Navigating the Ups and Downs of the AI Power Surge

The U.S. power market is on the verge of a significant transformation as consumption surges due to the AI technology boom.

The increase in power demand, primarily driven by data centers, is beginning to create winners in the American electricity sector. With expectations of increased consumption in the coming years, both wholesale and retail power prices are rising, leading to higher profits for power-generating firms and utilities, while also increasing household bills for consumers. This AI-induced spike in power demand could also trigger legislative changes in some states, potentially allowing utilities to own and invest in power-generation capacity.

Power Producers’ Profits Jump

Many independent power producers are adjusting their earnings guidance upward, anticipating much higher wholesale capacity auction prices in the coming years to sustain their revenues. With supplies tightening, this year’s capacity auction prices in one of the largest regional U.S. markets have increased significantly compared to last year.

PJM Interconnection, responsible for coordinating the movement of wholesale electricity and ensuring power supplies for 65 million people across 13 eastern and Midwest U.S. states and D.C., said at the end of July that it had secured enough resources to meet the reliability requirement for the 2025/2026 Delivery Year. The auction resulted in a price of $269.92 per megawatt (MW)-day for most of the PJM area, compared to $28.92/MW-day for the 2024/2025 auction, marking more than a nine-fold increase in just one year.

The main factors driving the higher prices included fewer supply offers into 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.

According to PJM, the high prices in regions like 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.” PJM further noted, “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.”

As a consequence of the high prices that power generators secured at the capacity auctions, many electricity producers have raised their earnings guidance when announcing their Q2 results this month. Talen Energy, for instance, 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. Similarly, Vistra Corp said it is confident about achieving Ongoing Operations Adjusted EBITDA results toward the upper end of the guidance range for 2024. Vistra’s President and CEO, Jim Burke, remarked, “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.” The company has begun constructing two new solar facilities: a 200-MW site supported by Amazon in Texas and a 405-MW site backed by Microsoft in Illinois.

Constellation Energy also raised its adjusted operating earnings per share for 2024, as its commercial business outperforms its guidance in a volatile market. According to Constellation Energy, the increase in PJM’s capacity auction prices will contribute an additional $0.25 to earnings per share (EPS) for 2025 and $1.25 to EPS for 2026.

Capacity auction prices are expected to remain high in the coming years as power producers rush to add more power plants to the grid to meet the soaring demand. Hugh Wynne, co-head of utilities and renewable energy research at SSR, told The Wall Street Journal that “What we’re seeing in the [latest] capacity auction is the tip of the iceberg,” referring to 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 lead to higher household electricity prices. When regulators permit, utilities will seek to pass on some of the higher costs and capital expenditures to consumers.

U.S. consumers are expected to pay higher electricity bills as power providers invest more in critical grid improvements to cope with the surging demand and more frequent extreme weather events amid an aging power system. Over the past year, electricity price inflation has exceeded total consumer inflation in the United States. Anticipated further increases in power rates for consumers could lead to political backlash in certain states and service areas. According to the U.S. Energy Information Administration (EIA), “Transmission and distribution costs have been one of the major drivers for increases in retail electricity prices in recent years.”

Due to tighter power supply, electric utility stocks are making a comeback this year as the surge in artificial intelligence technology has created an unexpected winner on the stock market. The U.S. power sector landscape might also be on the brink of regulatory changes, with some regionally regulated utilities pushing for the ability to invest in new generation capacity. Pennsylvania-based PPL Corporation exemplifies this trend, with its Vice President for Investor Relations, Andy Ludwig, saying 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.”