In the world of finance, the utilities sector is often considered the most boring of all. With its regulated nature and slower earnings growth, it’s not exactly the most exciting place to invest. These companies, burdened by their capital-intensive nature, funnel most of their cash into infrastructure while sparing a portion for shareholders through dividends. In fact, it’s these reliable dividends that make them vulnerable to rising interest rates as investors increasingly opt for safer and increasingly attractive treasury yields. This phenomenon has resulted in a significant valuation gap between utility stocks and the broader market. Yet don’t let the perceived boredom fool you; this sector might just be on the brink of an electrifying transformation.
Data centers, the unassuming behemoths humming in the background that power the entire digital universe, consume more power than small nations. Their insatiable energy demand is accelerating as artificial intelligence requires an exponential increase in computing power. A study from the University of Pennsylvania estimates that in 2018, computers consumed 1-2% of the world’s total supply of electricity and that by 2020 it jumped to roughly 5%. It estimates that by 2030, as much as 20% of all electricity could be used in computing power.
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As the race toward artificial intelligence intensifies, power demand is accelerating. It comes as no surprise that the trailblazers in AI are already forging strategic partnerships with utilities. Speculation is swirling that Microsoft is exploring building its own nuclear reactor to power its AI ambitions. Bill Gates, the co-founder of Microsoft, is chairman of the board at TerraPower, a nuclear company developing small-scale nuclear reactors. Sam Altman was the CEO of OpenAI, the artificial intelligence company Microsoft invested $13 billion in, and is a large investor in the nuclear fusion startup, Helion. As other tech titans like Alphabet, Apple, Amazon, and Meta charge ahead with expansive visions for AI, they too will grapple with the monumental challenge of powering their ambitions. The convergence of AI and energy solutions heralds an era where innovation meets sustainability head-on.
Also, the United States recently hit a crucial juncture in the realm of Electric Vehicles (EVs), a landmark dubbed as the ‘tipping point’ by Bloomberg. Currently, 5% of new vehicles in the US are electric, which should mark the start of a rapid acceleration in adoption rates. The discussion surrounding the additional power required to sustain an entirely electric fleet is a topic of debate, contingent on charging patterns. If Americans predominantly charge their EVs overnight, capitalizing on periods of low power demand, a roughly 25% increase in power generation might suffice. However, should charging occur whenever vehicles need to refill, the strain on the grid could be multiples higher. Even on the low end, this juncture signifies a new phase of growth, characterized by a scale and scope that utilities have not witnessed in decades.
Energy consumption is on the brink of transformation, propelled by a growth in computing power and the adoption of electric vehicles. Our usage habits are changing which will require a more modernized approach to distribution and a substantial increase in power generation. Against this backdrop of depressed valuations and a stronger growth outlook, the utility sector appears more interesting than it has in years. Exciting may be pushing it too far, but if you include the added possibility of the Fed ending its rate-hiking-cycle, then the utility sector is rather enticing.
For more of Jake’s thoughts click here.