as well as privately held engineering firm Enercon Services. The firm currently holds more than 400 patents, either granted or pending, in nearly 20 countries. Its SMR is the first to undergo licensing from the U.S. Nuclear Regulatory Commission (NRC), acknowledged at the international level as a gold standard in safety certification.

NuScale’s value proposition is based on a radically simplified design concept with improved safety resulting from the simplification. Each light-water reactor module, which produces up to 60 MWe (with 12 modules per plant), is small enough to be produced in a factory, transported, and installed in the reactor building (its reactor core is 1/20th the size of larger, standard reactors). And it uses natural convection — rather than mechanical pumps — to circulate water for reactor cooling.

The design is seismically robust, capable of withstanding a “Fukushima-type seismic event,” as well as hurricanes, floods, tornadoes, geomagnetic disturbances, electromagnetic pulse events, and aircraft impact. A single module can power an entire plant in the event that a grid is offline, without need for operator or computer actions, AC/DC power or additional water. Because the modules and associated plant systems are not software-based — they are built, instead, on field programmable gate array (FPGA) technology, thus less vulnerable to cyberattack.

The reactor’s small size also generates economic efficiencies. According to the company, the NuScale SMR is more cost-effective in leveled cost of electricity (LCOE) — the lifetime cost of building and operating a plant divided by its lifetime output — compared to other low-carbon energy options. It also has a more competitive overnight capital cost compared to larger, more complex nuclear reactor technologies.

The quest to develop and bring this technology to market has been expensive. Per Dr. Bowen’s report, based on December 2019 figures from NuScale, commercialization of the NuScale SMR is expected to cost $1.4 billion, of which $900 million has already been spent.

With investment on this scale unfeasible for most any single company, consortiums — including non-U.S. investors — will be crucial in bringing reactor projects to completion.

What(‘s) the FOCD?

But this has been a tough sell in Washington, due to long-standing prohibitions on “Foreign Ownership, Control or Domination” (or “FOCD provision”) of American nuclear power plants under Sections 103d and 104d of the 1954 Atomic Energy Agreement — the Cold War-era legalese that has been called the “primary legal barrier” to investment in U.S. nuclear reactor technology.

“The FOCD provision is inherently problematic because it effectively treats investments from U.S. allies like Canada, France and the U.K. in an equal manner to investments from potentially problematic countries like China and Russia,” Dr. Bowen writes. “This is not consistent with how the U.S. government approaches nuclear cooperation with nations in other contexts, where U.S. allies are differentiated from non-allies.

“If a Canadian or U.K. nuclear reactor company wishes to build its own nuclear reactor design in the United States, and is willing to fund more than half of the costs, it is hard to see why U.S. law should formulaically block them from doing so without consideration for how to facilitate such projects.”

Bowen notes that FOCD provisions have roadblocked several would-be collaborations — 17 specific cases between 1966 and 2014 — on seemingly trivial grounds, and almost all involving countries with friendly relations mutual defense agreements with the United States. Moreover, these restrictions on nuclear reactor investment are starkly at odds with the way the U.S. government handles foreign investment in other energy areas.

Here’s one mind-numbing example from the report. In 2007, STP Nuclear Operating Company (STPNOC), a Texas-based subsidiary of U.S.-based integrated power company NRG, applied for a license to build and operate two new power reactors at an existing nuclear power station that it owned in Bay City, Texas. Another NRG subsidiary, Nuclear Innovation North America (NINA) was ultimately listed as the lead applicant for the project, with STPNOC staying on as operator. But because NINA was only a 90-percent-owned subsidiary of NRG, with 10 percent owned by Toshiba American Nuclear Energy (TANE), a U.S. subsidiary of Japan’s Toshiba Corporation, the project ran afoul of FOCD and underwent years of costly delays and bureaucratic wrangling.

TANE ultimately withdrew from the project, which continued to incur costs without attracting new investors, saying it had “ceased to be financially viable.”

But wait…

Still, as Dr. Bowen notes, there are good reasons to re-evaluate some of the historical and philosophical objections to foreign investment in these areas. One is the global imperative for lower carbon-emission energy sources, and nuclear’s potential as part of the mix.

