US independent power producers' stock prices are soaring ahead of expected financial windfalls as electricity markets tighten, with datacenters' projected energy needs fueling much of that surging demand.

Since providing details about datacenter-related opportunities during their full-year 2023 earnings calls, Vistra Corp., Constellation Energy Corp. and NRG Energy Inc. shares have spiked 34%, 39% and 22%, respectively, as of the March 26 close. Merchant generators are also forecasting earnings outperformance in coming years, thanks in part to hyperscalers — large cloud service providers that offer computing and storage services at a massive scale and rely heavily on datacenters as part of their core business.

The sector, felled by cost cutting and refinancing less than a decade ago, is poised to capitalize on tech companies' insatiable appetite for round-the-clock power. The upside is set to come from both spiking power prices and long-term contracts to supply datacenters backed by generation asset colocation, according to industry analysts.

"What is most notable as a trend is this behind-the-meter colocation dynamic and I also think the concentration in certain markets" like PJM Interconnection LLC and the Electric Reliability Council of Texas Inc., Julien Dumoulin-Smith, Bank of America managing director of US power and utilities research, said in an interview.

"To see the interconnection issues effectively obviated by pulling assets off the grid, I don't say it's entirely resolved," Dumoulin-Smith added, noting that independent power producers can connect gas and nuclear plants directly to datacenters, enabling tech companies to bypass lengthy queues and minimize costs. "But that's the real point of margin expansion in long-term contracting and de-risking for the power space that we haven't seen before."

Talen Energy Corp. affiliate Cumulus Growth Holdings LLC recently sold its hyperscale datacenter campus in Pennsylvania to Amazon Web Services Inc. for $650 million. The campus, which has up to 960 MW of datacenter capacity, is adjacent to and will be powered by Talen's 2,494-MW Susquehanna Nuclear power plant in Luzerne County, Pa. Talen will both supply nuclear energy through a power purchase agreement and earn additional revenue from the Amazon.com Inc. subsidiary for any remaining power sold to the PJM market.

Since the March 4 announcement, Talen's stock price has risen 20% as of the March 26 close.

IPPs detail 'leverage'

Analysts at Morgan Stanley in a Feb. 20 note to clients estimated that Vistra, which has a 6.5-GW nuclear portfolio, could add $131 million of EBITDA and increase its valuation by 8% for each 1 GW of capacity contracted to new datacenter customers with 24-hours-a-day, seven-days-a-week operations.

Constellation, which has nearly 23 GW of nuclear generation capacity, expects federal tax credits to drive a 10% compound annual EPS growth rate through the end of the decade, but sees an "opportunity to do better since this outlook ... does not include getting paid for our clean and reliable attributes through datacenters," Executive Vice President and CFO Daniel Eggers said on a Feb. 27 earnings call.

"Today, it's not uncommon to see 100-MW datacenters, and with our clients, we're talking about datacenters that approach 1,000 megawatts," Constellation President and CEO Joseph Dominguez added.

The International Energy Agency projects US datacenter electricity consumption to grow from 200 TWh in 2022 to about 260 TWh in 2026 and account for 6% of total power demand. Grid planners have almost doubled the five-year load growth forecast, consulting firm Grid Strategies LLC wrote in a recent analysis based on filings with the Federal Energy Regulatory Commission.

Most other hyperscalers will likely not be interested in single-unit nuclear sites, according to analysts at Guggenheim.

"We remain cautious on applying the Talen deal to the entire sector," they wrote March 25. "Specifically, by all indications, actors in the space are moving judiciously on nuclear colocations in particular, with developer commentary pointing to specific issues with why some sites may be unworkable."

Vistra, however, is not concerned that the single-unit nuclear plants it will acquire in its $3.4 billion Energy Harbor Corp. merger deal may not attract datacenter customers interested in behind-the-meter services.

"While the redundancy may not be there on a single unit site, pulling from the grid would still be an option," President and CEO James Burke told analysts and investors Feb. 28. "We're seeing customers approach us at a rate that we haven't seen in my history with this industry."

Even as NRG increases its focus on home services and no longer owns nuclear facilities, the independent power producer (IPP) is considering adding up to 1.5 GW of dispatchable, gas-fired capacity in ERCOT. Increasing demand from hyperscalers "makes that ... more interesting," Executive Vice President of NRG Business Robert Gaudette said Feb. 28.

IPPs in general have greater potential than regulated utilities to translate tight electricity demand into earnings.

"They have much more leverage to this whole theme," whereas utilities may only see their 5% to 7% compound annual growth rate "lengthened and strengthened," Neil Kalton, managing director of utility equity research at Wells Fargo Securities, noted in an interview.

Analysts at Mizuho on March 6 emphasized that for regulated utilities, "[commercial and industrial] rates typically offer a lower tariff compared to residential."

Both Wells Fargo's Kalton and Bank of America's Dumoulin-Smith cautioned that excess capacity could dull IPPs' advantage, and there is no guarantee that datacenter demand will be a long-term tailwind.

Still, "there's a good argument to be made that for the next five or 10 years, this is setting up to be a pretty positive environment for IPPs," Kalton said.