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March 24, 2024 11:00 PM GMT

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Tech Diffusion and GenAI

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Powering GenAI: The Tortoise and
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the Hare
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We project a rapid decline in the cost of GenAI compute, analyze global GenAI power
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demand, and assess the implications of slow growth in power grid infrastructure. We
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expect power infrastructure will not keep pace with the rapid growth in GenAI compute
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demand. We highlight 13 OW-rated stocks.
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Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of
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interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment
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decision.
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For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to FINRA restrictions on
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communications with a subject company, public appearances and trading securities held by a research analyst account.
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Contributors

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Global Insight

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Contents

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10 Graphics That Speak to the Disconnect Between GenAI Growth and Power Infrastructure Growth
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12 Summary of Our New Analyses
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18 Power in Demand: Raising Power Gen Price Targets

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20 Mapping the GenAI Infrastructure Value Chain
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21 Appendix
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22 Risk Rewards
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23 Risk Reward - Constellation Energy Corporation (CEG.O)
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25 Risk Reward - Public Service Enterprise Group Inc (PEG.N)
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27 Risk Reward - Vistra Corp (VST.N)

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29 Risk Reward - NRG Energy Inc (NRG.N)

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Morgan Stanley Research 3

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Powering GenAI: The Tortoise and the Hare

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We believe the market is under-appreciating 3 dynamics: (1) the What’s Changed
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rapid drop in the cost of GenAI compute power (our Data Center Vistra Corp From To
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model shows a ~50% drop in the DC capital cost per teraFLOPs when Price Target $62.00 $78.00
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moving from the Hopper to the Blackwell GPU), (2) a significant mis-

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Constellation Energy Corporation
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match between the hyper-rapid growth in GenAI power needs (not- Price Target $166.00 $193.00
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withstanding continued efficiency improvements) and the slow

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NRG Energy Inc
growth in power grid infrastructure, and (3) the resulting very large Price Target $51.00 $63.00
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magnitude of the time value for power solutions providers that can Public Service Enterprise Group Inc
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reduce the delay in powering new and expanded data centers. We Price Target $61.00 $70.00
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recommend investing in companies that are well positioned to
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serve the rapidly growing power needs of the GenAI enablers —
we highlight 13 Overweight-rated stocks: AES.N, BE.N, CEG.N, Our Data Center economics model underscores how quickly the
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ENGIE.PA, FORTUM.HE, IBE.MC, NEE.N, ORSTED.CO, PEG.N, cost of compute is falling. The following chart shows the total data
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RWE.DE, SCIL.SI, TENA.KL, and VST.N. center capital cost relative to the compute power for data centers
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containing Hopper and Blackwell GPUs:
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Why should you read this report? We have developed several
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novel, proprietary analyses that can help investors assess where/ Exhibit 1: In our Data Center economics model using Hopper GPUs,
how to invest in the GenAI value chain: (1) an analysis of new data the data center capital cost/teraFLOPs is ~$14, while for our Blackwell
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center economics, including the value of "time to power" and an Data Center model, that ratio is ~$7
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assessment of the (rapidly falling) cost of compute as GPUs continue Capital Cost - Dollar per teraFLOPS
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to improve (we compare a Hopper Data Center to a Blackwell Data

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Total Data Center Compute Power (TFLOPS)

Center), (2) an updated assessment of global power demand from 14

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data centers, including the likely magnitude of different forms of 12

power generation required to power data center growth, (3) several

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analyses of the challenges in accelerating the growth of power infra-
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structure, (4) an analysis of the value for developers of new GenAI

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data centers to bring their DCs online more rapidly, (5) an analysis of
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US nuclear power plants most suitable to host large data centers,

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and (6) an updated assessment of the potential CO2 profile for data
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center development, given the evolution of strategies we are seeing

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to power new data centers (such as siting data centers behind the H100 - Capital Cost - Dollar per teraFLOPs B100 - Capital Cost - Dollar per teraFLOPs
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fence of nuclear power plants, which would increase the amount of Source: Company data, Morgan Stanley Research.Note: Based on assumptions of B100/H100 used, 8
GPUs per Server, 70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh. TeraFLOPs is calcu-
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fossil power plant usage to compensate for the on-site consumption

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lated based on SXM, FP8 Tensor Core.

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of this nuclear power).

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The following summary table shows the striking differences in Our analysis also points to a very high value for "time to power."
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economics between a "Hopper Data Center" and a "Blackwell Data The following chart shows the power price premium at which a
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Center": hyperscaler would be economically indifferent if a power solution
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provider could reduce the delay in powering a new or expanded data
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center — these premiums are much higher than the market appreci-

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Exhibit 2: We project a ~50% reduction in the "Data Center capital
cost of compute" as a result of the evolution from the Hopper to the ates:
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Blackwell NVIDIA GPU
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Data Center New Build Economics: Blackwell vs. Hopper Exhibit 4: Power price premium willingly paid (as a % of NPV of
100 Megawatts Total Data Center Power Capacity
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Number of GPUs 45,248 63,492
Power Price Premium Willingly Paid (as a % of NPV of Annual
Total Facility Capital Cost, Incl. GPUs ($m) $ 3,349 3,583
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Power Costs) for Bringing Data Centers Online Faster by 2 Years

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Total Data Center Compute Power (teraFLOPs) 447,724,895 251,301,587
120%
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teraFLOPs based on H100 SXM, FP8 Tensor Core

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DC Capital Cost - Dollar per teraFLOPs $ 7.48 $ 14.26

Power Price Premium (%)

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Annual Power Cost - Dollar per teraFLOPs $

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Capital Cost - $Million per Megawatt $ 33 $ 36
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Capital Cost Excl. GenAI Hardware - $Million
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$ 15 $ 15
per Megawatt 40%
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Source: Company data, Morgan Stanley Research. Note: Estimates assumes a 100MW data center with 8
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chips per server
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6 7 8 9 10
We also see a very significant mismatch in growth between GenAI
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and the power sector. The following chart underscores the magni-
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Source: Morgan Stanley Research. Note: Based on assumptions of B100 chips used, 8 GPUs per Server,
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tude of growth differentials: 70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh
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Exhibit 3: The Power sector is growing at a much slower rate than We are raising price targets for US power generation providers
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GenAI power demand that are well positioned for data center upside: CEG.O, VST.N,
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NRG.N, and PEG.N. We see ripple effects across the power genera-
Comparison of Growth Rates
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tion and retail market landscape from the significant electricity

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needs that are coming with the data center build-out ahead. We
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believe nuclear plant owners continue to be well positioned to

unlock upside from data center contracts given the advantages we
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assess in this report. A recent Talen Energy nuclear contract with

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Amazon Web Services data center implies a significantly higher price

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data center upside calculations and increasing our valuations for

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Annual Average US Power Demand GenAI Power Compute Power CEG.O, VST.N, and PEG.N to reflect this opportunity. We also think
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Utility Rate Base Increase - NVIDIA Demand CAGR, Increase (Training)

Growth from '23-'26 H100 vs A100 MS Base Case, - NVIDIA H100 vs NRG.N can potentially benefit from data center growth in Texas in
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2023-27 A100
several ways, so we raise our PT to account for these new options. We
Source: Company data, Morgan Stanley Research
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are Overweight CEG.O, VST.N and PEG.N, and Equal-weight NRG.N.