There are also rising geopolitical stakes. Where the U.S. used to be the leading supplier of reactors to other countries, today there are almost no reactors under construction in the U.S. Instead, Russia is now the world’s leading reactor exporter, while China has accumulated the world’s largest domestic build of reactors. U.S. relations with both countries have lately not been great. And perhaps the U.S. shouldn’t be so quick to cede its role internationally. Alliances sealed with reactors tend to stick: in the words of U.S. Department of Energy, a nuclear reactor build is a 100-year relationship.

Granted, there have been non-FOCD headwinds, in the U.S. and elsewhere. The last decade’s rollouts of Westinghouse’s heavily-touted, next-generation AP1000 plant design were beset with problems. Japan’s nuclear energy fleet has been slow to rebound since the 2011 Fukushima nuclear disaster. Largely in response to Fukushima, Germany expects a complete phaseout of nuclear energy by 2022. And France’s much-anticipated European pressurized reactor (EPR) project has been a decade delayed in development and way over budget.

Friends in allied places

Three non-U.S. companies have been instrumental in bringing NuScale’s SMR nearer the finish line. South Korea’s Doosan Heavy Industries and Construction (DHIC) agreed in 2018 to fabricate and supply parts for NuScale plants, and made a cash equity investment in NuScale with South Korean financial investors.

In 2015, NuScale and Framatome — a subsidiary of France’s mostly state-owned Électricité de France, which already provides nuclear fuel for about 5% of total U.S. electricity generation via a facility its owns in Washington state — announced an agreement for fuel design, testing, and analysis using Framatome’s own light water reactor fuel technology, along with initial fuel loads and later reloads for the first NuScale power plant.

Also in 2015, Ultra Electronics, an early NuScale investor based in the U.K., became a strategic partner and worked with NuScale to design safety-related instrument and control systems for the NuScale power plant.

How did this get through?

Non-U.S. equity investment in projects such as these can be passed after so-called CFIUS (Committee on Foreign Investment in the United States) review.

This interagency process, established in 1975 by Executive Order, allows the executive branch (through CFIUS, which is chaired by the Secretary of the Treasury, and includes the Secretaries of Defense, State, Energy, Commerce, Homeland Security and others) to review any merger, acquisitions or other covered transactions that could result in “foreign control of any person engaged in interstate commerce in the United States.”

Pursuant to a CFIUS review, a transaction can be blocked, suspended, or made subject to conditions (“mitigation”). While the CFIUS review can potentially overrule prior rulings on FOCD violations if the committee finds an investment is “not inimical” to U.S. security interests and objectives, the fact that it is used to appeal previous decisions results in redundancies and bureaucratic overlaps (which investors typically hate). While it is onerous and time-consuming (which investors also dislike), it is a/the bulwark against FOCD.

Co-investment

The CGEP report concludes that “deeper cooperation with U.S. allies on R&D and commercialization of nuclear technology could improve the likelihood of achieving successful reactor demonstration.” How can it work at scale in a way that attracts, rather than repels, investment?

One solution is to eliminate language in the AEA that applies restrictions in a “country-neutral” way — i.e., treating investments from Canada the same way it would those from China or Russia. One such amendment under consideration from the Nuclear Regulatory Commission some years ago would allow the NRC to analyze country risk, more in line with how the U.S. government approaches nuclear cooperation in other contexts.

Secondly, Congress could move to amend the FOCD provisions in sections 103d and 104d of the AEA: the FOCD provisions themselves, which Bowen writes, “effectively decrease the value of nuclear assets compared with other energy projects.”

In order to do this, the report recommends that the Congress amend the FOCD provisions under Sections 103d and 104d of the AEA, as it “effectively decreases the value of nuclear assets compared with other energy projects.”

Finally, Dr. Bowen and colleagues recommend that the U.S. Department of Energy “reassess” its nuclear energy international programs in light of new geopolitical developments, recent state and congressional activity, and — not least of all — the Paris Agreement.