AI Heralds a New Deal for Old Coal Plants

The new thing in electricity is datacenters. The new new thing is … coal?

Two companies you’ve probably never heard of have signed a deal that captures a seismic shift on America’s biggest power grid, with implications for household bills, climate change and the artificial intelligence revolution.

Energy Capital Partners LLC, a private equity firm, is buying Lightstone Holdco LLC, a joint venture between Blackstone Inc. and Arclight Capital Partners LLC that owns four power plants in Ohio and Indiana. Three are gas-fired. The other is one of the largest coal-fired plants in the US, the General James M. Gavin facility; briefly famous in 2001 when a prior owner dealt with local residents’ complaints about pollution by buying their town.

ECP isn’t a household name, but it is perhaps the savviest trader of power assets in the US, with one example being its spectacularly well-timed buyout of Calpine Corp. in 2018, swooping in when public markets had tired of the generation sector and with Calpine now worth multiples of what ECP paid. As with Calpine, the majority of the value in the Lightstone deal likely rests on those younger, more flexible gas-fired plants. Still, while we are a decade into mass coal-plant closures in the US, the private equity firm now also appears to see some value in taking on a 50-year-old, 2,700 megawatt coal facility.

This is the latest surprise in what’s been a year of them for the PJM grid, which covers Ohio, part of Indiana and other states across a swath of the Midwest and mid-Atlantic. In January, the grid operator suddenly tripled its forecast for annual demand growth, centered on proliferating power-hungry datacenters conducting AI operations. Two months later, Amazon.com Inc. announced a deal locking in the output from a nuclear reactor for a co-located datacenter in Pennsylvania. This sparked a frenzy for generator stocks, with Vistra Corp. now second only to AI chip giant Nvidia Corp. on this year’s S&P 500 leaderboard. Then, in late July, PJM’s capacity auction, which sets the amount paid to power plants just to be there if needed, including 30 gigawatts of coal-fired capacity, notched a price increase of 833%.

The Gavin plant’s acquisition would, therefore, reinforce a trend of rising anxiety about the PJM grid and the value of generating capacity rising in tandem. Under conservative assumptions, bidding half the plant’s capacity into the auction would generate payments adding 30% to implied revenue, potentially covering the plant’s entire fixed running costs.1 The deal’s gas plants also benefit from a tightening market.