Talen slides as regulators reject proposal to expand Amazon data center

Shares of Talen Energy (TLN) are under pressure on Monday after the Federal Energy Regulatory Commission, or FERC, rejected an amended interconnection agreement, or ISA, intended to support expanded co-located load at an Amazon Web Services, or AWS, data center connected to the Susquehanna nuclear power plant in Pennsylvania. Jefferies calls the decision “a major setback for the nuclear data center thesis,” while Morgan Stanley tells investors that it views the weakness in peers Constellation Energy (CEG), Vistra (VST) and PSEG (PEG) as “an excellent buying opportunity.”

BLOCKED PROPOSAL: On Friday, FERC issued an order rejecting an ISA that would have increased the amount of co-located load from 300 to 480 MW, citing grid reliability and cost fairness concerns. The proposal sought to modify ISA among PJM, the grid operator, the power plant owner, Susquehanna Nuclear, and interconnected transmission owner PPL Corp. that looked to increase the data center’s co-located load from 300 MW to 480 MW. Co-located refers to the Cumulus datacenter complex that Talen built next to the 2.5 GW Susquehanna nuclear plant in Pennsylvania which it operates, and which Amazon (AMZN) acquired back in March.

Responding to the decision, Talen said over the weekend that, “On Friday, FERC issued an order denying PJM, PPL, and Talen’s Susquehanna ISA. Talen believes FERC erred and we are evaluating our options, with a focus on commercial solutions. We believe this ISA amendment is just and reasonable and in the best interest of consumers. FERC’s decision will have a chilling effect on economic development in states such as Pennsylvania, Ohio, and New Jersey. Importantly, the existing ISA allows for 300 megawatts of co-located load at Susquehanna, and development of the first phases of the Amazon Web Services data center campus can proceed using those 300 megawatts while Talen continues to pursue approval of the amended ISA. Contrary to the Commission’s ruling, Talen’s co-location arrangement with AWS is part of the solution to issues raised on November 1 at the FERC technical conference on large co-located load. It brings service to the customer quickly and without expensive transmission upgrades necessary to serve large-load demand. But our direct-connect configuration is just one of several commercial solutions to the demand of large loads, and we are exploring other solutions as we move forward. The data center economy will require an all-of-the-above approach to satisfy the increased demand, including co-location such as Talen’s arrangement with AWS, hybrids that co-locate primary power behind the meter while using grid power for back-up, and front-of-the-meter connections to utility transmission. Talen looks forward to the continued dialogue.”

MAJOR SETBACK: Commenting on FERC’s decision, Jefferies calls it “a major setback for the nuclear data center thesis.” Based on the firm’s “extensive investor conversations,” very few investors, “including us, expected an outright FERC rejection of the ISA,” says Jefferies, which expects “a sharp negative share response” for Talen Energy as well as Constellation, Vistra, and PSEG.

Following the news, Oppenheimer lowered the firm’s price target on Talen Energy to $180 from $210 but kept an Outperform rating on the shares. The firm says that in a disappointing development, FERC rejected Talen/PJM’s amended ISA. Oppenheimer notes this ruling only impacts power supplied beyond the initial 300MW, which is not slated to be needed until 2027. The firm believes Talen has several paths forward, including file for re-hearing within 30 days, and then filing with the circuit court if rejected, and/or restructure the deal with AWS, and either stay behind-the-meter, but share the costs with AWS for grid backup, or more likely go in front-of-the-meter, sign a virtual PPA with AWS and share the costs.

BUYING OPPORTUNITY: Also commenting on the blocked deal, Morgan Stanley said that while it expects a negative market reaction, it views weakness in Constellation Energy, Vistra and PSEG as “an excellent buying opportunity” as the firm sees a path to more nuclear data center deals. Morgan Stanley still believes multiple large data centers will be co-located at power plants in PJM and in ERCOT, the Texas power market.

CONSTELLATION PACT NOT IMPACTED: Evercore ISI notes that in “a surprising move late Friday,” FERC voted two to one to deny the proposed amendment that sought to modify an ISA among PJM, the grid operator, the power plant owner, Talen, and interconnected transmission owner PPL that sought to increase the data center’s co-located load from 300 MW to 480 MW, citing concerns around grid reliability and consumer costs. The firm, however, believes there are alternate paths forward – including to re-file with additional support, a settlement with PJM transmission owners, or other alternatives – and expects Talen to outline next steps in coming days. After having caught up with Constellation Energy management, the firm noted that Constellation’s agreement with Microsoft (MSFT) is front of the meter and not impacted by this order.

PRICE ACTION: In morning trading, shares of Talen have dropped almost 4% to $167.36. Also lower, Constellation Energy has plunged over 11%, and Vistra and PSEG have slid about 5% each.