PJM auction delay complicates independent power producers' stock price recovery

US independent power producer valuations may be due for a rebound, industry analysts said, just days before the Federal Energy Regulatory Commission delayed a key capacity auction.

In the last 12 months, shares of Vistra Corp., Constellation Energy Corp., NRG Energy Inc. and Talen Energy Corp. have declined 30%, 22%, 41% and 28%, respectively, as of the Sept. 28 market close, contrasting sharply with the high-double and triple-digit percentage increases that dominated 2024.

Increasing political opposition to the AI-driven data center build-out and ongoing PJM Interconnection reforms have significantly dampened investor expectations in 2026, but analysts at Wells Fargo wrote Sept. 23 that "the next IPP inflection is measured in weeks, not years."

"The interest level is high, the demand is evident and could be unlocked over the next two months with key clearing events ... where we could finally see a return back to the mid-to-high-single digit [free cash flow] yields witnessed in the first bull run a couple of years ago," they said.

With the PJM reliability backstop auction's bilateral contracting phase due to begin Sept. 30 and customers' continued interest in the Electric Reliability Council of Texas market despite Texas Governor Greg Abbott's executive order pausing datacenter-related project permits, conditions for an upswing are "beginning to develop," according to Wells Fargo.

But on Sept. 29, FERC ordered PJM to suspend the process for five months until Feb. 28, 2027. If PJM submits a revised proposal, FERC could "expedite" the start date, according to the filing.

"We preliminarily find that PJM's existing tariff may be unjust and unreasonable because the existing reliability backstop provisions appear to be insufficient to prevent the grave resource adequacy concerns that led PJM to file the instant proposal in the first place," the commission wrote.

Constellation bore the brunt of investors' response, with shares settling 4% lower on Sept. 30.

In a Sept. 23 report, Jefferies analysts warned clients that the auction's $555/megawatt-day price cap may not be able to accommodate increasingly inflated prices for new gas plants and uprates, though FERC's order upheld it.

The delay itself "is arguably positive in further delaying supply additions," keeping merchant power prices high, "but is negative to the 'clarity' thesis on contracting existing assets," Jefferies analysts said in a separate Sept. 30 note.

"Many bullish investors argue that contracts on existing assets will come after regulatory clarity is secured," they said. "Our strong expectation remains that contracts on existing assets will be rare and nuclear uprates have the higher probability of success."

Commitments by tech companies and investor-owned utilities to use new generation to power new data centers had already complicated contracting for existing assets, Jefferies said in its Sept. 23 report.

A likely outcome of FERC's order is that the auction's approximately 6.8-gigawatt procurement target will be reduced, analysts at BMO said Sept. 30.

Renewed investor interest in IPPs, meanwhile, will ultimately come from the merchant side.

"Investors we speak to rightly or wrongly believe that contracting of existing power plants will happen after the midterm elections, likely leading to strength in shares," the Jefferies report said. "We prefer NRG and [Vistra] as we see more upside from Texas power price improvement."

Morningstar senior equity analyst Travis Miller agreed that investors are too focused on data center contracts alone, noting that hyperscalers have preferred to sign power purchase agreements with integrated utilities.

"Power producers still have a lot of value and still can produce a lot of cash flow for investors and have a good long-term competitive advantage, but I don't think the data center market is going to be as attractive as investors initially thought two years ago," Miller said in an interview.

At the same time, Jefferies anticipates that PJM market reforms will ultimately "push down pricing regardless of the market realities" as state oversight increases.

PJM proposed adding state appointees to its board nominating committee, as well as a bicameral structure for the Organization of PJM States Inc. that includes both state commissioners and state executive branch officials.

"This remains our principle concern around power IPPs beyond the lack of contracting progress on existing assets," Jefferies said.

If stock prices remain low in the longer term, IPPs may need to begin selling assets, according to Jefferies.

"For NRG ... we see the clearest argument for asset sales being accretive, especially when coupled with buybacks," the report said. "This would be the ultimate irony considering the push to bring assets back public in just recent months."

In January, NRG closed its acquisition of 18 natural gas-fired facilities, along with a commercial and industrial virtual power plant platform, from LS Power Development LLC as part of an industrywide gas generation buying spree.

Morningstar's Miller disagreed that IPPs could reach a point where selling assets would be the best option for balance sheet maintenance.

Constellation's $26.6 billion acquisition of private IPP Calpine LLC, which closed in January, will "still end up being a very good move in the coming years" as a merchant power market diversification play, Miller said.