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We are increasing our price targets as follows: CEG.O to $193 from

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$166, VST.N to $78 from $62, NRG.N to $63 from $51, and PEG.N to
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$70 from $61. The following list sets forth the Overweight-rated
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power generation (and generation equipment) stocks that we think

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are well positioned given the premium we see on companies that can
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provide valuable power solutions to hyperscalers and data center

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Exhibit 5: The following list sets forth the Overweight-rated power generation (and generation equipment) stocks that we
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and data center companies
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Stock (Ticker) Mkt Cap ($m) Analyst PT Currency PT Upside to PT (%) Bull/Bear Skew
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Orsted (ORSTED.CO) 23,221 Pulleyn, Robert DKK 530.00 39% 17.0
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RWE (RWEG.DE) 25,061 Pulleyn, Robert EUR 50.00 61% 11.0
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Bloom Energy (BE.N) 2,220 Percoco, Andrew USD 22.00 123% 6.0
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AES (AES.N) 11,535 Arcaro, David USD 25.00 54% 4.0
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NextEra Energy (NEE.N) 126,799 Arcaro, David USD 77.00 25% 3.0
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Sembcorp (SCIL.SI) 6,967 Maheshwari, Mayank SGD 7.20 36% 3.0
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Vistra Energy (VST.N) 24,035 Arcaro, David USD 78.00 13% 3.0
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PSEG (PEG.N) 32,423 Arcaro, David USD 70.00 8% 2.0
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ENGIE (ENGIE.PA) 40,643 Sitbon, Arthur EUR 19.00 23% 2.0

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Fortum Oyj (FORTUM.HE) 11,515 Williams, Harrison EUR 14.00 18% 2.0
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Iberdrola (IBE.MC) 78,437 Pulleyn, Robert EUR 13.00 15% 2.0
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Constellation Energy (CEG.O) 56,443 Arcaro, David USD 193.00 8% 1.0

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Tenaga (TENA.KL) 14,122 Maheshwari, Mayank MYR 13.24 15% 1.0

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Source: FactSet, Morgan Stanley Research. Data as of market close 3/22/24. For more context on each name's GenAI business model, see Appendix
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Highlights of our new analyses: rapid decline in the cost of compute is made possible by rapid
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improvements in power efficiency of NVIDIA GPUs, as was evidenced

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Analysis #1: Analysis of new data center economics. Working with by the rollout of the Blackwell GPU earlier this week. (2) Our model
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our Technology colleagues around the world, we developed an esti- can be helpful in comparing total data center costs for new builds
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mate of the total cost for the development of new, much larger data relative to acquired assets, on a $ per megawatt (MW) basis. For
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centers that are suitable for GenAI hardware. A few key takeaways example, our model shows a total build cost of ~$35m per MW, or
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from our Data Center economic analysis: (1) Our analysis shows a $15m per MW excluding the cost of the GPUs and servers - this can
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calculation that may be helpful to determining whether GenAI be helpful in assessing data center acquisitions. Our model also pro-
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software/solutions developer business models will generate an vides some indications of the economics of upgrading older data cen-
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attractive ROIC: the "DC Capital Cost per teraFLOPS." This calcula- ters, and we believe this data is indicative of potential attractive
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tion is driven by the ratio of total data center capital costs to the total upgrade economics. In our view, a portion of the "sunk costs" on
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teraFLOPs at the data center. In our Data Center economics model existing data center assets would have value, in the sense of reducing
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using Hopper GPUs, this ratio is ~$14 per teraFLOPs, while for our the cost of upgrading the DC. A November 2023 report from Dgtl
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Blackwell Data Center model, that ratio is ~$7 per teraFLOPs. This Infra estimated that the Land, Powered Shell + Building Fit-Out com-
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ponents of a DC comprises between 35% an 45% of the total cost to mission and distribution projects, as well as supply chain bottle-
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develop a new DC (excluding the cost of the actual GenAI hardware, necks. According to the Lawrence Berkeley National Laboratory,
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such as the GPUs and Servers). We believe these costs represent ben- upgrading existing transmission lines can take three years or more
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efits in terms of the value of existing data centers — while key ele- due to time-consuming regulatory hurdles. As a result, increasing the
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ments of an older data center would need to be largely/entirely generation and grid capacity in smaller secondary markets are strate-

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replaced (especially cooling and power electronics), other costs gies being pursued to more quickly enable data center expansion. A
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could be avoided relative to new DC construction. On the latest earn- report from Lawrence Berkeley National Lab entitled "Queued Up"
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ings call for Vistra, management noted multiple such DC upgrade (found here) provides an excellent deep dive of grid constraints in the
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Center cost model. projects spent in queues before being built has increased mark-
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edly. The typical project built in 2022 took 5 years from the inter-

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Analysis #2: Global GenAI/data center power demand forecast. connection request to commercial operations, compared to 3
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We have seen strong interest in our forecast GenAI power demand years in 2015 and <2 years in 2008…. Only 21% of all projects pro-
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growth (original note here), and we have had significant dialogue posed from 2000-2017 had reached commercial operations by
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with many company management teams on this topic. Based on this the end of 2022 – 72% had withdrawn from queues." The following
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feedback, we are providing an updated assessment of global power exhibit from the Berkeley Lab report focuses on the time between
demand from data centers, including the likely magnitude of dif- when a proposed power generation resource files its interconnection
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ferent forms of power generation required to power data center request and the commercial operations date (COD). In California
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growth. Please ask us for a copy of our latest global Data Center (CAISO), the median is over 125 months, and the other areas of likely
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power demand model. Changes we are making: (1) In our base case, new data center activity (such as PJM, the mid-Atlantic/Midwest
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we are increasing our GPU/Custom Silicon utilization rate from 60% power market, and ERCOT, the Texas power market) show total
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to 70%. We agree with the views of several management teams that times of five years or more. While bringing new load (sources of
utilization rates will be high for reasons ranging from the high finan- power demand such as data centers) is generally a shorter process,
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cial incentive for high utilization to the likelihood of high utilization the delays in power plant interconnection are echoed in challenges
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for large training tasks. (2) We are reducing the percentage of new to bring new load online.
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non-renewables. (3) We are updating our GPU and Custom Silicon on the time between when a proposed power generation resource files
volume estimates to reflect latest estimates from our semicon- its interconnection request and the commercial operations date (COD)
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ductor teams. In our base case, our projected 2024/27 global data
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center power demand (including GenAI) is ~430/748 terawatt-

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hours (TWh), which equates to ~2%/4% of 2022 global power

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demand in 2024/27. GenAI power demand CAGR in 2023-27 in our

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base case is ~105%, while overall global data center power demand
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(including GenAI) CAGR over that same time period would be ~20%.
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Our bull case (reflecting 90% chip utilization) has projected 2024/27
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global data center power demand of ~446/820 TWh, while our bear
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case (reflecting 50% utilization) has projected 2024/27 data center

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power demand at ~415/677 TWh. Translating these numbers to giga-

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watts of power capacity (GW), our base case total data center power
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capacity in 2024/27 would be ~70/122 GW.

