For Utilities Stocks, Wait and Watch When It Comes to Nuclear Plant Deals

As the artificial intelligence industry continues to boom, with data centers requiring more and more electricity, partnerships with nuclear plants are being explored as a source of cleaner, lower-cost power solutions.

Data center demand has been one of the factors driving utility stocks higher this year. However, nuclear power plant deals may only have limited benefit across the industry, according to Morningstar energy and utilities equity strategist Travis Miller. Among the utility stocks covered by Morningstar, Vistra VE is the only company in a position to reap significant benefits.

By 2032, the Morningstar base case expects data center demand to grow 46%. With this hunger for power, the connection between nuclear power plants and data centers has generated headlines this year. Miller points to the buzz around potential partnerships between data centers and nuclear plants (particularly small modular reactors) following recent announcements from Microsoft MSFT and Amazon AMZN. “Nuclear plants’ year-round, low-cost, emissions-free power matches well with data centers’ constant energy needs,” Miller says.

In March, Amazon announced a deal to acquire power from Talen Energy’s TAL Susquehanna nuclear plant. In October, Microsoft announced an agreement to buy power from Constellation Energy’s CEG Three Mile Island nuclear plant. Three Mile Island, the site of an accident in 1979, has been shut down since 2019.

Among stocks covered by Morningstar, Travis points to Vistra as a utility that could benefit from a data center deal involving nuclear energy. “Vistra is the only utility we cover with material upside to nuclear/data center partnerships,” he says. “Three of Vistra’s four nuclear plants are good candidates, in the same region as Susquehanna and Three Mile Island. A data center contract could come with higher margins than Vistra earns in the wholesale power markets.”

But he notes that Vistra stock, which has a Morningstar Rating of 1 star, is expensive: “The stock has tripled in the year to date—the best performer in the S&P 500—and trades 2.5 times higher than our $46 per share fair value estimate as of Sept. 25, 2024.” He adds that Morningstar does not include nuclear data center contracts in fair value estimates, “in part due to regulatory risk.”

How US Nuclear Data Center Deals Could Affect Utility Stocks

More broadly, the Amazon-Talen deal faces regulatory opposition from other utilities. And the benefits to other utilities don’t appear to be meaningful. “We don’t expect nuclear data center partnerships to have a material impact on other utilities,” says Miller. He notes that the recent investor excitement and the noise around the potential partnerships are insufficient to signal a nuclear revival. “We think utilities are unlikely to build SMRs without certainty that they can sell electricity at state-regulated rates that cover the plants’ costs plus a return on investment,” he adds.

“In the near term, we think utilities will explore opportunities like Dominion’s D nonfinancial SMR partnership with Amazon, announced Oct. 16. We think likely candidates are utilities with data center interest in their service territories and nuclear experience. These could include Southern SO, Entergy ETR, Duke Energy DUK, and American Electric Power AEP.” In addition, many utility stocks are trading at unattractive levels. “US utility stocks have had a rally since October 2023, which left many trading well above their fair value,” he notes.