CEG Divestiture Enables LS Power Expansion for PJM Data Center Contracting

Asset Locations and Generation Characteristics

The transacted portfolio consists primarily of baseload combined-cycle generation located in Eastern Pennsylvania, the Edge Moor cluster of combustion turbines in Delaware, and the Hay Road combined cycle plant, also in Delaware.

Locational Disadvantages and Regional Competition

While the assets are well-positioned to capture expanding data center demand in Virginia and Pennsylvania, they have notable locational disadvantages. Gas combined-cycle generation in the tri-state region of Ohio, West Virginia and Western Pennsylvania is closer to less expensive natural gas from the Marcellus and Uinta shale basins. Additionally, expected rapid growth of renewable generation centered in the eastern seaboard states of New Jersey, Maryland and Virginia creates added pressure on wholesale electricity revenues and generation levels. Across PJM, the Market Indicative Power Forecast estimates that combined solar and wind generation share will grow from 7.8% this year to 30.0% by 2035. While coal generation share is forecast to decline the most, the Market Indicative forecast projects that the gas portfolio's capacity factors will hold steady at 50% over the next four years, before falling to levels closer to 30% beyond 2030.

Nodal Basis Risk Near Nuclear Generation

Significant basis risk exists in Eastern Pennsylvania as well, with nodes at the region's numerous nuclear plants typically pricing at discounts to PJM's Eastern Hub. Most notably, the York Energy omplex is located by the Peach Bottom nuclear plant node, while Edge Moor and Hay Road are close to the Salem and Hope Creek nuclear plants in Delaware. Altogether, nodal estimates in S&P Global Energy's Power Evaluator indicate revenue impacts to the portfolio as high as $150/kW of discounted cash flow.

Potential Policy Upside from RGGI Exposure

Upside potential includes the expected re-entry of Virginia into the Regional Greenhouse Gas Initiative (RGGI), while the portfolio's Pennsylvania assets remain outside of RGGI. If Virginia plants are subject to RGGI's carbon emissions market, it will tend to increase wholesale electricity prices in PJM and support higher dispatch from the portfolio's combined-cycle generation.

Capacity Market Outlook as Primary Value Driver

While there are many risks to the portfolio with regard to wholesale electricity prices, the principal driver of asset value for the portfolio is a firm long-term outlook for PJM capacity auction prices, which are expected to clear at the price cap over the next two auctions before rising to levels consistent with the net cost of new entry for natural gas generation in PJM. Although we forecast PJM's reserve margins to increase to target levels as generation is added, anticipated load growth ensures that new capacity will be needed each year, maintaining upward pressure on cleared capacity prices.

Free Cash Flow Targets and Revenue Alignment

At the announced purchase price of $5 billion and a 10% weighted average cost of capital, we estimate the portfolio's annual target for free cash flow at $575 million, equivalent to a long-run net profit of $40.70/megawatt-hour. While merchant revenues (energy and capacity) net of operating costs are forecast to be somewhat lower than this over the next few years when the auction price cap is in place, new owner LS Power may look to bilateral contracting opportunities with PJM's growing datacenter loads, referencing the cost of new generation as a benchmark.

Post‑2030 Revenue Composition Shift

Due to reduced capacity factors, the forecast merchant revenue targets for the portfolio increase on a $/MWh basis after 2030. We forecast, however, that reduced energy market revenue will be more than offset by increased capacity revenue, driving revenue growth that more closely aligns with the portfolio's targets.

Leveraging Power Evaluator for PJM Asset Valuation

The transaction analysis underscores the importance of detailed, location-specific valuation tools in today’s PJM market. S&P Global’s Power Evaluator was referenced in the article for its ability to estimate net present value of EBITDA, account for locational basis risks, and quantify revenue impacts at the nodal level—for example, identifying up to $150/kW of discounted cash flow impact from proximity to nuclear plant nodes. By incorporating forecasted market dynamics, regulatory changes, and site-specific risks, Power Evaluator enables market participants to benchmark acquisition prices, assess long-term cash flows, and inform strategic decisions for both buyers and sellers of power generation assets in PJM. For stakeholders navigating complex market and locational challenges, Power Evaluator provides a robust framework for transparent and data-driven asset valuation.

PJM Market Outlook: Transaction, Risks, and Revenue Drivers

What is the significance of the CEG divestiture to LS Power’s PJM portfolio?

The divestiture of 4.4 GW of merchant gas generation by Constellation Energy Group Inc to LS Power Development LLC enables LS Power to double its PJM operating capacity and rebalance its regional gas portfolio, especially after its 2025 sale of PJM gas assets to NRG Energy Inc.

What locational and market risks affect the acquired portfolio?

The portfolio faces locational disadvantages, including natural gas price premiums, competition from expanding renewable generation, and nodal basis discounts near nuclear plants. These factors may impact merchant revenues and asset value.

How do auction price caps and renewable growth impact revenue recovery?

Forecast merchant revenue may not fully recover the annualized purchase price while PJM's capacity auction cap is in effect. Additionally, rapid growth in renewable generation should pressure wholesale electricity revenue and capacity factors for gas assets.

What is the forecast for PJM capacity prices and asset value?

PJM capacity auction prices are expected to clear at the price cap for the next two auctions before rising to levels consistent with the net cost of new entry for natural gas generation. Anticipated load growth and increased reserve margins support a firm long-term outlook for asset value.

How might regulatory changes such as RGGI impact the portfolio?

If Virginia re-enters the Regional Greenhouse Gas Initiative, wholesale electricity prices may increase, supporting higher dispatch and revenue for the portfolio’s combined-cycle generation. Pennsylvania assets remain outside RGGI, creating regulatory divergence.

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