By Jinjoo Lee
Investors looking to ride the artificial-intelligence wave have turned their eyes to a sleepier corner of the market -- companies that own and operate power plants. Is the run-up justified?
AI hype has helped lift Vistra stock 85% year to date. That falls short of Nvidia's eye-watering 92% surge, but is far greater than the 12% lift that Microsoft has seen over that time. Constellation Energy, the owner of the U.S.'s largest fleet of competitive nuclear generation capacity, has rallied 60% year to date, while NRG Energy is up 32%.
U.S. electricity demand has been relatively flat since 2010, thanks to energy efficiency. Now, the prospect of data-center growth due to AI, as well as a Chips Act-driven nearshoring of manufacturing and the electrification of things like heating and transportation, are expected to drive electricity demand growth. McKinsey, BCG and S&P Global Commodity Insights all project electricity demand tied to data centers to increase at a compound annual growth rate of between 13% and 15% through 2030. PJM Interconnection, whose jurisdiction includes data center-heavy Virginia, expects total electricity demand to grow at an annual rate of 2.4% over the next 10 years, up from its year-ago forecast of 1.4%.
This comes as the U.S. power market has been tightening for seven straight years, notes Steve Fleishman, equity analyst at Wolfe Research. Meanwhile, the time it takes for new capacity to go from the planning stage to commercial operation has only gotten longer as grid operators face long backlogs.
A nuclear-power purchase agreement announced earlier this month between Talen Energy and Amazon.com was a clear signal that clean, always-available power can command lofty rates. Based on the announced terms, Talen Energy appears to be getting at least a 50% premium over what its nuclear power plant would otherwise get in the power market today, according to estimates from Rodney Rebello, analyst for Reaves Asset Management, which manages a utilities-focused ETF.
Any company that is net long power -- that is, those that have more capacity to sell power than the obligation to buy power (say, on behalf of retail energy customers) -- are bound to experience tailwinds as power demand rises, notes Aneesh Prabhu, managing director at S&P Global Ratings. Few listed companies fall into this bucket, which might explain the concentrated rally. Vistra and Constellation are part of this club, as is NRG, though it has less generation capacity, according to Prabhu.
The first order impact is that any generator signing new power purchase agreements with data centers is likely to see a premium on the contracted prices. Those with clean, always-available nuclear power generation have a leg up here. Not only do nuclear power plants already have access to cooling water, but they also tend to be on large sites that make it feasible for companies to co-locate data centers (saving them the cost of connecting to the grid), according to a recent report from Morgan Stanley. In addition to Constellation and Vistra, PSEG has nuclear capacity suitable for data centers. As those contracts pull out existing capacity from the grid, any company that owns power generation should benefit from higher electricity prices.
Renewable and battery storage developers such as AES and NextEra Energy are likely beneficiaries, too, because nuclear generation alone won't be enough to meet all data-center energy needs. Their shares haven't rallied as much after jitters regarding high interest rates and supply-chain bottlenecks.
Bloom Energy, provider of on-site fuel cell-powered electricity, is another potential beneficiary. And Quanta Services, which helps build transmission lines, has rallied 18% year to date. While regulated utilities won't see the same kind of upside that unregulated power generators do, the rising investment needed in the grid will likely mean faster profit growth.
Anyone looking to profit off the AI theme would do well to keep a basket of electricity-exposed stocks in their basket.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
March 26, 2024 05:30 ET (09:30 GMT)
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