AI Has Turned Utilities Into A Power Play, And These Three Stocks Are Set To Light Up

The market’s dullest sector is becoming one of its flashiest. So here are three brightly shining stocks you may want to own.

US electricity demand has been, ahem, static over much of the past two decades, but it’s finally beginning to light up. That’s partly thanks to the explosive growth of AI. The innovative technology’s huge need for power now means that utility companies – traditionally one of the dullest corners of the stock market – could offer investors a pretty exciting way to play the market’s latest obsession. I’ve taken a look across the industry and found three standout firms.

Thesis

• Utilities are heavily regulated businesses that are permitted to earn a specified return on their “rate base”, which is essentially the total value of their approved investments. Because of this mechanism, a utility’s profit growth is mainly determined by its rate base growth.

• Power demand is forecast to grow by 55% between 2020 and 2040 in the US, with data centers accounting for roughly half of the expansion. That’s six times the 9% increase seen between 2000 and 2020.

• To meet this huge, once-in-a-generation surge in power demand, US utilities will have to invest heavily in new generation and transmission capacity. That, combined with the need to replace aging grid infrastructure and transition from coal to cleaner energy, will drive a structural shift in the size of US utilities’ investments and, in turn, the pace of their rate base growth.

• That makes utility stocks a potentially attractive investment. First, the sector's valuations are attractive relative to the broader market, especially given its ability to deliver solid total investor returns with much greater visibility and predictability than other industries. Second, falling interest rates (the environment we’re in today) tend to benefit utility stocks disproportionately. Third, having these shares in your portfolio can be a good way to increase diversification and protect against rough patches.

• And, sure, it’s perfectly sensible to use an ETF to gain broad exposure to the sector. But if you want to make a more calculated wager, three utilities stand out: Dominion, NextEra, and Constellation.

• Dominion serves Northern Virginia – the biggest data center market in the US by a mile. The utility is investing heavily to meet the region's growing power demand, which is projected to double by 2039 – dwarfing the 55% increase expected for the US as a whole.

• NextEra is America’s biggest developer and operator of wind and solar farms, capitalizing on a huge surge in renewable energy projects. The firm also owns a well-managed regulated utility operating in one of the fastest-growing states.

• Constellation is the country’s biggest owner of nuclear power plants, which are now in high demand from deep-pocketed tech firms trying to meet the massive energy needs of their data centers while staying aligned with their climate commitments.

Risks

• Sector-wide threats include rising bond yields, potential regulatory pushback on utilities’ big investment plans, increasing financing requirements, and the possibility that lofty power demand growth forecasts may prove overly optimistic.

• Dominion faces some big-project uncertainties related to the huge offshore wind farm it’s building.

• NextEra’s risks include regulatory uncertainty over its utility’s investment plan and potential changes to green energy tax credits. (Any repeal or watering down of these tax credits could also hurt Constellation’s nuclear business.)

• Other risks for Constellation include the potential for falling power prices and a bumpy, costly integration of Calpine (a rival that Constellation has agreed to buy).