AI Is Giving Nuclear Power a Big Lift. 4 Stocks Riding the Trend.

“The world clearly is moving in our direction,” said Constellation CEO Joe Dominguez on the company’s latest earnings call.

For years, most of the world was moving in the opposite direction. The fear of nuclear accidents like the 2011 Fukushima disaster is part of the problem. But economics have played a role, too. Operating a nuclear plant has been a terrible business — barely profitable without government subsidies. Generating electricity from nuclear fuel often costs more than generating it from natural gas, because natural-gas prices have fallen during the U.S. shale-drilling revolution. The growth of renewables also complicates life for nuclear power owners. When strong winds gust in Texas, the surge of wind power can cause electricity prices to fall below zero.

Only two new nuclear plants have been built in the U.S. since 2000. The last one, which opened in Georgia in 2023, was seven years late and cost twice as much to build as expected. Nuclear power accounts for 18% of U.S. electricity capacity, and it’s likely to keep drifting lower in the next few years as renewables expand. Globally, it accounted for 9.2% in 2022, the lowest in four decades, according to the World Nuclear Industry Status Report.

The industry’s recent rejuvenation is driven by two factors: political support and technological change.

Global efforts to slow climate change rely on expanding electric power. After more than a decade of relatively flat demand in the U.S., electricity use is set to rise quickly in the coming years as people plug in electric vehicles and appliances like heat pumps. Businesses are also set to ramp up their power demands.

Some of the biggest sources of new power demand are the data centers being built to run AI systems, each of which use as much power in a day as tens of thousands of homes. Data centers, which now account for about 2.5% of power demand, could eat up 7.5% by 2030, according to Boston Consulting Group. The companies that are building the most data centers are big technology firms, including Alphabet, Microsoft and Amazon.com.

Those companies have all made commitments to get their energy from cleaner sources, with Microsoft saying it will remove more carbon emissions from the atmosphere than it produces by 2030.

For companies with those kinds of ambitions, nuclear power fits the bill. Nuclear reactions don’t release carbon in the way that coal and natural gas plants do. And nuclear plants stay on constantly, giving them an advantage over intermittent clean power sources like solar and wind. Battery storage technology attached to solar and wind farms is advancing fast, but it isn’t yet ready to provide enough backup power to renewables to make them as reliable as nuclear power. As renewables take market share from coal and, eventually, natural gas, the percentage of power that can be counted on to run 24/7 will decline.

“You have an outlook where demand is going up, and reliable power going down,” said Rodney Rebello, an analyst focusing on nuclear at Reaves Asset Management. “Nuclear produces reliable power, and it also has the attribute of being clean in terms of its emission profile. The profile of nuclear—24/7, baseload power, clean—lines up really well with data center demand for power, which is around the clock.”

Reaves holds Constellation Energy and Vistra in its closed-end Utility Income fund and in the Virtus Reaves Utilities exchange-traded fund.

It’s important to note that not all nuclear plant owners are profiting from the shift. Independent power companies sell power into competitive markets and profit when prices rise. But utilities that own nuclear plants, like Duke Energy

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, have struggled, because their returns are limited by regulators. Duke stock is down 1% in the past year. About 60% of the U.S. nuclear fleet is in the hands of regulated utilities, meaning that most nuclear capacity is hamstrung by those rules.

Constellation, the largest owner of independent nuclear power plants in the U.S., has seen its stock jump 150% in the same period. It’s a major turnaround after a rough stretch for the company. Constellation was spun out of Illinois-based utility Exelon in 2022, a year after two of the company’s nuclear plants in Illinois needed a state bailout to stay open.

After the spinoff, Exelon retained its regulated utility and transmission businesses, leaving Constellation with the nuclear assets.

The stocks have since diverged. Exelon is down 9% over the past year, hurt by the larger forces bringing down utility stocks, like high interest rates, as well as company-specific challenges. Last year, Illinois regulators rejected its capital plan, which could have led to rate hikes for consumers and better earnings for the company.

Unlike Exelon and Duke, Constellation doesn’t need to ask regulators to approve rate hikes for its power. Constellation sells the power it produces into competitive electricity markets along the Atlantic coast and in the Midwest, where demand and prices have been rising. The company has also made direct deals with tech companies like Microsoft that are willing to spend extra to certify that the power they use for their data centers is carbon-free.

The company is also benefiting from political backing. Even as politicians fight over renewable energy and fossil fuels, there’s considerable bipartisan support for nuclear. In its latest earnings presentation, Constellation featured pronuclear quotes from both President Joe Biden and former President Donald Trump.

The company received a significant benefit from the Inflation Reduction Act, which gives tax credits to nuclear plants. The law effectively put a floor under nuclear power prices around $43 per megawatt-hour, a level at which the plants can make money.

The tax credit establishes a floor for the industry. But investors are now convinced there’s a higher ceiling, too. In March, Amazon agreed to an unusual new deal with Talen Energy, a Houston company that just emerged from bankruptcy last year. Amazon bought a site next to Talen’s nuclear plant in Pennsylvania for $650 million and will receive power directly from the plant, instead of connecting to the larger transmission grid like most data centers, an arrangement known as “behind the meter.” Amazon could phase in the data centers, eventually using as much as 960 megawatts worth of Talen’s 2.2 gigawatts of nuclear capacity. Analysts estimate that the deal values the power produced by Talen at about $75 per megawatt-hour, well above the average market prices that Talen receives by selling into the grid.

Analysts have extrapolated the figures in the Talen deal to other nuclear names: Constellation would probably benefit the most, simply because it owns the most nuclear plants.

The company’s earnings per share are expected to jump 33% this year, and Constellation says it can keep growing base earnings by at least 10% annually through the end of the decade, largely because of data center opportunities. Morgan Stanley analyst David Arcaro thinks Constellation could sign Talen-like deals for about a quarter of its nuclear capacity. He boosted his price target on Monday to $193 from $166, based on those projected deals.

Vistra, the second-largest owner of independent nuclear plants, could benefit, too. The company made a prescient decision last year to acquire three nuclear plants with four gigawatts of capacity just as the market was improving. Its stock is up 190% in the past year, but Arcaro sees more upside, increasing his price target to $78 from $62.

Then there’s Public Service Enterprise Group

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, a multifaceted New Jersey energy company that also owns nuclear power. Although it hasn’t benefited much from the nuclear rally so far, Arcaro thinks the company could sell one gigawatt of its nuclear capacity into a lucrative data center deal. He upped his price target to $70 from $61.

In the short term, the handful of companies that own nuclear plants have little to fear from new competition. But eventually, new entrants are likely to shake up the industry. Several of them, backed by big-name investors like Bill Gates and Sam Altman, are betting on small modular reactors that can be built much faster than the enormous reactors currently in use, and can sit right next to data centers like the ones Amazon is building.

None of these small reactors has been built yet, and the industry has recently had some setbacks. NuScale, the company that was furthest along, announced last year it was canceling plans for its first reactors, largely because of rising costs. Rebello doesn’t expect any of them to start operating in the next three years, but he sees small reactors eventually benefiting from the data center surge, too. “The Amazon deal validates nuclear as being a solid partner for data centers,” he said. “Arrangements like this could lead to nuclear happening sooner.”

Write to Avi Salzman at avi.salzman@barrons.com