The news comes as Britain moves forward with large-scale projects, including Hinkley Point C, which will be the country’s first new nuclear power plant in a generation.
Rolls-Royce said it has created a new Small Modular Reactor (SMR) division after landing a cash injection of Â£ 405million ($ 547million, â¬ 473million).
SMR reactors are much cheaper to build than large scale nuclear power plants because the vast majority of manufacturing and assembly is done in a factory, before transport to site.
“Today’s announcement is another step towards implementing the government’s net zero strategy,” Rolls added in a statement.
Environmental groups, however, have said the UK should invest in renewable technologies instead.
The UK government, which is currently hosting the UN climate change summit in Glasgow, aims to achieve net zero carbon by 2050 with the help of nuclear power.
Rolls-Royce, BNF Resources and Exelon Generation will together invest Â£ 195m over three years, along with a state grant of Â£ 210m, the group added in a statement.
“The SMR program is one of the ways in which Rolls-Royce is responding to the need to ensure that the UK continues to develop innovative ways to tackle the global threat of climate change,” said Managing Director Warren East.
“With Rolls-Royce SMR technology, we have developed a clean energy solution.”
The London-listed engineering giant hopes the new company could create up to 40,000 jobs by 2050.
UK Business and Energy Secretary Kwasi Kwarteng called the news a “unique opportunity” to “deploy more low-carbon energy … and ensure greater energy independence”.
The development would “bring clean electricity to homes and further reduce our already declining use of volatile fossil fuels,” he said.
The pressure group Greenpeace retorted that renewable energies were a “safer bet” to achieve climate goals.
“The small modular reactors were supposed to work around the flaws of the larger models, but they don’t,” said Doug Parr, chief scientist at Greenpeace UK.
“They are always more expensive than renewable technologies, there is still no solution to disposing of the radioactive waste they leave behind, and no consensus on where they should be located.”
Friends of the Earth said renewable resources were “woefully underfunded” when reviewing government spending last month.
âGovernment support and funding should be aimed at developing the UK’s substantial renewable resources, such as offshore wind, tides and solar, and strengthening measures to help households reduce energy waste “, did he declare.
British nuclear power plants built in the last century have closed or are nearing the end of their lifespan.
The Hinkley Point project in southwest England, the only nuclear project under construction, is expected to be completed in 2025.
The UK government wants to maintain the 20% electricity it produces from nuclear power to help deliver on its commitment to reduce carbon emissions to net zero by mid-century and fight change climate.