The Nuclear Power Surge: Fueling the Future of Data Centers and AI

The recent news of Constellation Energy (CEG) and Microsoft (MSFT) signing a two-decade-long contract for nuclear power has sparked a surge in utility stocks, signaling a potential "nuclear renaissance" in the energy sector. Analysts have been quick to upgrade and raise price targets on various nuclear power players, seeing the agreement as a harbinger of higher prices for future deals. This article delves into the implications of this landmark contract and the broader impact on the energy landscape, particularly as it relates to the growing demand for electricity from hyperscalers and the burgeoning AI industry.

Powering the Future: The Constellation-Microsoft Nuclear Deal

The Landmark Agreement

The two-decade-long contract between Constellation Energy and Microsoft to provide nuclear power for the tech giant's data centers has been a game-changer in the energy industry. Analysts have hailed this deal as a testament to the value of nuclear power for hyperscalers, with Morgan Stanley estimating that Microsoft is paying around $100 per megawatt hour, a $50 per megawatt hour premium compared to the broader market. This premium suggests that Microsoft was willing to pay as much as $130 per megawatt hour, indicating that higher prices for future nuclear power deals are on the horizon.

The Ripple Effect

The Constellation-Microsoft deal has had a ripple effect on the utility stock market, with fellow S&P 500 nuclear power utilities like Vistra (VST) and NRG Energy (NRG) seeing significant gains. Vistra, for instance, jumped 10.4% on the week, while NRG Energy advanced 1.5% after raising its 2024 guidance, citing the company's ability to "drive growth and capitalize on the emerging opportunities in our markets."

Diversifying Power Sources

The surge in nuclear power demand has also caught the attention of other major hyperscalers, who are now looking to diversify the ways in which they feed electricity to their data centers. According to Morgan Stanley, stocks like GE Vernova (GEV), with its natural gas power generation equipment segment, and Siemens (SIEGY) could benefit from this trend, as hyperscalers seek to expand their energy portfolios.

The Nuclear Renaissance

The Constellation-Microsoft deal has been hailed as a harbinger of a "nuclear renaissance," with analysts predicting that the increased demand for nuclear power will drive higher prices for future deals. This sentiment is echoed by the performance of other nuclear-related stocks, such as Oklo (OKLO), a nuclear power startup backed by OpenAI head Sam Altman, which surged 27% on September 20th after receiving a buy rating and a $10 price target from B. Riley Financial.

Ancillary Beneficiaries

The nuclear power surge has also had a positive impact on ancillary players in the industry, such as Flowserve (FLS), which provides industrial pumps, mechanical seals, and replacement parts for global infrastructure projects. Bank of America analyst Andrew Obin estimates that nuclear power exposure makes up about 3%-4% of Flowserve's total sales, suggesting that the company could see potential upside to its 2026 and 2027 forecasts as nuclear power demand grows.

The AI Connection

The growing demand for nuclear power is not only driven by the needs of hyperscalers but also by the increasing demand for electricity from the burgeoning AI industry. As generative AI programs and other AI-powered applications continue to proliferate, the need for reliable and scalable energy sources to power these technologies has become paramount. The Constellation-Microsoft deal and the broader nuclear power surge are seen as a crucial step in meeting this growing energy demand, paving the way for a more sustainable and efficient future for the AI industry.In conclusion, the Constellation-Microsoft nuclear power deal has ignited a surge in utility stocks, signaling a potential "nuclear renaissance" in the energy sector. This landmark agreement has not only highlighted the value of nuclear power for hyperscalers but has also sparked a broader shift in the energy landscape, with major players seeking to diversify their power sources and capitalize on the growing demand for electricity from the AI industry. As the energy sector continues to evolve, the impact of this deal is likely to be felt for years to come, shaping the future of data centers, AI, and the broader energy landscape.