Artificial intelligence is shining its aura on one of the most benighted corners of the stock-market. While two AI hardware firms top the S&P 500 leaderboard so far this year — Super Micro Computer Inc. and Nvidia Corp. — a close third is Constellation Energy Corp., which runs the sort of nuclear power plants that were cutting edge maybe half a century ago.
While human intelligence needs regular doses of water, snacks and sleep, the artificial kind devours electricity pretty much non-stop. Forecasts of US data centers’ power consumption tripling by the end of the decade have sparked life into the stocks of independent power producers, or IPPs, like Constellation. Their rally heralds a profound shift in US energy, with implications extending to nuclear power, the wider grid and household electricity bills.
As revivals go, this is Lazarus level. The last time IPPs — which produce and sell wholesale electricity competitively, distinct from regulated utilities — were this hot was about 25 years ago. Deregulation in the 1990s spurred a frenzy of power-plant construction and electricity trading that reached an apotheosis (of sorts) with Enron Corp. Then came a combination of regulatory backlash, cheap shale gas — which sunk power prices — and electricity demand flatlining after 2007. Many IPPs fell into bankruptcy and investors largely deserted the sector (see this). To understand how unloved they were, consider that Vistra Energy Corp. is up 78% this year — and still trades at only about 8 times forward Ebitda with a free cash flow yield of nearly 13%.
Perhaps more importantly, there is an actual deal to point to between Big Tech and a power generator. Talen Energy Corp. announced earlier this month that it was selling a datacenter, co-located with a nuclear power plant in Pennsylvania, to Amazon.com Inc.’s web services arm. Amazon also signed a long-term power supply agreement with the plant at an undisclosed price but assessed by analysts to be in the $70-per-megawatt-hour range, a significant premium to prevailing electricity futures, which are more like $40 or $50. That premium likely represents a mix of implicit carbon pricing — since nuclear power is emissions-free — and an expectation of rising power prices in general, says Andy DeVries, a utilities analyst at CreditSights.
Co-located nuclear power is tailor made for AI, given reactors run about 90% of the time and so do datacenters. Being onsite also means avoiding the hassle and costs of using the local grid: While $70-ish would be a premium to current wholesale electricity prices, it is way lower than average commercial tariffs on grid-supplied power, more like $110 in Pennsylvania. This is clearly an intriguing opportunity for other IPPs with nuclear plants, such as Constellation and Vistra.
Read the full article here by Liam Denning of Bloomberg News, Advisor Perspectives
