Google Signs Nuclear Deal With Constellation Energy

In a massive power generation deal agreed between two titans in their industries, Constellation Energy (NASDAQ:CEG) and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) have signed a pair of related long-term power purchase agreements (PPAs).

Alphabet, the parent company of eternal online search king Google, will buy 3.59 gigawatts of electricity from Constellation, the largest clean energy producer in the U.S. Of this, at least 890 megawatts will come from Constellation's nuclear assets.

This pact is already a huge boon to Constellation -- whose stock justifiably zoomed 12% higher on Tuesday following the announcement; however, we probably can't say the same for the wider nuclear industry. Let's dig into the deal to see why.

Image source: Getty Images.

Thirst for power

The electricity will be consumed by Google, which, like many deep-pocketed and ambitious tech companies, is aiming to expand its network of artificial intelligence (AI) data centers. It's willing and able to fund a clutch of these projects with significantly increased capital expenditures (of almost $45 billion in the last reported quarter). Most of this spending is devoted to AI and advanced data center construction.

In its announcement of the deal, Constellation did not specify how much Alphabet/Google will pay for the 3.59 gigawatts of power, an immense amount by any standard. It did specify that 890 megawatts -- almost 25% of the total -- would be produced by the utility company's nuclear fleet (which, by the way, is by far the largest in this country with 21 reactors). The remainder is to be channeled through the PJM wholesale market, within which Constellation is the largest single power producer. As several of the company's nuclear plants supply PJM, it's likely the Google facilities will draw much more than that 890 megawatts from such sources.

The nuclear-exclusive part of the deal has a 20-year term. The additional 2.7 gigawatts is covered under a 15-year PPA.

Alphabet/Google isn't only getting power juice in the arrangement with Constellation. The latter company has committed to implementing Google Cloud and Alphabet's Gemini Enterprise AI solution as part of a five-year "technology alliance" to bolster its operations.

"For communities served by Constellation Energy, the aim is to use AI to reduce the costs of new infrastructure, improve performance, ensure enough power is generated to meet rising demand, and safeguard the energy grid they rely on," the electricity company wrote.

The new age of nuclear

Nuclear power has enjoyed quite the resurgence in the U.S. recently, thanks largely to AI. The technology is a resource hog, requiring vast amounts of power to support the heavy computing it performs. Nuclear proponents argue that it’s the only form of energy, not to mention the sole green energy, which can service that kind of demand.

With this deal, Constellation will have plenty of coin to modernize and expand the capacity (or "uprate" in industry-speak) of its already considerable fleet -- it wrote in the press release that it'll devote a whopping $4.3 billion-plus to that purpose. Although we don’t know how much Alphabet/Google is spending on all that Constellation electricity, the amount is obviously considerable if over $4 billion from it can be allocated to plant improvements.

So, in the end, this deal pushes Constellation even higher up the ladder of both nuclear and clean-energy power producers. After all, existing and active nuclear plants in this country operate at nearly full capacity, so a meaningful expansion of the power supply would require physical engineering uprates or new builds. And with fleets that are notably smaller than Constellation's, there's only so much capacity expansion possible, even with a generous infusion of capital.

While small modular reactor (SMR) technology holds much promise, these facilities take time (and, of course, plenty of capital) to build and deploy. Some projects are in advanced stages of development, but the earliest operational targets are in 2028.

Ultimately, I'd consider this deal a monster win for Constellation. However, this assumes that collaboration with Alphabet/Google goes smoothly; that's never a guarantee in the nuclear industry, which is subject to execution risks such as regulatory hiccups, cost overruns, construction delays, and other constraints.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Constellation Energy. The Motley Fool has a disclosure policy.