| Talen Energy sees its proposed colocation deal with Amazon Web Services as a strong solution to meeting the surging demand from datacenters. Source: Amazon Web Services. |
Talen Energy Corp. believes its datacenter colocation deal offers a unique and necessary solution for power-hungry hyperscalers.
Talen has proposed an amendment to the interconnection service agreement (ISA) between its 2,494-MW Susquehanna Nuclear plant in Pennsylvania, the PJM Interconnection LLC and PPL Corp. to serve an Amazon.com Inc. datacenter campus. In March, Talen affiliate Cumulus Growth Holdings LLC sold the datacenter campus to Amazon Web Services Inc. for $650 million.
"I think our first-mover position signing that deal gives us a strategic advantage," Talen President and CEO Mac McFarland said Sept. 5 at the independent power producer's investor day in New York.
"Many of you have heard me say, I hope somebody else in the industry announces a deal," the CEO added. "I just hope we announce our second before anybody else announces their first."
The deal involves a power purchase agreement through which Amazon would buy up to 960 MW of direct, carbon-free power from the adjacent Susquehanna nuclear plant in Luzerne County, Pa.
As part of this process, the parties must amend the ISA "to support the generator, in this case, Susquehanna, providing power directly to the data campus without using the grid," Cole Muller, general manager of Cumulus Growth, said at Talen's investor day.
"We already have amended this ISA to allow for 300 MW to support colocated load," Muller added.
Defending the ISA
PJM in June submitted to the Federal Energy Regulatory Commission an additional amendment (ER24-2172) to the ISA between PJM, Susquehanna Nuclear and PPL subsidiary PPL Electric Utilities Corp. that, among other things, raises the volume of colocated load under the agreement to 480 MW, from 300 MW previously.
The filing was made after PJM and PPL concluded that increasing the colocated load to 480 MW would not create any grid stability or reliability issues, whereas meeting the full 960-MW commitment could create a "minor stability issue" that the company is now addressing, Muller said.
This proposal, however, has been challenged by utilities Exelon Corp. and American Electric Power Co. Inc. (AEP), which warn that ratepayers would bear another $58 million to $140 million per year in transmission system costs under the amendment.
Exelon and AEP also contend the agreement requires the Pennsylvania nuclear plant to incur system charges from PJM Interconnection LLC.
FERC in early August issued a deficiency letter calling for more information from PJM before moving forward with the proceeding.
PJM on Sept. 3 responded to the deficiency letter and provided "a pretty fulsome outline" on the reliability safeguards incorporated in the ISA and "why this is actually reliability enhancing," Muller said.
FERC's response is expected by Nov. 4.
"We continue to be optimistic that once FERC reads PJM's response, goes through it fully and understands the setup we have, the unique characteristics here, that they will move forward and approve the ISA," Muller said.
FERC also set a Nov. 1 technical conference to discuss colocated load arrangements at generation facilities.
"We really think that a rapid resolution here is key. If they don't, and this kind of waffling continues out there, it's going to chill investment. It's going to chill growth," Muller said. "And ultimately, our deal might not be the deal for everyone or every generator out there, but we do think it is one solution of many that can ultimately solve the problem."
'Tremendous opportunity'
McFarland said the sector faces a "tremendous opportunity ... to step up where we are today to power the AI economy."
The Talen CEO, in response to an analyst's question, also acknowledged, "I don't think anything is going to stop the insatiable appetite of the AI datacenter demand."
This datacenter demand provides strong capital growth potential for Talen, management said.
"We like where we are because we have something that other people don't have," McFarland said. "We have the ability to perfect and accelerate the AWS contract, pull that forward, and that is growth. That is real cash flow growth over time that is seeable, and all we have got to do is work it."
This opportunity for growth, however, can be spread out among transmission and distribution companies, and other power plant developers.
"Everybody can have their cake and eat it, too," McFarland said. "That is why I keep saying this opportunity set is so big for the sector. We should all just figure out how to solve it as opposed to argue over who gets to solve it before we even talk about what the solution is."
The key to realizing this potential is for both sides to become more educated.
"I think the power side needs to get smarter about datacenters and I think the datacenter side needs to get smarter about power. It's that simple," McFarland said. "We don't understand the demand, but the demand doesn't understand the supply, either."
When it comes to resource adequacy, datacenters actually have a "white knight opportunity" to help balance the grid through demand response by using backup generation or by deploying the energy needed for machine learning more efficiently, according to McFarland.
Talen also believes that PJM is sending the appropriate price signals to incent the investment needed to solve the resource adequacy issue, which is compounded by rising demand, electrification and policies "that push generation off the grid."
"We're at an inflection point where gas is going to have to solve the problem," McFarland said.
Share buybacks
Talen on Sept. 5 said it secured approval from its board of directors to increase its share repurchase program to $1.25 billion.
The power producer in October 2023 received board approval for a $300 million share repurchase program, later upsized to $1 billion.
Talen has already executed about $930 million of the share buyback program and could repurchase up to $1.25 billion of outstanding common stock through the end of 2026.
In addition, Talen on Sept. 5 introduced 2025 adjusted EBITDA guidance of $925 million to about $1.18 billion and provided a 2026 outlook of $1.13 billion to $1.53 billion of adjusted EBITDA.
The company also issued 2025 adjusted free cash flow guidance of $395 million to $595 million, with the 2026 outlook in a range of $535 million to $895 million.
"Our adjusted EBITDA, or our earnings potential, grows at a significant compounded annual growth rate, well in excess of 30% over the next few years," Talen CFO Terry Nutt said. "What's even more interesting ... is our adjusted free cash flow almost doubles that growth rate."
Talen has incorporated the recent PJM capacity auction results into its 2025 guidance and assumed a similar clearing price for its 2026 outlook.
The auction for PJM's 2025/2026 delivery year cleared at $269.92/MW-day for much of the grid operator's footprint, a nearly tenfold increase from $28.92/MW-day for the 2024/2025 auction, driven by tighter supply, higher demand and market rule changes, according to results posted July 30.
"There's a potential for this to be higher," Nutt said. "So, a $50 per MW-day change in the 26-27 planning year results impacts our fiscal year [2026] adjusted EBITDA by approximately $50 million."