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Analysis #3: The challenges in accelerating the growth of power

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growth in data centers is the availability of grid connections neces-

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sary to support new data center capacity. Key issues include limited
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Source: Lawrence Berkeley National Lab Report. Notes: (1) In-service date was only available for 6 ISOs
and 5 utilities representing 58% of all operational projects; (2) Duration is calculated as the number of
power line capacity, delays in planning and permitting for new trans- months from the queue entry date to the in-service date.
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The high cost of longer lead times in terms of grid interconnection for benefits in the event of an operational issue at any single unit. In addi-
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data centers becomes clear when we combine move to Analysis #4. tion, the operational track record of the nuclear power sector (in
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terms of avoidance of unplanned outages) is excellent.
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Analysis #4: Calculation of the value for Data Center developers
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to bring their DCs online more rapidly. Given the large amount of Our analysis of US nuclear power plants focused on the criteria

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capital deployed on these new, very large data centers, and given the that would likely be used by data center companies, and by
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rapid pace of GenAI chip innovation, there is tremendous value for nuclear power plant owners themselves:(1) competitive plant (as
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data center owners to connect to the grid as quickly as possible. For opposed to a regulated nuclear power plant), (2) no existing long-
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developer could secure a power source with a two-year time (4) dual unit. The results of our analysis: We estimate that close to
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advantage relative to other data center developers (for example, 24 gigawatts (GW) of US nuclear capacity is well suited for data cen-

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due to a streamlined grid connection regulatory process), the ters. Assuming half of this power could be used by data centers, we
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developer would be willing to pay a ~101% power price premium project 12 GW of available data center capacity. Theoretically, this
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assuming a six-year economic life of the GPUs, or ~61% assuming volume of available US nuclear capacity could provide the needed
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though this would be longer in practice because we believe a signifi-
Exhibit 7: Power price premium willingly paid (as a % of NPV of cant percentage of data center power will come from incremental
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annual power costs) for bringing data centers online faster by 2 years renewables. OW-rated nuclear plant owners that are in our view
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Power Price Premium Willingly Paid (as a % of NPV of Annual Power
well-positioned to host data centers behind the fence:
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Costs) for Bringing Data Centers Online Faster by 2 Years Constellation Energy (CEG.O), PSEG (PEG.N), and Vistra Energy
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100% suitable for data centers (>13 GW), followed by VST (5.5 GW) and
Power Price Premium (%)

PEG (4 GW).
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Analysis #6: An updated assessment of the potential CO2 profile
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natural gas usage in power plants than we had originally forecast,
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driven both by (1) increased potential for siting data centers directly
Economic Life of GPUs (Years)
at nuclear power plants, which in effect results in other dispatchable
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Source: Morgan Stanley Research. Note: Based on assumptions of B100 chips used, 8 GPUs per Server,
70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh power plants (primarily natural gas-fired) running more frequently
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and (2) increased potential for on-site natural gas-fired power gener-
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Analysis #5: US nuclear power plants best suited to host data cen- ation, driven both by shorter "time to power" and by a desire for
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ters "behind the fence line." Given the very large Amazon/Talen greater power reliability. From a Sustainability perspective, this
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transaction, in which Amazon may ultimately build ~960 MW of data would increase carbon emissions from data centers; by 2027, our
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center capacity behind the fence line at a nuclear power plant in base case projected total global data center carbon emissions total
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Pennsylvania, we have conducted an analysis of the US nuclear ~67 million tons, equal to ~0.5% of 2022 global CO2 emissions. In our
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plants that are most suitable to host large data centers. Among all of base case, US natural gas–fired power generation would increase by
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the solutions that could potentially de-bottleneck the power system 27 TWh in 2025, an increase of ~2% above the projection developed
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and enable more rapid data center deployment, we are most bullish by US Utility analyst David Arcaro.
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with respect to nuclear power plants. Why? (1) a much faster process
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to power up a data center, (2) nuclear power plant sites are typically How will data center growth differ around the world? Which
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very large, which affords the space required to build large data cen- stocks are best positioned for this growth globally? We see simi-
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ters, (3) significant power infrastructure already exists at nuclear larities in data center strategies around the world, but we also see
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power plants, reducing the cost of developing the power infrastruc- key differences. What is similar: Data center companies and hyper-
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cooling water, which could represent an advantage for data centers to minimize "time to power," minimize cost and reduce emissions (key
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given the likely requirement for liquid cooling at the new, much OW-rated power developers: AES.N, NEE.N, ORSTED.CO, SCIL.SI,
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hotter data centers and (5) dual-unit nuclear plants offer redundancy TENA.KL), grid connection issues are widespread globally, and there
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are instances of political pushback against the concentration of data tion stocks positioned to benefit:SCIL.SI and TENA.KL. In China,
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centers (as seen in Ireland, Singapore, and Virginia). What is dif- data center dynamics are very different, driven by previous over-
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ferent: In the US, we saw the first signs of partnerships between supply of DC capacity and challenges in securing sufficient vol-
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hyperscalers and nuclear power plant owners to site new, large data umes of GenAI chipsets. In China, we see older data centers suffering
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centers at nuclear power plants (benefitting OW-rated CEG.O and from a consistently slow utilization rate ramp up due to weak tradi-

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VST.N), and we are also seeing interest in on-site generation (which tional cloud demand, and the desire for GenAI customers to use
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could benefit many stocks, including OW-rateBE.N). brand new DCs dedicated for GenAI specifications, from the design
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stage. In addition, the chipset ban is another reason that GenAI com-
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a data center deep dive (found here) that highlighted a fivefold power
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expansion by 2035 driven by demand for sovereign European DCs. How could we be wrong? (1) It is possible that the solution providers

