By Jinjoo Lee

When the excitement around artificial intelligence started spreading to power stocks, the rally was concentrated on those with a big portfolio of nuclear power plants, such as Constellation Energy and Vistra. This could now be changing.

Thanks to regulatory scrutiny in key markets of deals between nuclear plants and data centers, most of which effectively draw power away from the rest of the grid, investor favor may shift to others: Companies that can quickly build new gas-fired power plants and vertically integrated utilities.

Shares of NRG Energy, which doesn't own any nuclear capacity, had lagged behind the surge seen by nuclear-owning peers Vistra, Constellation Energy and Talen Energy over the past two years. But on Wednesday, its shares jumped 11% after it made two big announcements.

One was an agreement with gas turbine manufacturer GE Vernova and contractor Kiewit to construct more than 5 gigawatts worth of new gas-fired power plants, which would be enough to power millions of homes. Separately, the company said it is in talks with two data center developers to supply power, primarily from new natural gas-fired plants. Even after a broad selloff among power stocks on Thursday, its shares are outperforming Vistra and Constellation so far this year.

Vistra shares fell 12% on Thursday after it failed to disclose any new contracts in its earnings call. Chief Executive Jim Burke said on the call that "there are a number of questions to be answered" from regulators before Vistra can finalize certain contracts with data center customers. The company expects more regulatory clarity by midyear. Constellation disclosed quarterly results last week without announcing new contracts. Constellation and Vistra operate the largest and second-largest nuclear power fleets, respectively, that operate in competitive power markets.

There are many reasons why funneling energy from existing nuclear power makes sense for data centers. It is quicker than building a power plant from scratch and provides round-the-clock clean power. Because these sites have plenty of land, it is possible to co-locate data centers and possibly dodge transmission fees. The sites also have ready access to cooling water. These are also the most lucrative contracts for power plant owners, who get to charge higher power prices for an existing asset.

But these deals are facing skepticism from regulators in the largest competitive power markets, which are already seeing surging power prices. Late last year, the Federal Energy Regulatory Commission blocked part of Talen Energy's plan to sell power from its existing nuclear power plant directly to Amazon's data center in Pennsylvania. Trump-nominated FERC Chair Mark Christie said an agreement of that type could have "huge ramifications for both grid reliability and consumer costs." The regulators last week voted to launch a review of issues associated with such arrangements in PJM Interconnection, a market that includes Pennsylvania.

Meanwhile, Texas' state Senate introduced a bill a few weeks ago that, if passed, would add transmission costs for large power customers and create guardrails to make sure they don't threaten grid reliability.

None of this spells complete doom for nuclear power plants looking to sign deals. Depending on how regulation shakes out, it could just mean such customers have to pay more transmission fees. The bigger risk is that the regulatory process drags out. FERC's Christie has said the commission would act quickly, but given the sensitivity around grid stability and power prices, there could be legal challenges to their decision.

Time is of the essence for data center customers; they may prefer to ink contracts that involve less regulatory uncertainty. "It's not just the money, it's really the time," notes Stephen Byrd, equity analyst at Morgan Stanley. His team's analysis shows that there is going to be some 42 GW worth of shortfall between data center demand for power and actual grid capacity through 2028 in the U.S.

Easier contracts to strike could include ones for new natural gas-fired power plants, such as those NRG announced. Next to existing nuclear power, new natural gas-fired power is the best bet for AI because it runs around the clock and can be built much faster than nuclear power. Tech companies might also find it easier to put net-zero ambitions on the back burner under the current administration.

NRG said long-term contracts on those new gas-fired power projects could range from $70 to $90 per megawatt-hour, similar to industry analysts' estimate of what Talen Energy's nuclear power plant would get from its lucrative contract with Amazon. There is enough potential profit here that even Exxon Mobil and Chevron, oil majors with higher return hurdles, plan to build new natural gas-fired power plants for data centers. Because there is a limited supply of gas turbines, investors will want to keep an eye on companies that have secured slot agreements.

Vistra, for its part, said it has gas turbines booked for delivery in 2026 and 2027.

More data center customers could also look to work with vertically integrated utilities rather than power producers in competitive markets. Going this route may not come with the same level of speed or long-term fixed price certainty, but it could be simpler because it only involves dealing with one entity, according to Rodney Rebello, co-portfolio manager of Virtus Reaves Utilities ETF. Shares of utilities announcing data center deals have rallied: Entergy, which operates across several Southern states, is up about 74% over the past 12 months, while Alliant Energy, which serves Iowa and Wisconsin, has gained 36%.

As tech companies broaden the pool of prospective contracts, the AI power rally should spread across more stocks, not just a few highfliers.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

March 01, 2025 07:00 ET (12:00 GMT)

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