Electricity Is In a Bull Market: Here’s What AI Companies Are Doing To Hedge Against Energy Uncertainty – The Average Joe
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    Electricity Is In a Bull Market: Here’s What AI Companies Are Doing To Hedge Against Energy Uncertainty

    Noah Weidner

    March 26, 2024

    Let’s shed some light on the electricity industry’s recent surge. Thanks to advancements in artificial intelligence (AI), data centers, and the electrification of just about everything, the industry is experiencing its first significant upturn in decades. In December, US grid planner Grid Strategies reported that the era of flat power demand was over — predicting a nearly doubled demand for electricity over the next five years.

    That’s welcome news for electricians, energy titans, and power producers — but raises concerns for American consumers and businesses, who may face higher electricity prices if sufficient power facilities aren’t built. Fortunately for big tech, money talks — and companies have found a workaround to paying the price everybody else pays.

    They’ve got the power: Concerned about securing enough electricity for their energy-intensive AI data centers, tech giants are lining up deals with the less-regulated independent power producers (IPPs) who sell energy to the highest bidder.  Andy DeVries of Credit Sights notes that this trend could signal “rising power prices.”.

    • In recent years, companies like Microsoft ($MSFT) and Google ($GOOG) have signed power purchase agreements with clean energy and nuclear energy producers — part of an effort to offset their fossil fuel use.
    • Earlier this month, Amazon ($AMZN) partnered with nuclear-power producer Talen Energy ($TLNE) to power one of its data centers — paying a ~50%+ premium over market rate.

    Rise of the independents

    According to S&P Managing Director Aneesh Prabhu, companies capable of selling power are “bound to experience tailwinds as power demand rises,” which is one reason why publicly traded IPPs are finding fans on Wall Street — with investors anticipating more major power deals on the horizon.

    • Constellation Energy ($CEG), which owns the largest US nuclear energy fleet, has rallied over 60% year-to-date — making it the S&P 500’s third best-performing stock behind Super Micro ($SMCI) and Nvidia ($NVDA).
    • Shares of other IPPs, such as Vistra ($VST) and NRG Energy ($NRG), have seen gains of nearly 30% and 77% YTD, respectively.

    Early days: This newfound attention marks the first time in 25 years that many IPPs have seen significant interest, and their boom may continue, AI bubble or not. Vistra trades at just 8x its forward EBITDA (compared with 13.8x for the rest of the green and renewable energy industry, according to NYU Stern.) Further major deals could unlock additional value for these companies.

    Read: There Isn’t Enough Water and Electricity To Power Data Centers, America’s Next Gold Rush

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