Who are the winners of the AI power race?
For some time, it seemed as though owners of existing power plants -- such as Vistra and Constellation Energy -- were in a great spot. With demand growth outstripping new power supply, incumbent power plants could reap higher prices for their output without putting much capital at risk. But recent regulatory changes are muddying this bullish narrative.
Power plant owners have had a rough year on the stock market. Constellation Energy is down 21% year to date, Vistra is down 10% and NRG Energy has shed 25%. By contrast, power equipment makers have had a blockbuster year. GE Vernova and Caterpillar have gained 55% and 47%, respectively. Shares of Howmet Aerospace, which makes blades for those companies' turbines, are up 37%. Solaris Energy, a provider of off-grid power for data centers, is up 28%.
The rotation highlights changes in two major power markets, Texas and the mid-Atlantic, that have tilted in favor of new power capacity with mixed implications for existing plant owners.
In Texas, Gov. Greg Abbott last week ordered a halt on data center connections to the grid, putting a pause on a new process that would have fast-tracked such interconnections. Abbott, who is up for re-election, called for a comprehensive audit to get more information on each data center project. Faster interconnections would have helped raise overall power prices, benefiting Texas-exposed Vistra and NRG.
Industry analysts don't see the move as an outright moratorium. However, there might be "little political incentive" to complete the audit before election day in November, according to research firm ClearView Energy Partners. Even before the pause, many data centers in Texas had been moving ahead with off-grid solutions, working with companies that specialize in modular power. Further delays could accelerate that trend.
Meanwhile, developments at PJM Interconnection, which serves 13 mid-Atlantic states including Virginia, are also less than ideal for existing power plant owners.
Every summer, the grid operator runs a so-called capacity auction to make sure there is enough power supply to keep up with demand, plus a cushion for extra hot or cold days. The process is meant to incentivize the build-out of new power capacity. The grid operator's latest auction failed to attract enough supply for the delivery year that starts in mid-2028. As a result, it is making some changes to compensate for the 6.8-gigawatt shortfall while limiting rate hikes on other ratepayers.
First, PJM plans to run an extra procurement starting late September that would offer capacity payments for additional power sources with terms of up to 15 years. At the same time, PJM plans to play matchmaker between data centers and power providers to facilitate direct contracts. Data centers will have a strong incentive to sign such contracts. Under a proposed PJM rule targeted for June 2027, large data centers that don't bring online their own power supply would be subject to power cuts during times of grid stress.
The net effect will be lower future capacity prices, according to industry analysts. That is unwelcome news for incumbents. Existing generators were "perfectly happy not to build anything" because a tightening market meant capacity prices would just keep going up, said Hugh Wynne, analyst at SSR. This dynamic assured that existing generators could reap higher profits without risking capital, he said.
Bulls argue that PJM's new measures bring certainty that will help companies such as Constellation Energy and Vistra sign more contracts with data centers. These companies could offer expanded capacity at existing power plants, which would be a cheaper option than new projects that face rising equipment and construction costs, notes James West, analyst at Melius Research.
On the company's earnings call last Thursday, Constellation Energy CEO Joe Dominguez argued that the early phase of the data center build-out is going to rely heavily on existing generation. "We're never going to build this economy if the outcome is...we've got to wait for new power plants to be built before we can connect any data center," he said.
Investors will get a clearer picture of who the ultimate winners will be once companies start announcing data center contracts. West says that could happen "any day now." The other big overhang at PJM is the lack of rules around data centers that plan to "co-locate" next to existing power plants. Constellation Energy said it expects more clarity in the second quarter of 2027.
The recent regulatory shifts don't spell doom for power plant owners, but the broad direction of travel favors new power generation -- both on and off the grid. That widens the door for new competition.
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