By Avi Salzman

Amazon.com announced a deal Wednesday to buy enough power from a Pennsylvania nuclear plant to sustain a midsize city for years. The agreement with power producer Talen Energy will help Amazon secure electricity for a massive data center campus, part of a $20 billion data center investment in the state. It also could solve a thorny issue that threatened to hinder Amazon's AI data center expansion: Balancing the tech titan's needs with those of homeowners struggling to pay their power bills.

"This restructured deal absolutely solves a political problem," said Rodney Rebello, a portfolio manager at Reaves Asset Management. Amazon's deal on Wednesday should alleviate the company's regulatory headaches, and help local electricity consumers in a way that's palatable to local politicians, Rebello said.

The growing use of electricity by tech companies has become a potent political issue. It's a central concern to everyone from President Donald Trump to local legislators trying to keep the lights on in their towns. AI searches already use around 10 times as much power as regular internet searches, and AI servers are only getting more energy-thirsty.

Just how tech companies get their power matters a lot. They can buy the electricity they need in many ways, and the nature of their deals with power plants can have differing impacts on the cost and reliability of electricity for other consumers. The financial agreements have head-spinning names like "virtual power purchase agreements" that mean nothing to average consumers. But they can mean quite a bit for their electricity bills.

Amazon's first idea to get power from the Pennsylvania nuclear plant was to plug its data centers in "behind the meter", meaning the wires would go straight from the reactor to the data centers and wouldn't have to connect to the larger electricity grid. Everything would happen on the customer's side of the electricity meter -- hence, "behind" the meter. Amazon announced plans for that arrangement in 2023.

But siphoning off power from the grid like that for a data center proved controversial. Some utilities like Exelon challenged the deal on the grounds that Amazon wasn't paying its fair share into the larger grid to keep the lights on in the surrounding community. The Federal Energy Regulatory Commission, or FERC, which oversees the nation's grid operators, limited the size of Amazon's deal, and is now looking to write new rules for how behind the meter power can operate.

Other political problems have also been cropping up for big tech companies that want to secure power for their data centers. Some studies, including by energy research firm Wood Mackenzie, have found that new data centers can increase the cost of power for people living in the nearby community. Monitoring Analytics, an independent watchdog overseeing the grid operator for Pennsylvania and other states, found that data centers are the main reason that power capacity prices -- which impact consumer bills -- rose ninefold in the latest power auction.

Tech companies say they are paying their fair share for electricity, and argue that they bring other economic benefits to the towns where they house their data centers. When Google-owner Alphabet buys power for its data centers, "we're going to pay for what we need, and we're not going to saddle communities with that cost, regardless of how much we use," Will Conkling, a top Google executive in charge of data center energy, said at a conference in New York last week.

Electricity prices are increasingly a hot-button issue. America's average retail electricity rates rose more than 20% between 2021 and 2024, and more hikes are likely ahead. Much of that increase was due to issues like the rising price of natural gas, a leading source of electricity. But data centers may be a driving force too. Politicians will certainly notice if seniors on fixed incomes suddenly have to pay more for their monthly electricity bill so that a tech company can use more electricity for its AI apps.

Several state representatives have begun to speak out about the issue. "We have a crisis coming our way in electric rates," New Jersey state Sen. Bob Smith told the publication Stateline in April. Smith chairs the state's Environment and Energy Committee. "These outrageous increases are going to be put on the citizens. Why should they bear the rate increases?"

New data center power deals may help assuage those concerns about the larger cost to society from the data centers. Facebook-owner Meta agreed last week to buy power from an Illinois nuclear plant starting in 2027, replacing taxpayer-provided subsidies that had been necessary to keep the plant open.

Amazon's deal with Talen that was announced Wednesday also includes changes that could blunt political criticism of data centers. As part of the deal, Amazon will switch to a "front of the meter" deal starting in 2026. That means Amazon will no longer be hooking the wires from the reactor straight into the data centers and using power that would otherwise go to other users. Talen's nuclear plant will instead remain plugged into the larger electricity grid and Amazon will be paying transmission and distribution charges to a company called PPL Electric Utilities to support the grid.

PPL said in a statement that "connecting large load customers like data centers to our transmission system helps lower the transmission component of energy bills for all customers, as large load customers pay significant transmission charges on our network." Amazon will also work with Talen to add power capacity to the nuclear plant, and potentially add more reactors on site.

The switch to the front of the meter arrangement means that Amazon won't have to wait for FERC to weigh in on its deal with Talen. And it appears to be engendering good will among Pennsylvania politicians. Gov. Josh Shapiro celebrated the announcement and said his administration will review the permits "as efficiently as possible."

Rebello, the Reaves portfolio manager, said that the arrangement allows Amazon to "avoid being seen as the bad guy, and the entity that's causing inflation."

Power producers like Talen should benefit too, reaping the rewards of arrangements where data centers pay for power at above-market rates. Talen, and fellow power producers Vistra and Constellation Energy are top positions in the Virtus Reaves Utilities ETF, which is up more than 11% this year, about twice as much as the broader utility sector. Being on the right side of the political issue may also keep the stocks on the right side of the market.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 11, 2025 17:29 ET (21:29 GMT)

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