Ritika Janiya
Artificial intelligence is sending a shock wave through the utility sector, which represents an enormous new electricity demand. Billions of dollars are flooding into utility stocks, which are seen as a cheaper way to play the growth of Big Tech. As a result of the artificial intelligence boom, utility companies are being forced to drastically increase their investments in generation, transforming what was once a rather sedate industry into a hot market.
Artificial intelligence is not only changing how we use technology but also upsetting industries once believed to be stable and predictable. Independent utilities is one such industry, made of the companies that provide the essential services of electricity and water. An astonishing rise in investment in utility stocks has been seen over the last few months, and the reason behind this increase is the rising electricity demand generated by AI.
Utility stocks are usually considered a haven in times of uncertainty. People mostly invest in utilities because the companies provide services which everybody will need irrespective of how the economy is performing. However, something which has not happened now appears—investors rushing into utility stocks during a strong bull market—in other words, during periods when the stock market is doing pretty well. This has attracted much attention in the financial world.
What’s behind this new interest in utilities? The answer lies in AI’s huge energy appetites. Big Tech firms like Microsoft and Google are pouring billions of dollars into creating enormous data centers that shall support the new AI technology. These data centers use far more electricity than the classical computing systems. For instance, just one query to the AI service of ChatGPT uses almost 10 times more electricity compared to a regular Google search. This humongous increase in power demand is reshaping the utility sector.
In May and June, more than $1.7 billion was invested in U.S. utilities funds, which jointly oversee about $41 billion. The best performance for these funds in nearly two years, according to data analytics firm Morningstar Direct. But it doesn’t stop there. Another $1.1 billion is expected to flow into utilities funds in July, particularly the Utilities Select Sector SPDR exchange-traded fund, according to a State Street financial services company.
Jay Jacobs, US head of thematic and active ETFs at BlackRock, the investment giant, also expects the trend to continue throughout the year. Investors are on the lookout for AI-related opportunity outside the big tech—Nvidia, Microsoft, Google. Jacobs says investors are hunting for what’s next in AI, and utility stocks offer a somewhat inexpensive way to play it.
That is not what is happening, and the rising demand for electricity is not short term. This demand is accelerating, according to Pedro Pizarro, Edison International’s chief executive, one of the biggest utility companies in the US. Utility companies are therefore increasing their spending on new generation and transmission power infrastructure. Edison International increased its annual capital spend from $6 billion to $8 billion.
The impact of AI on energy consumption is staggering. With such huge demand, the IEA estimates that by 2026, power demand from data centers worldwide could reach 1,000 terawatt hours—more than double the levels seen in 2022. That is equivalent to the total power demand of Germany—one of the world’s biggest economies. Microsoft is opening a new data center every three days just to keep up with demand.
The surge in electricity demand is also pushing up utility stock prices. The S&P 500 Utilities index, tracking the largest US utility companies, is up 10.4% since the beginning of the year. That same index was down 7.1% in 2023 and up just 1.6% last year. One of the more popular plays in that space, the Utilities Select Sector SPDR ETF, is up about 15.3% year to-date.
Three utility companies—Vistra Corp, Constellation Energy and NRG Energy—are top 10 performers on the S&P 500 this year. Following a recent power market auction, the results of which overshot last year’s by more than 800%, Vistra’s share price leaped in excess of 15%, becoming one of the largest US power generation companies. This increase could be viewed as consistent with a very strong incentive to invest more in the sector.
This renewed interest in utility stocks is a big reversal from last year, when $7.4 billion plus was lost in net outflows from the sector, says Matt Bartolini, head of SPDR Americas research at State Street Global Advisors. As Bartolini explains, utilities are now being viewed as a rather dynamic sector with new business opportunities driven by both macroeconomic factors and changes in consumer demand.
Over the past two decades, the volume of electricity consumed in the US has grown by less than 0.5% per year, according to Goldman Sachs. That is now about to change dramatically. The period from 2024 to 2030 now projecting a compound annual growth rate of 2.4% in US electricity consumption. Utility companies, to satiate that appetite, are shredding old spending plans and pouring money into new infrastructure.
In other words, the rise of AI is the new tailwind blowing into investments in the utility sector. Fueled by the expected surge in electricity demand from AI and other digital technologies, utility companies are going through a sea change—from a safe, steady investment to a dynamic, high-growth one. Looking to ride the AI boom, investors are increasingly turning to utilities as the smart and strategic choice.