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FORTUM.HE, ENGIE.PA, ORSTED.CO, and RWEG.DE. In ASEAN, cell manufacturers) could become so effective at de-bottlenecking
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Mayank Maheshwari led a note (found here and here) highlighting power infrastructure that it becomes much easier to develop new
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strong power demand growth in Malaysia, Singapore and Thailand. data centers, which in turn could reduce the value of existing data
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To minimize "time to power," we are seeing data center developers centers — but our analysis shows that for the most promising such
build through partnerships with local power players in ASEAN: solution, nuclear power plants we see limited capacity relative to
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NVIDIA & YTL Power partner for $4.3b AI data centers in Malaysia data center growth (satisfying slightly more than two years of US
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(link), Singtel, GULF (one of Thailand’s largest private power pro- data center power demand growth). (2) To the extent that NVIDIA
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ducers), and AIS (Thai telco) commence construction of a new Thai and other chip makers achieve incredibly rapid increases in chip com-
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data center (link), and Singtel entering into a strategic partnership pute power, data centers might need to be upgraded frequently to
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with Indonesia's largest telco Telkom and Indonesian energy com- remain competitive with newer DCs, and if data center owners are
pany Medco Power for its first data centre project in Indonesia (link). not fully compensated for these frequent renovations (we believe
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Mayank estimates that the total data center power demand in they likely would be compensated), DC owners could find them-
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ASEAN could rise to ~7 GW by 2027 (from ~1.7 GW in 2023, ~8% of selves on a "capex treadmill." (3) There may be practical challenges
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total capacity in the region) driven by AI business/government digital

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transformation, data security and edge computing, as well as, the (water availability may be an issue — but some new liquid cooling
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stable local geopolitical environments and supportive policies on the technologies use closed loop systems). (4) There is the potential that
digital economy. He sees data center demand absorbing excess data center customers might be at risk of default if their (in some
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power supply in Malaysia and Thailand while keeping electricity mar- cases as yet unproven) GenAI business models fail to generate the
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kets tighter for longer in Singapore. OW-rated APAC power genera- forecasted margins.
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Graphics That Speak to the Disconnect Between GenAI
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Growth and Power Infrastructure Growth
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Graphic #1: This chart, developed by Morgan Stanley Research, Exhibit 9: The following exhibit from the Berkeley Lab report
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shows the disconnect in growth rates between the power sector focuses on the time between when a proposed power generation
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and GenAI GPUs. US Utility analyst David Arcaro estimates that resource files its interconnection request and the commercial oper-

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utility rate base growth is 8% per year. Contrast this growth rate with ations date (COD)
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(1) the 75% growth in power required for NVIDIA's H100 GPU relative

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to the prior GPU (the A100), (2) the ~105% Morgan Stanley's pro-
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jected 2023-27 base case power demand CAGR for GenAI, and (3) the
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~250% increase in compute power (for training) for NVIDIA's
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Blackwell GPU relative to the Hopper GPU.
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Exhibit 8: The Power sector is growing at a much slower rate
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than GenAI power demand
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Comparison of Growth Rates
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Source: Lawrence Berkeley National Lab Report. Notes: (1) In-service date was only available for 6 ISOs
Annual Average US Power Demand GenAI Power Compute Power
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and 5 utilities representing 58% of all operational projects; (2) Duration is calculated as the number of
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Utility Rate Base Increase - NVIDIA Demand CAGR, Increase (Training)

months from the queue entry date to the in-service date.
Growth from '23-'26 H100 vs A100 MS Base Case, - NVIDIA H100 vs
2023-27 A100
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Source: Company data, Morgan Stanley Research estimates Graphic #3: This flow chart, from a report published by Advanced
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Energy United, highlights the wide range of challenges throughout

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Laboratory, focused on the time between when a proposed power

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Exhibit 10: The flow chart highlights the wide range of challenges
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generation resource files its interconnection request and the com-

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throughout grid interconnection process

mercial operations date (COD). In California (CAISO), the median is
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over 125 months, and the other areas of likely new data center
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activity (such as PJM, the mid-Atlantic/Midwest power market, and

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Graphic #4: Wood Mackenzie published a report on the lead times Exhibit 13: Our analysis of US nuclear power plants most suitable
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for two critical grid components relevant for interconnection: trans- to host data centers shows that nuclear power could satisfy slightly
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formers and generator step-ups. more than 2 years of US data center power demand growth
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Exhibit 11: Lead times for two critical grid components relevant Suitable US Nuclear Power vs Data Center
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for interconnection Growth
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120
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US Nuclear Power 2024 Data Center 2024-25 2024-26
Output Suitable for Power Demand Cumulative Data Cumulative Data
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US Data Centers Growth Center Power Center Power
Demand Growth Demand Growth
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Source: Wood Mackenzie
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Graphic #5: This exhibit shows the (extremely low) vacancy rates for Graphic #7: Analysis of the "time to power." Given the large amount
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Northern Virginia data centers — Loudoun County, Virginia, is the of capital deployed on these new, very large data centers, and given
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most concentrated hub of data centers in the world. the rapid pace of GenAI chip innovation, there is tremendous value
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for data center owners to connect to the grid as quickly as possible.
Exhibit 12: This exhibit shows the (extremely low) vacancy rates
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For example, using our GenAI Data Center cost estimates, if a data
for Northern Virginia data centers - Loudoun County, Virginia is the
center developer could secure a power source with a two-year
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most concentrated hub of data centers in the world

time advantage relative to other data center developers (for
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example, due to a streamlined grid connection regulatory pro-

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cess), the developer would be willing to pay a ~101% power price

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premium assuming a six-year economic life of the GPUs, or ~61%
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assuming a 10-year economic life.

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Exhibit 14: Power price premium willingly paid (as a % of NPV of

annual power costs) for bringing data centers online faster by 2
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years
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Power Price Premium Willingly Paid (as a % of NPV of Annual

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Power Costs) for Bringing Data Centers Online Faster by 2 Years
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120%
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Source: CBRE
Power Price Premium (%)

100%
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80%
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Graphic #6: Among the various technologies that could help to de-
60%
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bottleneck the power sector, existing nuclear power plants are one
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of the most promising — see our section on Summary of Our New
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Analyses to see why. That said, the volume of nuclear power that 20%
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would be suitable for data centers is not unlimited — our analysis for 0%
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6 7 8 9 10
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the US shows that suitable nuclear power plants could theoretically Economic Life of GPUs (Years)
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provide sufficient power to cover two years of data center power

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Source: Morgan Stanley Research. Note: Based on assumptions of B100 chips used, 8 GPUs per Server,
70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh
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Summary of Our New Analyses
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We developed several new analyses for this report, and within this Exhibit 15: In our Data Center economics model using Hopper

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section of the note, we summarize the nature of these analyses GPUs, this ratio is ~$14 per teraFLOPs, while for our Blackwell Data
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and the key takeaways. New analyses contained within this note: Center model, that ratio is ~$7 per teraFLOPs.
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(1) an analysis of new data center economics, (2) an updated assess- Capital Cost - Dollar per teraFLOPS
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Total Data Center Compute Power (TFLOPS)
magnitude of different forms of power generation required to power 14
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data center growth, (3) several analyses of the challenges in acceler-

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ating the growth of power infrastructure, (4) an analysis of the value

