Investing.com -- Goldman Sachs initiated coverage of two major U.S. independent power producers, arguing that tightening electricity supply and surging demand from data centers in the PJM power market will support higher power prices and earnings growth through the end of the decade.

The brokerage launched coverage of Talen Energy with a Buy rating and a $499 price target, while assigning Constellation Energy a Neutral rating and a $305 target. Goldman said the PJM grid, which serves 67 million customers across 13 states and hosts roughly 35% of U.S. data center capacity, is experiencing a structural supply-demand imbalance driven by power plant retirements and growing electricity demand.

Talen Energy emerged as Goldman’s preferred way to play the theme, with analysts citing the company’s 17-year power purchase agreement with Amazon Web Services, its nearly exclusive exposure to the PJM market, and valuation that they view as attractive relative to growth prospects. Goldman estimates Talen offers a potential total return of 29%, compared with 17% for Constellation.

The bank expects PJM demand to grow at a 3% annual rate through 2035, fueled by data centers, manufacturing reshoring and electrification trends. At the same time, more than 40 gigawatts of thermal generation capacity have retired since 2010, while grid connection bottlenecks are slowing new supply additions. Goldman forecasts reserve margins in PJM could shrink from about 23% in 2026 to just 7% by 2030.

The tightening market has already pushed PJM capacity auction prices to record highs, with recent auctions clearing at regulatory caps above $325 per megawatt-day. Goldman expects elevated capacity prices and firm power markets to persist, benefiting owners of existing nuclear and natural-gas-fired generation assets.

While Goldman acknowledged ongoing regulatory uncertainty surrounding PJM’s proposed Reliability Backstop Procurement mechanism and data center-related power contracting, it expects greater clarity over the coming months to unlock additional power purchase agreements and support earnings revisions across the sector.

Among major U.S. independent power producers, Goldman continues to favor Talen, Vistra and NRG Energy, while viewing Constellation’s premium valuation as already reflecting the scarcity value of its nuclear fleet, potential data-center contracts and benefits from its acquisition of Calpine.