Electricity companies are surging as AI craze boosts demand for power

The explosive growth of artificial intelligence — fueled by generative platforms such as the now ubiquitous ChatGPT — is famous for sending shares of chipmakers like NVIDIA (NASDAQ: NVDA) to record highs, but it’s also boosting an industry that some may not immediately connect to the latest high tech boom: electric power utilities.

At the heart of the action is the growing number of data centers used to process all the digital queries, and they’re using so much electricity that Goldman Sachs is predicting that demand will grow 160% by 2030. The activity has already been a boon for Vistra (NYSE: VST), Constellation Energy (NASDAQ: CEG) and NRG Energy (NYSE: NRG), three generation companies that have joined NVIDIA and Super Micro Computer (NASDAQ: SMCI) as the top five performing stocks of the S&P 500 so far this year. 

Goldman Sachs noted in a report that a single ChatGPT query uses ten times as much electricity as a Google search, and it predicts that data centers will consume 3-4% of total power output by the end of the decade. The US Energy Information Administration, meanwhile, is expecting electricity generation in the country to grow 3% in 2024 alone because of the rising demand from data centers, in addition to warmer weather and increased manufacturing activity. 

“The interest is like nothing else we’ve seen in 20 years in terms of the number of clients that are coming to us, the size and scale of the opportunity,” Constellation Energy CEO Joseph Dominguez said in an earnings call when asked about data centers, noting that the company was focusing on nuclear capacity because of mandates for cleaner energy. “Our prospective customers in this space are all in a hot competition, one against another to grow this kind of capability.”

Not all utilities are created equally, however, and the market has been pricing companies differently depending on where they sit on the value chain. The electricity business is generally split into generation, transmission and distribution segments, with the latter two under rising pressure because of risks connected to wildfires that can be sparked by downed power lines. Hawaiian Electric (NYSE: HE), for example, has seen its shares decline nearly 70% over the past year in the aftermath of a series of fires last year that killed more than 100 people and caused widespread damage. 

Consolidated utility companies — which have both generation and consumer distribution segments under one roof — have been performing in the middle of the pack so far this year, with NextEra Energy (NYSE: NEE) shares gaining 23%, Dominion Energy (NYSE: D) rising 10.8% and Duke Energy (NYSE: DUK) increasing 6%. That’s compared to the massive gains seen by generation-focused Vistra, Constellation Energy, NRG Energy — up 140%, 87% and 59%, respectively — and suggests that companies could come under increasing investor pressure to spin off generation units to capture more of that upside.

The global electricity market is complex, bound by geography, multiple regulatory frameworks and ongoing pressure to diversify away from fuels such as coal and natural gas into more renewable sources that can be more expensive and less reliable. It’s also connected to broader economic cycles and weather patterns that can make investment forecasts challenging, to say the least. Yet, as global dependency on cloud computing and AI continues to grow, the need for expanded electricity capacity is becoming one of the few certainties. Tech companies won’t be the only winners.