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for developers of new GenAI data centers to bring their DCs online
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more rapidly, (5) an analysis of US nuclear power plants most suit-
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able to host large data centers, and (6) an updated assessment of the 6
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potential CO2 profile for data center development, given the evolu- 4

tion of strategies we are seeing to power new data centers (such as

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siting data centers behind the fence of nuclear power plants, which
0
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would increase the amount of fossil power plant usage to compen- H100 - Capital Cost - Dollar per teraFLOPs B100 - Capital Cost - Dollar per teraFLOPs
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sate for the on-site consumption of this nuclear power). Source: Company data, Morgan Stanley Research. Note: Based on assumptions of B100/H100 used, 8
GPUs per Server, 70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh. TeraFLOPs is calcu-
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lated based on SXM, FP8 Tensor Core

Analysis #1: New Data Center Economics

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Our model can be helpful in comparing total data center costs for
new builds relative to acquired assets, on a $ per megawatt (MW)
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Working with our Technology colleagues around the world, we basis. For example, our model shows a total build cost of ~$35m per
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developed an estimate of the total cost for the development of new, MW, or $15m per MW excluding the cost of the GPUs and servers. On
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much larger data centers that are suitable for GenAI hardware. We March 8, 2024, Digital Core REIT, the Singapore listed group,
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acknowledge that costs can vary by site and by design parameters, announced an agreement to purchase an additional 24.9% stake in
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but we found that developing this estimate helped us in assessing Digital Frankfurt, Wilhelm-Fay-Straße, Frankfurt (a 34 MW data
several important questions about many development tradeoffs, for center, with over 42,000 square meters, or ~450,000 square feet)
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example between sites that would have lower power costs but a from Digital Realty, for €117 million (i.e., valuing the entire asset at
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longer time line for power grid interconnection. A few key takeaways €470 million), according to React News. The article added that
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the acquisition, while Digital Realty will have a 50.1% stake.

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Our analysis shows a calculation that may be helpful to deter- According to the article, the data center was built in phases between
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mining whether GenAI software/solutions developer business 2017 and 2022, and is now 92% occupied with 14 tenants and 2.7-year
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models will generate an attractive ROIC: the "Capital Cost per weighted average remaining lease expiry. The resulting purchase
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teraFLOPS." This calculation is driven by the ratio of total data price per MW: ~€14 million. Interestingly, this price per MW for the
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center capital costs to the total teraFLOPs at the data center. In our Wilhelm-Fay-Straße property is modestly our estimated cost per
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Data Center economics model using Hopper GPUs, this ratio is ~$14 MW of a new, large (180 MW) GenAI data center, which we would
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per teraFLOPs, while for our Blackwell Data Center model, that ratio attribute to a combination of (1) a higher cost structure for DCs in
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is ~$7 per teraFLOPs. We also calculated the annual power costs as Europe relative to the US and (2) some degree of potential to
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a multiple of teraFLOPs of compute power — at $100/MWh power increase the power capacity (and compute power hosted) at
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cost, our Data Center model shows an annual power cost of ~$0.24/ Wilhelm-Fay-Straße.
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teraFLOPs for a Hopper Data Center, and ~$0.14/teraFLOPs for a

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Blackwell Data Center. Our model provides some indications of upgrading older data cen-
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upgrade economics. For example, the combination of (A) sunk costs

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on existing data center assets would have value, in the sense of Changes we are making: (1) In our base case, we are increasing our
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reducing the cost of upgrading the DC. A November 2023 report GPU/Custom Silicon utilization rate from 60% to 70%. We agree
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from Dgtl Infra estimated that the Land, Powered Shell + Building with the views of several management teams that utilization rates
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Fit-Out components of a DC comprises between 35% an 45% of the will be high for reasons ranging from the high financial incentive for
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total cost to develop a new DC (excluding the cost of the actual high utilization to the likelihood of high utilization for large training

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GenAI hardware, such as the GPUs and Servers). We believe these tasks. (2) We are reducing the percentage of new data center power
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costs represent benefits in terms of the value of existing data centers served by renewables, due to data points (such as the Amazon/Talen
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— while key elements of an older data center would need to be transaction) that would suggest a greater role for non-renewables.
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other costs would be avoided relative to new DC construction. A key GPUs and Custom Silicon from our semis team.
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wildcard for upgrading an existing DC would be the "power uprate"

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approval time — this relates to the time required to receive approval In our base case, our projected 2024/27 data center power
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from the utility to substantially increase the power (load) consump- demand (including GenAI) is ~430/748 terawatt-hours (TWh),
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tion at the DC site. On the latest earnings call for Vistra, management which equates to ~2%/4% of '22 global power demand in 2024/27.
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noted multiple such requests in Texas. It is likely that power uprates GenAI power demand CAGR in 2023-27 in our base case is ~105%,
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will require less time, and cost less, relative to request for connection while overall global data center power demand (including GenAI)
of entirely new sources of power demand (i.e., an entirely new data CAGR over that same time period would be ~20%. Our bull case
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center), but there are risks relating to the total connection time (reflecting 90% chip utilization) has projected 2024/27 data center
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required. power demand of ~446/820 TWh, while our Bear case (reflecting
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50% utilization) has projected 2024/27 data center power demand at
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Please ask us for a copy of our new build Data Center cost model. ~415/677 TWh. Translating these numbers to gigawatts of power
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capacity (GW), our base case total data center power capacity in
Exhibit 16: We project a ~50% reduction in the "Data Center capital
2024/27 would be ~70/122 GW.
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cost of compute" as a result of the evolution from the Hopper to the

Blackwell NVIDIA GPU
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Renewables volumes to serve incremental data center power

Data Center New Build Economics: Blackwell vs. Hopper
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demand total 17 gigawatts (GW) in 2024, rising to 36 GW by 2027.

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Blackwell Hopper Capex required for the renewables volumes in 2024-27 would be
Number of GPUs 45,248 63,492
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Total Facility Capital Cost, Incl. GPUs ($m) $ 3,349 3,583 ~$95 billion, while capex for energy storage over that same time
Total Data Center Compute Power (teraFLOPs) 447,724,895 251,301,587 period would total ~$35 billion. Fossil fuel (likely natural gas) power
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teraFLOPs based on H100 SXM, FP8 Tensor Core capacity required would be ~6 GW in 2027, which would emit ~67
DC Capital Cost - Dollar per teraFLOPs $ 7.48 $ 14.26
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Annual Power Cost - Dollar per teraFLOPs $ 0.14 $ 0.24 million tons of CO2 equal to ~0.5% of 2022 global CO emissions.
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Capital Cost - $Million per Megawatt $ 33
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Capital Cost Excl. GenAI Hardware - $Million
$ 15 $ 15
per Megawatt
Analysis #3: Challenges in Accelerating the
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Growth in Grid Infrastructure
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chips per server

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A major concern around the highly anticipated growth in data centers

Analysis #2: Global GenAI/Data Center
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Power Demand Forecast
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center capacity. Several issues include limited power line capacity,

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delays in planning and permitting for new transmission and distribu-

