Constellation Energy (CEG), the largest nuclear plant operator in the US, has experienced a significant surge in its stock price, climbing over 85% year to date, reaching an all-time high in May. This impressive performance can be attributed to Wall Street's anticipation of potential "collocation" deals between Constellation and Big Tech companies. These deals would allow data centers built for artificial intelligence (AI) use to be located next to Constellation's nuclear plants, providing access to carbon-free power.

Constellation CEO Joe Dominguez confirmed that the company is currently engaged in discussions with several interested tech players looking to establish such collocation arrangements. The demand for carbon-free power is driven by the growing energy demands of data centers in the US, which are projected to more than double by 2030 due to the increased use of AI technologies.

Analysts have identified Constellation as a standout player in the utilities sector due to its extensive nuclear plant fleet consisting of 21 reactors spread across the country. This large fleet positions Constellation to better serve Big Tech companies striving to achieve their carbon emissions goals. As a result, the stock has received favorable ratings, with nine Buy and five Hold analyst recommendations, reflecting investor confidence in Constellation's market position.

James Thalacker, a utilities, power, and renewables analyst at BMO, emphasized that nuclear plant operators possess a unique ability to provide uninterrupted carbon-free generation to data centers operating around the clock, highlighting the advantage Constellation holds over traditional utility companies.

Amazon's recent purchase of a $650 million data center campus in Berwick, Pennsylvania, adjacent to a nuclear power plant owned by Talen Energy, exemplifies the growing demand for such collocation agreements. Furthermore, analysts suggest that Constellation's plants in Illinois and Pennsylvania could serve as ideal locations for Big Tech companies seeking access to carbon-free power.

In addition to its nuclear fleet, Constellation enjoys further advantages as an energy provider. Unlike regulated utility companies, Constellation has the flexibility to set energy rates without regulator approval. This, coupled with the Biden Administration's Inflation Reduction Act incentivizing the transition to green energy, positions Constellation favorably in the market.

Neil Kalton, a senior equity analyst at Wells Fargo, highlighted Constellation's cost efficiency, with power production costing approximately $25 per megawatt hour, while the Inflation Reduction Act allows for a selling floor price of around $45 per megawatt hour, allowing room for higher profits.

However, analysts caution that rapid spikes in power prices could attract unwanted political attention and regulatory scrutiny. A gradual and steady increase in power prices is considered the optimal outcome for customers, generators, and shareholders.

Since its separation from utility giant Exelon in 2022, Constellation has operated as a standalone energy provider, with a focus on renewables and hydroelectric energy. The company has also engaged in various partnerships, such as the one with Microsoft to reduce emissions at its data centers through carbon-free energy matching. Additionally, Constellation has signed agreements with companies like PepsiCo, McCormick, and Best Buy to power their operations with renewable energy from its solar project in Texas.

During Constellation's latest quarterly results, the company forecasted 10% annual earnings per share growth for the rest of the decade. However, if power prices rise or the anticipated collocation deals with Big Tech materialize, this growth rate could potentially surpass expectations.

In conclusion, Constellation Energy's stock surge is driven by the company's position as a leading nuclear plant operator in the US, poised to meet the growing demand for carbon-free power from Big Tech companies establishing AI data centers. The potential for collocation agreements, coupled with favorable market conditions and the company's focus on renewables, positions Constellation for continued success in the energy sector.