Constellation Energy's sweeping nuclear deal sparks rally in power sector stocks

Constellation Energy (CEG) surged 12.2% on Tuesday, making it one of the top two gainers on the S&P 500, after unveiling a 20-year power purchase agreement with Google (GOOG) (GOOGL) supporting the addition of 890 MW of new nuclear generation, to be added through uprates of 11 existing reactors.

The deal is the largest-ever uprate project—one that squeezes more power out of existing reactors—between a nuclear power provider and a tech company and will provide additional power to the grid that is roughly equivalent to building a large new reactor.

Along with the nuclear deal, which will be backed by $4.3B in new investment by Constellation (CEG), the two companies also entered into a 15-year supply agreement for another 2,700 MW across the PJM power market.

"This is exactly the kind of nuclear growth investors should want to see... high-quality, low-risk growth that enhances earnings visibility, derisks the company's capital deployment strategy, and reinforces confidence in how CEG plans to invest its significant cash flow," KeyBanc's Sophie Karp said in a note.

The analyst said the news validates a key pillar in her bullish case for the stock: "CEG's growth opportunity is driven by its ability to strike commercial deals, not by political debates and outcomes... while broader power market reforms remain subject to debate and an overhang on the sector, CEG's ability to execute throughout this uncertainty is a clear positive for our bullish view on the company and the sector more broadly."

Constellation's (CEG) news lifted shares of other power producers, including Talen Energy (TLN), Vistra (VST), and NRG Energy (NRG), which surged 12.4%, 10.7%, and 7%, respectively, and the top utilities ETF (XLU)—the State Street Utilities Select Sector SPDR—jumped 3%.

Google's (GOOG) (GOOGL) nuclear power plans have been among the most ambitious in the tech industry, as it has sought to quickly add new capacity at a time that data centers are under increased criticism.

Google (GOOG) (GOOGL) announced plans last month to support nuclear plant upgrades in Georgia, it is working with NextEra Energy to restart the Duane Arnold nuclear reactor in Iowa, and it has paired with reactor developer Kairos Power to purchase electricity from its projects.