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We have seen extremely strong interest in our forecast GenAI power tion projects, as well as supply chain bottlenecks. According to the
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demand growth (original note here), and we have had significant dia- Lawrence Berkeley National Laboratory, upgrading existing trans-
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logue with many company management teams on this topic. Based mission lines can take three years or more due to time-consuming
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on this feedback, we are providing an updated assessment of global regulatory hurdles. As a result, increasing the generation and grid
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power demand from data centers, including the likely magnitude of capacity in smaller secondary markets are strategies being pursued
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growth. Please ask us for a copy of our latest global Data Center
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power demand model. A few key takeaways:

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We highlight several case studies of utility responses to data center Exhibit 17: The following chart shows the very low project
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demand and grid limitations: Dominion Energy has been analyzing its completion rates
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network and working with customers to provide incremental
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capacity for new data center projects. For a long-term solution,
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Dominion is accelerating work on a 500 kV transmission line in

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Southern Loudoun County, VA, which is expected to be completed in
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2026 and will relieve many of the transmission bottlenecks that are
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limiting new connections for data centers in Eastern Loudoun. In
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MW of offshore wind, over 14,000 MW of solar and 2,700 MW of
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storage available by 2037. It will spend $7 billion in “Electric Grid

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Transformation” expenses for transmission, grid transformation and
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strategic undergrounding to ease transmission and distribution bot-
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tlenecks. Recently adopted federal legislation provides $2.5 billion in
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public funding for this effort. Additionally, the Federal Energy
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Regulatory Commission (FERC) plans to study and address these
ongoing issues. Utility companies are working with regulators, city
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Source: Lawrence Berkeley National Lab Report. Note: (1) Completion rate shown here is calcu-
officials, operators, and developers throughout the US to improve lated by number of projects online by end of 2022, not capacity-weighted. (2) Calculated as
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number ofprojects operational as of EOY 2022 divided by the total number of requests per

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interconnections. year. (3) Includes data from 7 ISO/RTOs and 26 utilities.
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A report from Lawrence Berkeley National Lab entitled "Queued The following chart from the Berkeley Lab report focuses on the time
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Up" (found here) provides an excellent deep dive of grid con- between when a proposed power generation resource files its inter-
straints in the US. A few key takeaways from the report: connection request and the commercial operations date (COD). In
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California (CAISO), the median is over 125 months, and the other
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1. "[T]he average time projects spent in queues before being built has areas of likely new data center activity (such as PJM, the mid-Atlantic/
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increased markedly. The typical project built in 2022 took 5 years

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Midwest power market, and ERCOT, the Texas power market) show

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from the interconnection request to commercial operations, com- total times of five years or more.
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pared to 3 years in 2015 and <2 years in 2008."

Exhibit 18: The following exhibit from the Berkeley Lab
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2. "Active capacity in queues (~2,040 GW) exceeds installed capacity report focuses on the time between when a proposed power
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of entire U.S. power plant fleet (~1,250 GW), as well as peak load and generation resource files its interconnection request and the
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installed capacity in most ISO/RTOs [grid operators]." commercial operations date (COD)
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3. "Only 21% of all projects proposed from 2000-2017 had reached

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commercial operations by the end of 2022 — 72% had withdrawn

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from queues."
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Source: Lawrence Berkeley National Lab Report. Notes: (1) In-service date was only available
for 6 ISOs and 5 utilities representing 58% of all operational projects; (2) Duration is calculated
as the number of months from the queue entry date to the in-service date.
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Note that most data relating to interconnection time relates to new Analysis #4: The Large Value of "Time to
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power generation projects (such as wind and solar), rather than new Power"
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sources of power demand such as new data centers or upgraded
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existing data centers. That said, the interconnection process for new Given the large amount of capital deployed on these new, very large
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major "loads" (sources of power demand, such as data centers) bears data centers, and given the rapid pace of GenAI chip innovation, there

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many similarities to the process for new power generation. As the is tremendous value for data center owners to connect to the grid as
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New York grid operator (NYISO) noted: quickly as possible.
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"There are three types of interconnection requests that the NYISO For example, using our GenAI Data Center cost estimates, if a data

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analyzes. These include: generator additions intended to increase the center developer could secure a power source with a two-year time
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amount of supply available to the grid; transmission projects advantage relative to other data center developers (for example, due

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intended to provide consumers greater access to supply across the to a streamlined grid connection regulatory process), the developer
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grid, and certain substantial load interconnections, such as manufac- would be willing to pay a ~101% power price premium assuming a
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turing facilities, data centers, or other large loads that will add signifi- six-year economic life of the GPUs, or ~61% assuming a 10-year eco-
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cant demand to the grid… The NYISO interconnection process for nomic life.
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generators generally involves up to three successive engineering
Exhibit 19: Power price premium willingly paid (as a % of NPV of
studies: Optional Feasibility Study — evaluation of the configuration
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annual power costs) for bringing data centers online faster
and local system impacts to inform developers of potential issues
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with the point of interconnection. System Impact Study — a single Power Price Premium Willingly Paid (as a % of NPV of Annual
Power Costs) for Bringing Data Centers Online Faster
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project study to evaluate the impact of the proposed project on the Faster by 2 Years Faster by 3 Years
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existing electric system, including changes to the way power flows 300% Faster by 4 Years Faster by 5 Years
epPower Price Premium (%)

across the system and impacts protection systems. This study also 250%

determines whether the project triggers the need for any system 200%
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upgrades. Facilities Study — evaluates the cumulative impact of a 150%

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group of projects that have completed similar milestones known as 100%

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the 'Class Year', This part of the process also identifies specific least- 50%
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cost system upgrades and assigns binding cost allocations that each 6 7 8 9 10
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Economic Life of GPUs (Years)

developer must accept or reject. Proposed load interconnections, or
significant new sources of demand on the grid, are not subject to the Source: Morgan Stanley Research. Note: Based on assumptions of B100 chips used, 8 GPUs per Server,
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70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh

same process as new sources of generation. For load requests [such
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as those for data centers], the NYISO conducts a System Impact

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1.0 6 7 8 9 10
The Texas grid operator (ERCOT) has enacted a streamlined process
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2.0 101% 87% 76% 67% 61%

Required to Bring DC

for interconnection of "large loads" such as data centers. According

Additional Time

2.5 126% 108% 95% 84% 76%

Online (Years)
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3.0 152% 130% 114% 101% 91%

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to an ERCOT report, this change has resulted in new loads being con-
3.5 177% 152% 133% 118% 106%
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nected to the grid in under 2 years. Contrast this to Santa Clara,

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4.0 202% 173% 152% 135% 121%

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California, where feedback at Morgan Stanley's recent 4.5 228% 195% 171% 152% 137%
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5.0 253% 217% 190% 169% 152%
Tech-Media-Telecom conference indicated a total wait time of ~six
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Source: Morgan Stanley Research. Note: Based on assumptions of B100 chips used, 8 GPUs per Server,
years for new large data center interconnection requests. 70% Server Utilization Rate, Power Cost (Incl T&D) at $100/MWh
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The high cost of longer lead times in terms of grid interconnection for
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data centers becomes clear when we combine move to Analysis #4.

