Today’s AI boom is boosting demand for the construction of power-hungry data centers.

As these facilities continue to consume enormous amounts of power, hyperscalers are desperate for power generation solutions amid rising energy costs.

As prices continue to rise, electric producers stand to benefit, however some firms are more uniquely positioned for profitability than others. 

NRG Energy (NRG) is an independent power producer that sells its power at market rates and faces fewer pricing regulations compared to traditional utilities. 

The company has performed well since the AI took off in late 2022, generating returns as high as 44% in 2024, a massive jump from the 6% it generated prior.

With its recent acquisition of LS Power’s power generation assets, NRG is set to benefit from growing electricity demand in the years to come.

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As we mentioned last week, data centers serve as the backbone of today’s artificial intelligence (“AI”) boom.

These vast, physical structures house thousands of servers that store data and perform millions of complex computations needed to make AI tools run. These facilities are also tremendous consumers of electricity.

Data centers are often measured not in terms of their physical size or the number of servers or processing power, but in terms of power consumption.

Back in 2022, the Federal Energy Regulatory Commission (“FERC”) forecast that peak energy demand in 2029 would rise 23 gigawatts (“GW”) from 2022 levels to 840 GW. In 2023 FERC revised its estimate, projecting peak demand of 859 GW by 2029.

And since the proliferation of AI and the data centers which power them, FERC has once again increased its energy demand estimation to 947 GW by 2029.

Data centers are the largest contributors to this growth trend. In 2023, these facilities accounted for 4% of electricity demand in the U.S. By 2030, this number is expected to reach 12%. 

And as energy demand continues to soar, so will prices. So far this year, household electricity bills have increased 10%, with retail electricity prices averaging $0.18 per kilowatt hour (“kWh”) during the opening half of the year.

The combination of rising energy demand and electricity prices presents a significant opportunity for the companies providing electricity to the grid. However, not every firm will be positioned to capitalize.

Utilities own and operate the majority of power plants, and since they have a monopoly over their regions, they’re subject to heavy regulation. These firms can only charge a slightly higher premium above costs at pre-negotiated rates.

When energy prices are low, regulators stabilize the returns of utilities. Conversely, profitability is capped when prices rise.

Independent power producers (“IPP”) on the other hand sell power to customers at market rates, and while they struggle when energy prices are low, they can outperform traditional utilities when costs are rising.

NRG Energy (NRG) is an IPP headquartered in Houston, Texas, that’s uniquely positioned to become one of the leading suppliers of power during the AI boom.

It is one of the major power retailers to residential customers in the U.S. and is also one of the biggest retailers to businesses. NRG sells around two-thirds of its electricity to businesses, with the remaining third being sold to consumers.

NRG’s profitability is closely tied to energy prices. When these are flat, the company has a hard time improving returns. However, prices have risen in the past few years, climbing from around $0.15 per kWh before the pandemic to more than $0.20 per kWh this year.

Due to this, NRG has been able to improve its returns. The company’s Uniform return on assets (“ROA”) have jumped from just 6% prior to the start of this AI boom to a record 44% in 2024.

The company’s profitability has been transformed in recent years thanks to tailwinds produced by the AI boom. And now, NRG is doubling down on its power producing capabilities to keep up with soaring energy demand. 

Earlier this year, the company announced its acquisition of the power generation assets of LS Power, which will more than double its generation capabilities.

This acquisition will transform NRG from a short capacity producer to a long capacity producer.

When a producer is short capacity, it means it does not have enough power on its own to meet customer demand, forcing it to buy from an energy market and resell it, a strategy that reduces margins as energy prices continue to scale.

With NRG becoming a long capacity producer, it will be able to sell excess energy to the market, protecting margins and giving the company an additional revenue stream. This level of self-sufficiency is ideal for NRG given the growing demand for energy and likely continued increases in energy costs.

As power demand in the U.S. continues to skyrocket in the wake of the AI boom’s electricity requirements, NRG is well-positioned to sustain its recent profitability improvements, which could solidify the company as a winner in the current market environment. 

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research