The Great Alignment
An Infrastructure Bank, High Performance Compute, and Tokenization is the mixture needed to make new nuclear capacity hit escape velocity.
Six months ago I wrote about Bitcoin mining accelerating the arrival of the neo-atomic age. The first phase of this has already begun with miners like Terawulf, Cleanspark, and others soaking up existing nuclear capacity. There’s no reason on the horizon why this wouldn’t continue, strengthening the economic sustainability of the existing fleet of older reactors. This is great but what happens after miners fill the existing demand gaps?
The electricity generated by our existing fleet is low cost and extremely reliable, with coal and natural gas acting as its only close competitors. However, the capital costs of existing capacity have already been absorbed by governments as well as large utilities, energy companies, and their commercial and retail customers decades ago. Building new capacity is capital intensive, making the upfront investment needed a formidable barrier to expansion.
On a positive note, there’s been a huge uptick of financial interest in nuclear energy by techno-optimist Angels/VCs and traditional players starting to acknowledge and invest in a burgeoning nuclear renaissance. Public excitement, government policy, and investor interest are at local all time highs for nuclear power but are there enough customers and financiers?
NuScale Neutered
Just recently the pro-nuclear momentum has taken a big hit with the recent termination of a project the pro-nuclear movement was justifiably excited about.
“…it appears unlikely that the project will have enough subscriptions to continue toward deployment. Therefore, UAMPS and NuScale have mutually determined that ending the project is the most prudent decision for both parties.”
As the first and only operator to have a “Small Modular Reactor” with a design certified by the U.S. Nuclear Regulatory Commission, this is understandably very disappointing for NuScale and advocates of the nuclear renaissance.
According to Deseret News, the project needed to have an 80% subscription rate to remain financially viable, but it was not able to maintain that threshold. The once hyped agreement was slowly falling apart due to continuous increases in projected $/MWh until it met a point of no return. In the US, there are only two other new nuclear builds in the pipeline, courtesy of X-energy and Terrapower, and these projects have yet to agree on the terms of their commercial contracts with their respective customers.
If we zoom out and look at the global picture for new generation there are many bright-spots such as China, India, Russia, and the UAE but the United States and the West in general, are comparatively sluggish.
If utilities like UAMPS are backing out and X-energy and Terrapower are still working out the details of their commercial contracts in the US, we have to ask, is their enough demand to fund the factory fabrication flywheel?
The narrative around SMRs centers around the benefits of economies of scale. But this narrative falls apart if there isn’t enough demand to move inventory out of the factory and reinvest that revenue into refining and expanding the production process to again move new generation that’s financially more digestible. Lack of demand, coupled with emerging international competition from China, Russia, and others spells trouble for firms in the United States as well as the West more generally. They might have trouble getting the necessary momentum to achieve the economies of scale desired, if not addressed.
On-line & On-chain
Traditionally, governments and utilities have been the primary financiers and consumers of nuclear energy production. They’ll continue to play a large role but neither will want to shoulder the entire burden going forward due to weaker balance sheets, atrophied state capacity, and competing interests pulling them in different directions.
Although NuScale’s municipal contract fell apart another project of theirs points to an emerging force attracting capital to new nuclear capacity.
In October of this year, NuScale announced a partnership with Standard Power, a hosting provider for high performance compute (HPC), to provide them with 77 SMRs that in total produce up to 2GWh of nuclear energy! I don’t know if this specific project will work out; the NuScale/UAMPS looked promising at one time as well. The Standard Power partnership is a large, ambitious project involving fairly young organizations without long track records of successful execution. But, the outline of this deal points to the promise of high performance computing’s (HPC) ability to bring in financing for new capacity.
Presumably, Standard Power has successfully made this case to a group of UHNW family offices (according to their website) but it’s unlikely there are enough UHNW family offices with the patience and risk tolerance required to fund these projects at global scale. It’s a great start but relying on UHNW family offices probably isn’t a highly replicable and scalable financing model.
After doing a little digging on nuclear financing, I came across an organization trying to create a more dependable and deeper source of financing.
International Bank for Nuclear Infrastructure (IBNI)
The mission of the IBNI is to become the de-facto multilateral financing institution for nuclear energy, providing the capital, expertise, and coordination for projects inside its member countries. The infrastructure bank’s strategic advisory group is currently recruiting interested countries to provide the initial capital and permission to seek additional funding in global capital markets. The group has a roster full of experienced professionals with the skills and connections necessary for a project of this magnitude. Given the group’s deep capabilities and the announcements made at COP28, they have a favorable chance of making this institution a working reality.