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Separately, if a developer faced a choice between a site that offered a two-year time advantage and another site with 30% lower power costs,
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the developer would in our view choose the site with the time advantage; the ratio of the time value benefit to the higher power cost would
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be ~3:1 assuming a six-year economic life of the GPUs, or ~2:1 assuming a 10-year economic life.
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Exhibit 21: "Delay Depreciation" as a Multiple of Power Costs Saved
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Additional Time Required to Bring DC Online (Years)
3.4 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00
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10% 1.3 2.5 3.8 5.1 6.3 7.6 8.8 10.1 11.4 12.6 13.9 15.2
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Power Costs Saved (%)

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0.8 1.7 2.5 3.4 4.2 5.1 5.9 6.7 7.6 8.4 9.3 10.1

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15%
20% 0.6 1.3 1.9 2.5 3.2 3.8 4.4 5.1 5.7 6.3 7.0 7.6
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25% 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.6 5.1 5.6 6.1
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30% 0.4 0.8 1.3 1.7 2.1 2.5 2.9 3.4 3.8 4.2 4.6 5.1
35% 0.4 0.7 1.1 1.4 1.8 2.2 2.5 2.9 3.3 3.6 4.0 4.3
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40% 0.3 0.6 0.9 1.3 1.6 1.9 2.2 2.5 2.8 3.2 3.5 3.8
45% 0.3 0.6 0.8 1.1 1.4 1.7 2.0 2.2 2.5 2.8 3.1 3.4
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50% 0.3 0.5 0.8 1.0 1.3 1.5 1.8 2.0 2.3 2.5 2.8 3.0
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Source: Morgan Stanley Research. Note: "Delay Depreciation" as a Multiple of Power Costs Saved is calculated by dividing the benefit of time to market (GPU depreciation costs) with NPV of higher power costs. Based on
assumptions of B100 chips used, 8 GPUs per Server, 70% Server Utilization Rate, 6 Years of Economic Life for GPUs.
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Analysis #5: US Nuclear Power Plants Most 5. Dual-unit nuclear plants offer redundancy benefits in the event
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Suitable to Host Data Centers of an operational issue at any single unit. In addition, the operational
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track record of the nuclear power sector (in terms of avoidance of
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Given the very large Amazon/Talen transaction, in which Amazon unplanned outages) is excellent.
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may ultimately build ~960 MW of data center capacity behind the
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fence line at a nuclear power plant in Pennsylvania, we have con- Key parameters of the Talen/AWS data center deal. Talen Energy
ducted an analysis of the US nuclear plants that are most suitable to (TLNE) announced a deal earlier in March to contract power from its
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host large data centers. Among all of the solutions that could Susquehanna nuclear plant to Amazon Web Services (AWS) at an
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potentially de-bottleneck the power system and enable more implied power price around $75/MWh — i.e., a ~$30/MWh premium
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rapid data center deployment, we are most bullish with respect to

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nuclear power plants. Why? adding 120 MW of data center capacity each year over an eight-year
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period to a total size of 960 MW when full built. Each 120 MW

1. Powering up data centers located at nuclear power plants tranche would receive contracted power for 10-year periods from
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should be much more rapid, because this approach obviates the the Susquehanna plant. The 2.2 GW total capacity of the nuclear
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need to take many of the steps required to interconnect to the power plant would cover the energy needs of the data center with one of
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grid. Because the data center power usage occurs before the nuclear the two nuclear units, and would be backed up by the other nuclear
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power ever enters the power grid, the powering of such data centers unit at the site in case of planned or unplanned outages. As part of
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is a far simpler process. Given our earlier analysis of the very high the deal AWS is also purchasing carbon-free attributes from Talen,
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value of "Time to Power," we view this as a key advantage. but the volume and pricing is not disclosed.
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2. Nuclear power plant sites are typically very large, which affords Our analysis of US nuclear power plants focused on the criteria
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nuclear power plant owners themselves:

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3. Significant power infrastructure already exists at nuclear

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power plants, reducing the cost of developing the power infra- 1. Competitive plant (as opposed to a regulated nuclear power
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structure required. plant). Because regulated nuclear plants are in substance "dedi-
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4. Nuclear plants have access to large volumes of cooling water, challenging to secure regulatory approval required to direct large
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which could represent an advantage for data centers given the likely amounts of this power to new data centers. Competitive nuclear
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requirement for liquid cooling at the new, much hotter data centers. plant owners have no such limitation.
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2. No existing long-term offtake agreement. Some competitive Analysis #6: Carbon Footprint of Data
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nuclear power plants have existing power sales agreements, which Center Growth
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would make a large sale of power to new data centers more chal-
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lenging. We see the potential for increased natural gas usage in power plants
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than we had originally forecast, driven both by (1) increased potential

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3. No complex ownership structures. Some nuclear power plants for siting data centers directly at nuclear power plants, which in
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are owned by many parties including municipalities and co-ops, that effect results in other dispatchable power plants (primarily natural
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would make securing approvals more challenging/complex. gas-fired) running more frequently and (2) increased potential for
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4. Dual unit. As mentioned in (E) above, dual-unit nuclear plants "time to power" and by a desire for greater power reliability. From a
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offer redundancy benefits in the event of an operational issue at any Sustainability perspective, this would increase carbon emissions

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single unit. In addition, when one reactor is down for maintenance, from data centers; by 2027, our base case projected total global data
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the other reactor can provide power to the data centers. center carbon emissions total ~67 million tons, equal to ~0.5% of
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2022 global CO2 emissions. In our base case, US natural gas-fired
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The results of our analysis: We estimate that close to 24 gigawatts power generation would increase on average by ~27 TWh in 2025, an
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(GW) of US nuclear capacity is well-suited for data centers. increase of ~2% above the projection developed by US Utility analyst
Assuming half of this power could be used by data centers, we David Arcaro.
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project 12 GW of available data center capacity. Theoretically, this
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volume of available US nuclear capacity could provide the needed
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power for 2-3 years of US data center growth. The US nuclear
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power plants best suited for data centers are, in our view:
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Owned by CEG: Calvert Cliffs (Maryland), LaSalle (Illinois), Limerick

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(Pennsylvania), Peach Bottom (co-owned with PEG, in Pennsylvania),

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Salem (co-owned with PEG, in New Jersey) — CEG's ownership totals

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13,293 MW
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Owned by VST: Beaver Valley (Pennsylvania), Comanche Peak

(Texas) — total of 5,512 MW
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Owned by PEG: Salem (co-owned with CEG, in New Jersey), Peach

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Bottom (co-owned with CEG, in Pennsylvania) — PEG's ownership

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totals 3,979 MW
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Power in Demand: Raising Power Gen Price Targets
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Raising price targets for power generation providers well posi- $46/share of value. This represents a $27/share increase vs. our prior

