By Laila Kearney and Timothy Gardner

NEW YORK/WASHINGTON (Reuters) - Constellation Energy and Microsoft plan to restart the Three Mile Island nuclear plant, hoping they have scored a quick source of enough climate-friendly energy to power rapidly expanding data centers for artificial intelligence (AI).

U.S. power generation capacity through the end of the decade could rise by about 2.4% to 2.7%, according to an analysis of the most recent available U.S. Energy Information Administration (EIA) data, from late 2022. Data center power use is expected to more than double by 2030 to consume about 9% of all the country's electricity.

Tech companies are scrambling to meet a surge in energy demand from data centers to power generative AI. But tapping the nuclear system involves regulatory hurdles, possible supply-chain snags, sometimes stiff local opposition and scrutiny from water authorities concerned about healthy reservoirs.

In March, 1979, Three Mile Island made global headlines with a partial meltdown at its Unit 2 reactor. The reopening plan covers the Unit 1 reactor at the Pennsylvania plant, which operated safely for decades before being closed five years ago.

The $1.6-billion plan would restart Unit 1 by 2028 to offset Microsoft's data-center power consumption in the region. It is the latest deal between a technology company and a nuclear-power provider. In March, Talen Energy agreed to sell a data center to Amazon.com next to Talen's nuclear plant, which operates elsewhere in Pennsylvania.

More nuclear contracts for data centers are in the works, power industry sources say. But each tech-nuclear deal is unique and comes with its own challenges.

"Nobody has done this before," said Kate Fowler, global nuclear energy leader for Marsh, an energy insurance broker and risk advisor, about Three Mile Island's attempted restart. "There's going to be challenges that pop up."

Supply-chain bottlenecks have cropped up since Three Mile Island shut its Unit 1 in 2019, Fowler said. For instance, Washington slapped restrictions on enriched uranium following Russia's 2022 full-scale invasion of Ukraine.

Securing licenses from the U.S. Nuclear Regulatory Commission will also be challenging, as will negotiating with local opponents, who remember the 1979 partial meltdown.

"The NRC currently really has a full plate," said Sola Talabi, a nuclear engineer and president of energy risk consultancy Pittsburgh Technical, noting license applications for different types of reactors the agency has never considered before, including high-tech modular plants and another decommissioned reactor in Michigan.

Even though President Joe Biden recently signed legislation to streamline the NRC's licensing process, consideration of the queue of new projects by the timelines laid out by companies will challenge NRC personnel and technical resources, Talabi said.

While Constellation seeks NRC operating approvals for Three Mile Island, the public comment period could prolong the processes. It could also take years to reconnect the project to the regional grid.

OTHER HURDLES

Regulators may follow lengthier review processes to restart a fully shut nuclear plant, risk and energy experts said.

Even though the Talen plant is operating, Amazon's data center there faces challenges on the federal level from two regulated utilities who predict it could increase transmission costs that would raise power bills. Talen disputes the prediction that the public would face higher power bills or reliability problems from the data center, which could consume enough electricity to power all the homes in New Mexico.

At Three Mile Island, resuming the use of equipment and infrastructure that has been dormant for five years could be tricky, said Edwin Lyman, a nuclear safety expert at the Union of Concerned Scientists.

"Constellation should expect to encounter problems that will be costly and time-consuming to fix," Lyman said.

Three Mile Island also will require modified surface and groundwater permits, said Stacey Hanrahan, a spokesperson for the Susquehanna River Basin Commission.

"Any modification request will be thoroughly reviewed, and the project's expected water demands will be evaluated for sustainability and potential adverse impacts to the environment and other users," Hanrahan said.

Talabi said four years is enough for Constellation to address any technical issues at Three Mile Island, which could be substantial when sensitive components such as steam generators and reactor vessels have been closed for years.

Talabi also emphasized the importance of handling environmental and community concerns that may arise around the site, particularly given the 1979 accident.

"Probably more than anywhere else in the country, the need for community engagement to ensure that we have societal acceptance is going to be critical for restart," Talabi said.

(Reporting by Laila Kearney and Timothy Gardner; Editing by David Gregorio)