AI Power Boom winners and losers

The US energy market is poised for a sea change as consumption rises amid the AI ​​technology boom.

Growth in energy demand, led by data centers, has begun to create winners in the US electric sector. Expectations for consumption growth in the coming years are higher wholesale and retail electricity prices, higher profits for power producers and utilities, and higher household bills for consumers.

AI-driven energy demand growth could also trigger legislative changes in some states that could allow utilities to own and invest in power generation capacity.

Power producers’ profits are rising

Many independent power producers are raising their earnings guidance, expecting much higher wholesale capacity auction prices for years to come to continue supporting their earnings.

Amid tighter supply, this year’s capacity auction prices in one of the largest regional US markets rose compared to last year.

PJM Interconnection, which coordinates the movement of wholesale electricity and provides power to 65 million people in all or parts of 13 states in the eastern and midwestern U.S. and DC, said in late July that it had secured resources sufficient to meet the reliability requirements for the 2025/2026 delivery year.

The auction produced a price of $269.92 per megawatt (MW)-day for much of PJM’s footprint, compared to $28.92/MW-day for the 2024/2025 auction. That’s more than a nine-fold jump in a single year.

Key drivers of the higher prices included lower supply bids in the auction, primarily due to generator retirements, an increase in projected peak load and market reforms approved by FERC, including improved reliability risk modeling for extreme weather.

High prices in areas of Maryland, Virginia and North Carolina are “due to insufficient resources in those regions and constraints on the transportation system that limit the ability to import capacity,” according to PJM.

“These prices indicate that those regions would benefit from either additional resources or additional transmission to allow increased imports into those regions, or a combination of the two,” PJM said.

As a result of the high prices that power generators paid in capacity auctions, many power producers raised their earnings guidance when they announced Q2 results this month.

Talen Energy, for example, raised its guidance ranges for 2024 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 USD.

Vistra Corp said it is confident of achieving adjusted EBITDA results for ongoing operations towards the upper end of its 2024 guidance range.

“Furthermore, given our strong coverage profile and recent PJM capacity auction results, we are raising our mid-opportunity range for adjusted EBITDA from ongoing operations in 2025 by $200 million to $5.2 billion to $5.7 billion million dollars,” said Jim Burke, president and chief executive officer of Vistra.

The corporation has begun construction on two new solar facilities, a 200 MW Amazon-backed site in Texas and a 405 MW Microsoft-backed one in Illinois.

Constellation Energy also raised its adjusted operating earnings per share for 2024 as its commercial business beats guidance in a volatile market.

The increase in PJM capacity auction prices will translate to an additional $0.25 in earnings per share (EPS) growth for 2025 and $1.25 in additional EPS for 2026, Constellation Energy said.

Capacity auction prices are likely to remain high over the next few years as power producers race to add more power plants to the grid amid rising 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 US energy market.

Higher prices for consumers

The need for more energy resources and increased investment in transmission lines and grid expansion and modernization will begin to drive up the cost of household electricity prices as utilities, when permitted by regulators, will seek to transfer some between the higher costs and expenses on consumers.

American consumers are poised to pay higher electricity bills as energy providers ramp up investment in much-needed grid improvements amid an aging power system that is not designed to handle rising demand and more frequent extreme weather events.

Over the past year, electricity price inflation has outpaced overall consumer inflation in the United States. Further expected increases in consumer energy rates could cause political backlash in some states and service areas.

“Transmission and distribution costs have been one of the major drivers of retail electricity price increases in recent years,” says the US Energy Information Administration (EIA).

Thanks to the tighter supply, electric utility stocks are on the rebound this year as the rise of artificial intelligence technology has created an unlikely winner in the stock market.

The U.S. energy sector landscape could also be on the cusp of regulatory change as some regionally regulated utilities push for changes to allow them to invest in new generation capacity.

That’s the case with Pennsylvania-based PPL Corporation, whose Vice President of Investor Relations Andy Ludwig said on the Q2 earnings call that the company will “push for legislative changes in Pennsylvania that would drive the development of necessary generation, including the authority which would support regulated investment in next-generation utilities.”

By Tsvetana Paraskova for Oilprice.com

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