After a key part of Amazon's (NASDAQ:AMZN) nuclear power deal with Talen Energy was rejected by the Federal Energy Regulatory Commission, UBS said investors in the sector should look "through the noise".
The decision, via a 2-1 vote by the FERC to reject the 480 MW interconnection services agreement between Amazon Web Services (AWS) and Talen, the companies can renegotiate a new agreement without significant delay, UBS said.
TLN applied to expand the contract to 480 MW in 2027 from 300 MW currently, which was before the all-time high capacity auction price by the Pennsylvania-New Jersey-Maryland power pool in July and before widespread acknowledgement of a market shortage of power supply through the end of the decade, the analysts noted.
"We do not expect a material reduction in the fixed PPA price or for [Talen] to bear the burden of ancillary services/grid charges, as we believe AWS was realizing significant value under the initial terms," UBS said, with the existing interconnection service agreement for 300 MWs affords the company time to work out a solution.
The FERC order was "light on details" and the rejection "appeared to be more driven by broader policy issues rather than specifics to the ISA amendment request", the analysts added.
They said they expected Talen shares to fall on the news, "but believe investors should focus on the strong fundamental backdrop for TLN and the IPPs broadly, and see through the noise created by the FERC ruling".
Talen has 30 days to request a rehearing, after it could pursue legal challenges but Talen indicated in a statement that it is more likely to pursue a commercial solution.
UBS said this could be a new "hybrid" agreement that includes accommodations for grid backup or it could be "virtual PPA", which has the advantage of not requiring FERC's approval and still provides a dedicated supply agreement.