Microsoft reopens Three Mile Island

Microsoft has signed a 20-year power purchase agreement that will bring the shuttered Unit 1 reactor at Three Mile Island back into service. The deal gives the company 835 megawatts of carbon-free baseload power for its growing fleet of artificial intelligence data centres. Few corporate energy contracts in memory come close.

The counterparty is Constellation Energy, the largest operator of nuclear plants in America, which closed Unit 1 in 2019 because it could not compete with cheap gas. The reactor sits beside Unit 2, which partly melted down in 1979 and has not run since. Constellation will rename the site the Crane Clean Energy Center and aims, subject to approval from the Nuclear Regulatory Commission, to have the reactor running again by 2028. Neither side has disclosed the price.

Buying a reactor's output

Big tech used to buy electricity off the grid like everyone else. Now it is paying to restart commercial nuclear plants. By committing to twenty years of dedicated power at premium tariffs, Microsoft takes on a long-term obligation in place of spending its own capital on generation. The AI race and the nuclear industry now share a customer.

The division of labour is neat. Constellation spends the money on inspections, new equipment and staff, and carries the risk that the restart runs late. Microsoft supplies the one thing a lender or a board wants to see before approving that spending: a creditworthy buyer locked in for two decades. In effect the contract turns Microsoft's balance sheet into Constellation's collateral, while Microsoft keeps its own cash for chips and buildings. For Constellation, a long contract with one of the world's most valuable companies turns a plant exposed to swings in wholesale prices into something closer to a bond, and a bond is much easier to finance.

Why nuclear, and why now

Data centres need power around the clock, which is what nuclear plants provide. American reactors run at full output more than 90 per cent of the time, far more than wind or solar farms, whose output rises and falls with the weather. Microsoft has also promised to become carbon negative by 2030, and its own sustainability report this year showed its emissions rising since 2020, largely because of the construction of data centres. Contracts for wind and solar alone cannot close that gap for a load that never sleeps.

Building new reactors is no answer on the timescale that matters to tech firms. The two new units at Plant Vogtle in Georgia, the first new American reactors approved in decades, came into service years late and at more than twice their original budget. Restarting a plant that already has a site, a grid connection and a licence history is quicker and far cheaper, which is why the handful of recently closed reactors has suddenly become valuable.

A queue is forming

Microsoft is not alone. In March Amazon bought a data-centre campus next to Talen Energy's Susquehanna nuclear plant in Pennsylvania for $650 million, with power supplied directly by the station. In Michigan, Holtec is working to reopen the Palisades plant with the help of a federal loan. The Inflation Reduction Act added a production tax credit for existing nuclear plants, which puts a floor under their revenues and makes restarts easier to finance.

The grid itself is sending the same signal. This summer's capacity auction run by PJM, the grid operator covering Pennsylvania and much of the mid-Atlantic, cleared at many times the previous year's price as demand forecasts rose and older plants retired. Utilities that once worried about surplus generation now warn of shortages later this decade.

Investors have noticed. Shares in companies that own nuclear plants have been among the best performers in American markets this year, as analysts began to value their output as a scarce input to computing rather than as a commodity sold at whatever the wholesale market pays. That rerating is itself a financing tool. A generator whose shares trade at a higher multiple can raise equity more cheaply to fund restarts and upgrades that would once have been hard to justify.

Who pays the premium

The winners are owners of existing nuclear fleets, whose output can now be sold to a buyer that values reliability and carbon credentials far above the wholesale price. The losers could be ordinary ratepayers. When a data centre takes the output of a plant that once fed the grid, other customers must find that power elsewhere, and in a tight market that means higher bills. Regulators in several states have begun asking who should bear the cost of new transmission and capacity built for tech companies. Three Mile Island is a slightly easier case, since its output has been off the grid for five years.

What could go wrong

The case against is that the AI boom may not last as long as the contract. Twenty years is an eternity in technology, and a slowdown in demand for AI services, or a leap in the energy efficiency of chips, could leave Microsoft paying premium prices for power it no longer needs. Restarts carry their own risk: no American commercial reactor has come back after being fully shut and prepared for decommissioning, and the regulator's review could expose costly problems. There is also regulatory risk in the model. Federal regulators are reviewing an amended grid agreement for the Susquehanna arrangement, and utilities have argued that data centres drawing power directly from plants should still pay their share of the grid's upkeep. A ruling against such deals would raise costs for the next buyer, though it matters less for a restart like this one, which will feed the grid in the ordinary way. Still, for a company with Microsoft's cash flow, a long power bill is a small price for securing the one input that cannot be bought quickly.

AI demand has moved on from chips to power stations. Owners of idle reactors should expect calls from the other tech giants, and at prices the old utility customers never paid. Expect Constellation's peers to announce similar contracts within the next year, and ratepayers in states with tight grids to start paying for them in their bills soon after.