There have been a number of headlines about AI’s big demand for energy. First, there was the announcement that Constellation Energy (CEG) would restart a nuclear reactor at Three Mile Island to help fuel Microsoft’s (MSFT) need for power for its AI systems. That was followed by reports that OpenAI went to the White House to pitch huge data centers to help feed AI demand.
TCW Senior Portfolio Manager Eli Horton tells Yahoo Finance that the US is facing an “impending power shortage.” He notes that power demand had been flat for decades, but that is changing due to things like AI and EVs. “We’re seeing a significant shortage in the infrastructure and the power generation to meet this demand acceleration,” he says.
So, how do you play this trend? Horton points to the need to build out infrastructure “from power generation to the transmission and distribution, and then the electrical and software businesses at the data center level.”
One stock Horton highlighted is Vistra (VST). Find out why he likes it and other plays in the video above.
For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.
This post was written by Stephanie Mikulich.
Video Transcript
As the artificial intelligence boom continues to grow, so does the strain on electrical grids across the country.
As a result, Clean Energy has been making headlines.
On Friday, Constellation Energy announced it is reopening Three Mile Island in Pennsylvania to sell nuclear power to Microsoft for the next 20 years and open A I is pitching the White House on an unprecedented data centre.
Build out.
What does this all mean for investors?
Let’s take a closer look with Eli Horton, senior portfolio manager at W, who runs an ETF.
Invests in some of these energy sources.
Eli, it’s good to see you.
Good to see you too, Julie.
So that Three Mile Island headline was very interesting.
Do you think that we’re going to see a lot more of that?
And the long awaited sort of rekindling of nuclear power is data centres.
What’s going to be the thing that finally unlocks that?
So short answer is yes, but I’d be remiss if I didn’t kind of give some context to that.
So we think that we are facing an impending power shortage in the US.
Uh, the situation has changed dramatically over the past two decades.
Power consumption has been basically flat in the US that is now rapidly changing.
Over the next three decades, power demand is going to approximately double.
Uh, we’re electrifying our economy electric vehicles.
We’re bringing manufacturing back.
And so the the the fire was already lit.
And now a I and the S insatiable demand for compute and for data centres has just poured gas on that fire.
So we’re seeing a significant shortage in the infrastructure and the power generation to meet this demand acceleration.
What does that mean?
It means we’ve already seen two of these hyper scalar announcements contracting for nuclear power generation capacity.
This is reliable 24 7 power.
We think there will be more ahead.
We think nuclear is a particularly interesting fuel source at this time.
Let me ask you when Julie says Three Mile Island, there are some viewers, you know, raise some eyebrows when you hear that, right?
I mean, how do How do viewers investors?
How do your clients How do you tell them to think about risk when it comes to nuclear power?
I mean, look, there was a tragic accident.
We have a long, long history of operating nuclear power plants safely in this country.
There’s 94 generators, 9094 reactors, I should say up and running now.
The problem.
The problem is that we have not built enough of them.
There has only been three reactors brought into operational capacity since the two thousands that that’s just not enough.
And so now you’re seeing Three Mile Island being brought back.
There’s Palisades in Michigan that may be brought back online.
There’s a large plant, uh, Diablo Canyon in California that got a five year extension.
Uh, it’s because nuclear power is carbon free.
It’s 24 7.
It’s reliable.
Hyper scalar need reliable power, and they’re paying a premium for this.
So both Microsoft and Amazon in their deals paid over double the prevailing market rate for this type of power.
Candidly, we think there is demand for natural gas generation as well.
And so what is the best way then to play this?
Do you buy?
You know, Constellation Energy is the company that Microsoft contracted.
Within this case, you guys in your front own a lot of utility companies.
But you also own a lot of fossil fuel companies.
So are you just sort of hedging your bets.
And is it like everything they’re gonna need to draw from all kinds of energy sources?
So it’s It’s definitely not everything.
So So net Z, um, is a investment strategy focused on the energy transformation.
One theme inside the portfolio is power shortage and the need for capital investment in our grid.
And so we look throughout that ecosystem all the way from power generation to the transmission and distribution and then the the electrical and software businesses, uh, at the the data centre level as well.
And so we look for ideas across this system.
We run a very concentrated portfolio, about 25 investments.
So we own Vista and Constellation.
On that power generation side, we own companies like Vertiv that are providing power management and cooling management Inside the data centres themselves.
Our work is to go throughout the system, do very deep research and try to surface the small handful of winners rather than a spray and pray own everything type of strategy.
Well, what about Vista?
Though Eli, I mean its stock is It’s a monster.
It’s up like 200% this year that seems to be baking in a lot of good news.
Uh, it is, uh, we We’ve owned it for a couple of years.
Uh, they have, uh, they have a very large nuclear asset called Comanche Peak, which we still think is undervalued today.
Um, they have a very attractive natural gas portfolio.
Numbers have have gone up quite a bit.
Uh, we still think the company is, um, has a great runway ahead.
Uh, that’s reflected in it being a large position for us.
I. I also want to ask you about some of the more experimental nuclear plays that are out there.
There’s one start up, for example called Olo.
If I’m saying that, right, Um, that came public through a back.
And there’s this new frontier of small modular reactors sort of what are thought, like many nuclear plants that go next to a data centre and just provide energy to that.
I don’t think any of them actually exist yet, but there’s talk that that’s gonna be the next thing.
Do you invest in that yet?
How close are we to that?
How are you thinking about it?
So So we we research it, we study it.
We’re not invested in it.
I think the potential is exciting, but it’s a ways out.
It’s probably at least a decade out for SMR technology.
So this really highlights the point.
We’re looking for these new, uh, clean sources SMRS certainly wind and solar, but those two pieces are intermittent and we need reliable base load power generation That comes back to the nuclear fleet that we have today That is worth a very high price and natural gas.
And so, yes, we look at these innovative technologies, but we think that right now the opportunity is in some of the older type assets.
And then one more quick question do you buy uranium?
Do you buy something like a UE, which has been kind of hot?
Uh, if you think nuclear is gonna have more of a comeback, So So we could We haven’t, uh this is one thing that we try to do is I. I described that system earlier power generation all the way through to where it’s consumed and the components that are involved with that the electrical components.
We look for the businesses with the largest competitive advantages, and I and I listed off a few, uh earlier like Vertiv or VSTRA.
And which company should accrue the profit potential, the profit pools and what’s priced into those stocks.
So So we we could own uranium.
We don’t, uh, we We currently have about six or seven companies that are tethered to this theme that we’re particularly excited about, but we’re always looking for for new ideas for investors.
All right, when you have them come back, Eli fast.
Thank you so much.
I appreciate you joining us.