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tioned for data center upside: CEG.O, VST.N, NRG.N, and PEG.N. approach.
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We see ripple effects across the power generation and retail market
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landscape from the significant electricity needs that are coming with Vistra Energy (VST.N): Raising PT to $78 from $62
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the data center buildout ahead. We believe nuclear plant owners

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continue to be well positioned to unlock upside from data center con- We had previously assumed the company would sign a data center
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tracts given the characteristics laid out previously in this report. A contract covering 1 GW of its nuclear plants at a $15/MWh premium,

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recent Talen Energy nuclear contract with an Amazon data center and recognized a premium for clean energy attributes on another 1
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implies a significantly higher price than we were expecting for the GW of nuclear at $10/MWh. This contributed $7/share to our valua-
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nuclear power so we're revisiting our data center upside calculations tion.
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and increasing our valuations for CEG, VST, and PEG to reflect this
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opportunity. We also think NRG can potentially benefit from data Valuation updates:
center growth in Texas in several ways, so we raise our PT to account
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• Incorporating data center contract pricing upside +$10/
for these new options.
share: We're now assuming the company signs power con-
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tracts with 2 GW of data centers at a $30/MWh premium to
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Factoring in higher prices for potential data center contracts with
the nuclear price floor, a similar pricing level as the Talen
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nuclear plants. Talen Energy (TLNE) announced a deal earlier in
transaction. This represents 30% of the company's 6.5 GW
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March to contract power from its Susquehanna nuclear plant to

fleet and ~8% of new US data centers through 2027 (and data
Amazon Web Services (AWS) at an implied power price around $75/
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centers built after 2027 remain an opportunity). We apply an

MWh — i.e., a ~$30/MWh premium to the $45/MWh nuclear price
11x EV/EBITDA multiple to the $525m of EBITDA to arrive at
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floor. We had previously assumed that data center deals with nuclear
$16.50/share of value. This represents a $10/share increase
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plants could potentially be priced in the $10-15/MWh range, and our

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vs. our prior approach.
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price targets for several nuclear plant operators (VST.N, CEG.O) had
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• Modestly raising valuation multiple on non-nuclear

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incorporated upside from potential data center contracts at these

levels. In light of Talen's deal we are re-running the upside potential EBITDA +$4/share: We are raising the EV/EBITDA multiple
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from contracts with data centers and factoring in a $30/MWh uplift we apply to the non-nuclear business (energy retail and fossil
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generation) to 7x from the prior 6.5x level to be consistent

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level for this opportunity.

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with our valuation of direct peer NRG. We also see a more

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Constellation Energy (CEG.O): Raising PT to $193 from $166: constructive outlook for the value of fossil plants on poten-
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tial power price upside from load growth (especially stem-
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We had previously assumed the company would sign a data center ming from potential data center demand).
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contract covering 2.5 GW of its nuclear plants at a $15/MWh pre- • Adjusting valuation for $2.476 billion of preferred stock
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mium, and recognized a premium for clean energy attributes on -$7/share. Our prior valuation approach did not fully con-
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another 2.5 GW of nuclear at $10/MWh. This contributed $19/share

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sider the liability from the company's outstanding preferred

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to our valuation.
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• Quantifying Texas power price upside from greater

Incorporating data center contract pricing upside +$27/share:
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demand from data centers +9/share: We see a strong poten-

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We're now assuming the company signs power contracts with 5 GW

tial for data centers to be located in Texas and to drive a
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of data centers at a $30/MWh premium to the nuclear price floor, a

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tighter supply-demand. 96 TWh of the company's generation

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similar pricing level as the Talen transaction. This represents 24% of

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exposed to this upside. We estimate 12% higher ATC power

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the company's 21 GW fleet and ~20% of new US data centers through

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prices (~$5/MWh) from 1 GW of incremental data center load

2027 (and data centers built after 2027 remain an opportunity). We
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added to ERCOT, resulting in ~$560 million higher ERCOT

apply an 11x EV/EBITDA multiple to the $1.3b of EBITDA to arrive at
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generation EBITDA assuming unhedged by 2027. We apply 7x • Slight increase in EV/EBITDA multiple (+$3/share). We
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EV/EBITDA multiple to the uplift to arrive at $9/share. apply a 7x EV/EBITDA multiple on the company's energy
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retail business, aligned with the historical trading level and
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in-line with the multiple we apply to VST's fossil/retail busi-
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Public Service Enterprise Group (PEG.N): Raising PT to $70 from ness. This is up slightly from the 6.8x level previously applied

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$61: in the model.
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We had previously not incorporated any data center upside into our
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• Incorporating data center contract pricing upside +$6.50/ • Higher C&I retail demand (+$1/share). NRG is one of the
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share: We're now assuming the company signs power con- largest power retailers in Texas and is well positioned to sign
up data center load. We assume 1GW of additional C&I
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tracts with 1 GW of data centers at a $30/MWh premium to

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the nuclear price floor. This represents 27% of the company's demand (~10% of the current book) stemming from data
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3.7 GW fleet and ~4% of new US data centers through 2027. center demand, at a ~$4/MWh margin.
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We estimate $0.42/share in EPS uplift from this revenue • Higher power prices (+$3.5/share). As discussed in notes
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stream and value this at a 10% premium to utility P/E of 14.4x here and here, we see a strong potential for data centers to
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= +$6.50/share. be located in Texas and to drive a tighter supply-demand in
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the market along with higher power prices. This benefits

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• Increasing utility premium +$3/share: We are applying a
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NRG's generation fleet in the state. We are assuming 12%

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higher prices in Texas or ~$5/MWh resulting from an assump-

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resulting in a 15.7x P/E, up from our prior 5% premium. As we
tion of 1GW incremental data center load, and 40 TWh of the
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look beyond the current New Jersey rate case we think the
low risk regulatory backdrop, achievable EPS growth, company's generation exposed to this upside.
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T&D-only assets, and strong balance sheet with no equity

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needs will support a valuation at this level, among the top

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NRG Energy (NRG.N): Raising PT to $63 from $51, remaining EW

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• Growth synergies and cost cuts (+$4.5/share). We are

incorporating NRG's targeted growth synergies in its home
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services business as the company is tracking ahead of plan

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and has achieved strong results thus far in the smart home
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business overall. We are also fully incorporating cost cutting
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targets announced last year, which we had initially been more

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conservative in modeling. The company achieved solid finan-

cial results last year and overdelivered on the guided syner-
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gies/cost cuts so we are raising our estimates to remove the

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Mapping the GenAI Infrastructure Value Chain
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Recently, Morgan Stanley Telecom, Networking and Communication Equipment analyst Meta Marshall provided a map of the GenAI
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Infrastructure value chain (see Exhibit 22 ). We find it helpful to regularly refer back to this chart in order to place where each company plays

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across this value chain given that GPUs will be surrounded by extensive data center infrastructure (see note here). In our view, the AI data center
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infrastructure creates a large next wave of investment opportunities.
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Exhibit 22: Detailed AI Data Center Infrastructure Map
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Source: Morgan Stanley Research

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