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The Winners and Losers of the AI Power Boom

The U.S. power market is poised for a major shake-up as consumption is soaring amid the AI technology boom.
The surge in power demand, led by data centers, has started to create winners in the American electricity sector. Expectations of booming consumption in the coming years are raising wholesale and retail power prices, pushing up profits for power-generating firms and utilities, and raising household bills for consumers.
The AI-led jump in power demand could also kick-start legislative changes in some states that could allow utilities to own and invest in power-generation capacity.
Power Producers’ Profits Jump
Many independent power producers are boosting their earnings guidance, expecting much higher wholesale capacity auction prices for the coming years to continue supporting their revenues.  
Amid tighter supplies, this year’s capacity auction prices at one of the biggest regional U.S. markets have soared compared to last year.
PJM Interconnection, which coordinates the movement of wholesale electricity and ensures power supplies for 65 million people in all or parts of 13 eastern and Midwest U.S. states and D.C., said at the end of July that it had secured sufficient resources to meet the reliability requirement for the 2025/2026 Delivery Year.  
The auction produced a price of $269.92 per megawatt (MW)-day for much of the PJM footprint, compared to $28.92/MW-day for the 2024/2025 auction. That’s more than a nine-fold jump in just one year.
The key drivers of the higher prices included decreased supply offers into the auction due mainly to generator retirements, an increase in projected peak load, and FERC-approved market reforms, including improved reliability risk modeling for extreme weather.
The high prices in areas in Maryland, Virginia, and North Carolina are “due to insufficient resources inside those regions and constraints on the transmission system that limit the ability to import capacity,” according to PJM.
“These prices indicate that those regions would benefit from either additional resources, additional transmission to allow increased imports into those regions, or a combination of the two,” said PJM.
As a result of the high prices that power generators cleared at the capacity auctions, many electricity producers raised their earnings guidance when announcing Q2 results this month.
Talen Energy, for example, raised its 2024 guidance ranges, with a new Adjusted EBITDA range of $720 million to $780 million and a new Adjusted Free Cash Flow range of $245 million to $285 million.  
Vistra Corp said it’s confident that it would achieve Ongoing Operations Adjusted EBITDA results toward the upper end of the guidance range for 2024.
“Additionally, given our strong hedge profile and the recent PJM capacity auction results, we are increasing the range of our midpoint opportunity for 2025 Ongoing Operations Adjusted EBITDA by $200 million to $5,200 million to $5,700 million,” said Jim Burke, president and chief executive officer of Vistra.
The corporation has started construction of two new solar facilities, a 200-MW site backed by Amazon in Texas and a 405-MW site backed by Microsoft in Illinois.
Constellation Energy raised its adjusted operating earnings per share for 2024, too, as its commercial business is outperforming the guidance in a volatile market.
The jump in PJM’s capacity auction prices will translate into a $0.25 additional boost to earnings per share (EPS) for 2025 and $1.25 in additional EPS for 2026, Constellation Energy said.  
Capacity auction prices will likely remain high in the next few years as power producers race to add more power plants to the grid amid surging demand.
“What we’re seeing in the [latest] capacity auction is the tip of the iceberg,” Hugh Wynne, co-head of utilities and renewable energy research at SSR, told The Wall Street Journal, commenting on the capacity and supply needs of the U.S. power market.
Higher Prices for Consumers
The need for more power resources and increased investments in transmission lines and grid expansions and upgrades will start to raise the cost of household electricity prices as utilities, when allowed by regulators, will seek to pass on some of the higher costs and capex onto consumers.
U.S. consumers are set to pay higher electricity bills as power providers raise investments in much-needed grid improvements amid an old power system that is not designed to cope with soaring demand and more frequent extreme weather events.   
Over the past year, electricity price inflation has outpaced total consumer inflation in the United States. Expected further hikes in power rates for consumers could spark political backlash in some states and service areas.
“Transmission and distribution costs have been one of the major drivers for increases in retail electricity prices in recent years,” U.S. Energy Information Administration (EIA) says.
Due to tighter power supply, electric utility stocks are on the rebound this year as the surge in artificial intelligence technology has created a most unlikely winner on the stock market.
The U.S. power sector landscape could also be on the tip of regulatory changes as some regionally regulated utilities are pushing for changes to be allowed to invest in new generation capacity.
Such is the case with Pennsylvania-based PPL Corporation, whose Vice President for Investor Relations, Andy Ludwig, said on the Q2 earnings call that the company would be “advocating for legislative changes in Pennsylvania that would drive needed generation development, including authority that would support regulated utility investments in new generation.”
By Tsvetana Paraskova for Oilprice.com
Aug 17, 2024 10:31
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