The IBNI would create an opportunity and risk sharing framework for governments to collaborate, avoiding the need to allocate all of the capital needed to build new capacity in their country and all the risk that entails. The nuclear supply chain, material, capital, and talent, is international; a global infrastructure bank that is dedicated to the intricacies and peculiarities of nuclear energy would be a welcome addition.
I haven’t seen it in their materials yet, and if they haven’t already, the IBNI should look to include HPC organizations, for-profit and non-profit, in their operating model. They’re dependable sources of demand for new capacity and might be interested in being equity investors in the bank or specific projects sponsored by the bank. Digital infrastructure companies, like Microsoft, Marathon Digital and others like them, have massive and growing energy needs as well as large, growing balance sheets. The IBNI is in a great position to bring HPC into alignment with the traditional stakeholders of nuclear energy in a way that everyone benefits.
Tokenization
Assuming the IBNI is successful in bringing in the necessary capital and stakeholders, they’d be well served focusing a small portion of its attention exploring the tools and opportunities that the new on-line and on-chain environment provides. These are small trends and immature tools but given IBNI’s long-term goals, this nascent space of on-chain capital formation should be an area of interest and exploration given the affordability of capital intensive projects, like nuclear energy, are extremely sensitive to the cost of capital.
Traditional investors should read “tokenization” as “on-line and on-chain” securitization. The tokenization of gold, real estate, treasuries, investment funds, uranium as well as other forms of “real-world assets” have begun in earnest. What’s happening is the financial equivalent of bringing media properties like music, news, movies, and television on-line, increasing access and distribution capabilities.
An energy generating asset has some overlaps with that of a real estate asset. In both cases we have a physical asset providing a service to a customer. Space and shelter, in the case of real estate, electricity and/or heat, in the case of a generating asset. The customer paying for the electricity/heat is in effect, the leas-see of the generating asset. Refining and applying the methods of real estate tokenization to capital assets like a micro-reactor isn’t as far fetched as it might sound.
There is already a small market for “energy backed” securities that exists in traditional markets in the form of bundled Power Purchase Agreements (PPAs), issued primarily by renewable energy players. The general groundwork for this type of market has already been laid over the past decade. In principle, securitizing nuclear PPAs, contracts for difference, or similar contracts is a logical extension of that market. I’m not implying this is easy, far from it, but it is something an infrastructure bank should and could be able to make happen. Creating baseline quality guidelines for securitization, standardizing contracts, and advising credit rating agencies on how to evaluate a pool of contracts are all actions an organization like an IBNI could play a meaningful role in.
But, why tokenize when the traditional market already exists?
Tokenization increases accessibility and programmability, which in turn decrease the cost of capital, the raison d'être of new methods of financing. The securitization process is designed to bring down the cost of capital and transmuting that process into a natively digital instrument can put more downward pressure on capital costs.
Tokenization opens up nuclear finance to a whole new market for capital. Creating a larger, automated pipeline for global capital to flow through could be the difference between breaking ground on new capacity or promising projects never getting off the ground.
A noteworthy side benefit of this opening, is increasing participation increases general support and good-will for these projects. A wider surface area of social interest can put pressure on regulatory bodies to be efficient and make political power brokers captured and backed by hostile interest groups think twice before trying to kill projects not in their sponsors’ interest.
The other aspect of tokenization (on-chain securitization) that bring down the cost of capital is programmability. In traditional finance there are a cacophony of middle men providing services and taking fees that can be performed by “smart” contracts. Below is a diagram put together by PwC that illustrates this:
Many of these services can be reduced down to a few simple functions:
Collection and Distribution of Payments
Buying/Selling
Calculation/Valuation
Auditing
These are functions that can be automated by smart contracts, reducing the overhead of securitization and increasing the speed at which these functions can be performed. The functions that can’t be automated specifically by smart contracts might be automated by a digitally native platform that provides an easy to use interface for originators and investors to interact more directly with one another for a much smaller overall fee. Investment banking, legal, and other fees might be sidestepped altogether or reduced substantially in this new model.
The infrastructure to get this done isn’t there yet but if we extrapolate the development trend from the creation of bitcoin to where on-chain financing is today coupled with a growing and maturing PPA backed securitization market, the “tokenization” of generation assets is poised to slowly, then suddenly, move out of fictional finance and into a serious source of capital over the course of my lifetime. If the IBNI secures the international backing it desires, it could be in a good position to make this a reality.
Energy Abundance, Sound Computing, & Open Finance
A dedicated multilateral infrastructure bank leveraging global, high performance compute and innovative financing has the potential to help next generation nuclear hit escape velocity. Facilitating global coordination, securing dependable revenue, and lowering capital costs are all crucial aspects of creating a new energy paradigm.