The AI investment boom is breathing life back into companies that were until recently relatively unloved by investors, as the scramble to build data centres and secure the critical infrastructure around them leads to transformational deals for once-struggling sectors.
Independent power producers are among those riding the crest of the AI wave, with a handful of suppliers signing multibillion dollar deals with the likes of Alphabet, Meta and OpenAI to provide electricity to a new generation of power-hungry data centres across the US.
The deals have led to a surge in valuations and triggered a rethink about the creditworthiness of some IPPs, with banks and investors that had until recently been wary about lending to the sector now open to funding their expansion – and on favourable terms.
Vistra is one company riding the wave. The utility, which operates gas, coal and nuclear power plants, emerged out of the TXU bankruptcy in 2016. For years, it struggled to shake off the shadow of the bankruptcy, with its share price flatlining and ratings agencies judging it a junk credit.
But its shares have quadrupled over the last two years as the AI boom has triggered a scramble to secure power deals with independents like Vistra. Last week it struck a deal to supply up to 2.6GW of power to Meta data centres – including its flagship Prometheus “supercluster” in Ohio. It also sold a US$2.25bn secured bond offering to fund its latest acquisition and is eyeing investment-grade status.
Meta also announced deals with nuclear startups Oklo and TerraPower that – together with the Vistra deal – will lock in 6.6GW of power supply, enough to supply five million homes. Last year, it inked a deal with Constellation Energy to extend the life of a nuclear power plant in Illinois.
Unlocking finance
The International Energy Agency expects power consumed by data centres globally to double over the next four years, to around 945TWh – more than all the energy consumed by Japan each year. It projects that the US will account for by far the largest chunk of that increase.
“Access to power remains a key constraint for new data centres in most markets, with utilities and independent power producers working overtime to meet this once-in-a-generation surge in power demand,” Moody’s analysts wrote in a report published this week.
The ratings agency expects the AI boom to spur investment in gas-fired plants – particularly in the shale-rich regions of Ohio, Pennsylvania and Texas. It is no coincidence that many of the new AI hyperscaler facilities are being built in these regions, close to cheap supplies of shale gas.
Rising demand from hyperscalers is a shot in the arm for independents that have in recent years been forced to offer concessions like collateral and juicy coupons to investors to lock in financing. Many struggled as a result: Talen Energy, a peer of Vistra, filed for bankruptcy in 2022, although bonds issued by Talen in October have surged three points since.
Buying plants
Many are now striking deals to buy up old plants that were due to be mothballed by regulated utilities, which have been under pressure to move into renewables. Vistra recently bought 10 gas power plants for US$4bn. Rival NRG Energy last year bought 18 plants for US$12bn.
“A top priority for any IPP is to sell electricity at the highest price and generate returns for shareholders,” said Jake Weimer, a credit analyst at investment management firm PPM America. “They see more accretive opportunities from buying existing natural gas plants versus renewable assets or the construction of a new gas plant.”
“Regulated utilities will continue to build renewables driven by state mandates, but IPPs are focused on cash generation and see better value in buying existing natural gas plants. It’s now more cost effective for them to buy existing plants as new gas plants are currently three to four times the cost of existing plants."
While bond markets have been a critical source of financing for those acquisitions, bond investors are likely to draw the line at financing the ambitions of new ventures being backed by the likes of Meta to develop new untested technologies.
As well as its deal with Vistra, Meta also signed deals with two startups. Oklo will build a new nuclear power plant, while Bill Gates-backed startup TerraPower will develop new reactors. Both are likely to rely on venture capital to fund their ambitions, say investors.
“We suspect that would be funded with cash as many investors may not be willing to add startup nuclear risk given past issues with nuclear projects in the US,” said Weimer. “On behalf of our clients, we would need significant creditor protection to participate in such an opportunity.”
Separately, OpenAI and SoftBank have also struck a deal to each inject US$500m of equity into SB Energy, which is developing a 1.2GW data centre in Texas that will form part of their Stargate joint venture. Alternative asset manager Ares is also injecting US$800m of redeemable preferred equity.