Why Data Centers Are Turning Energy Stocks Into AI Plays

Hyperscalers are investing in data centers at an astounding pace. However, these data centers are facing a major bottleneck: energy. While constructing a data center may take up to two years, developing the necessary grid infrastructure can take four to 10 years, or longer.

Demand is only going up from here. According to the International Energy Agency, data center power consumption averaged about 540 kilowatt-hours (kWh) per capita in 2024, with projections indicating it could rise to 1,200 kWh per capita by 2030.

Companies with power capacity to meet the expanding energy demands of data centers, such as Constellation Energy (NASDAQ: CEG) and Vistra Energy (NYSE: VST), are positioning themselves as key players amid this AI-driven capex boom.

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Energy stocks have gone from boring, stable investments to AI growth plays

Energy stocks are historically viewed as low-growth, defensive stocks due to their stable businesses and steady demand for energy. However, the rapid expansion of AI data centers is turning this on its head, and energy stocks are now becoming AI growth plays amid the unprecedented surge in power demand.

Because AI data centers need reliable baseload power, many are getting creative with what type of power they use and where. Since many of these technology companies have decarbonization mandates, more are turning to utilities that provide carbon-free nuclear energy or other low-carbon power sources.

Hyperscalers are locking in energy with multi-decade power purchase agreements

Amid this backdrop, independent power producers such as Constellation Energy and Vistra Energy have secured a slew of long-term agreements with hyperscalers and others in the AI space.

For example, in the second quarter, Constellation signed roughly 920 megawatts (MW) of long-term nuclear contracts with corporate customers, averaging 18.5 years, locking up about 30% of its clean baseload output under long-term agreements.

It also signed a power purchase agreement with Walmart, representing the retailer's first-ever nuclear energy agreement. The agreement includes approximately 176 MW of wholesale supply from the Dresden Clean Energy Center in Illinois across two 15-year terms starting in 2029 and 2030. This builds on the company's earlier agreements with Microsoft and Meta Platforms.

Earlier this year, Vistra signed a massive power purchase agreement with Meta Platforms for 2,600 MW of energy and capacity at its PJM nuclear site. It also signed a long-term contract with Amazon Web Services for up to 1,200 MW of power from its nuclear plant in Texas.

In June, Vistra partnered with KKR, Nvidia, and the Kuwait Investment Authority to form Helix Digital Infrastructure, an infrastructure development and financing company with $10 billion in capital commitments, including $1 billion from Vistra. Vistra will serve as the preferred power partner for both new-build and existing projects.

Constellation and Vistra are bets on the AI-driven energy shortage

Constellation and Vistra are seeing robust energy demand, and both benefit from their IPP business models and massive nuclear energy capacity. These companies have locked in multi-decade, fixed-price agreements with built-in inflation escalators.

The companies remain vulnerable to the regulatory backdrop, including scrutiny around co-location or behind-the-meter deals. They also face the risk of AI capex drying up, which would reduce projections for energy demand growth.

With that said, for investors looking to capitalize on the shortages created by the massive data center build-out, Constellation and Vistra, both down 32% from their 52-week highs, are two intriguing energy stocks to play these tight power markets.

Courtney Carlsen has positions in Constellation Energy, Meta Platforms, Microsoft, Nvidia, and Vistra. The Motley Fool has positions in and recommends Amazon, Constellation Energy, KKR, Meta Platforms, Microsoft, Nvidia, Vistra, and Walmart. The Motley Fool has a disclosure policy.