SUPERNEWS

Macro

AI-Driven Utility Surge: Power Needs Could Jump 900% in Chicago

Utilities sector sees revival with a 4.4% increase in 2024, driven by AI's rising energy demands, forecasting a 900% surge in data center power needs.

By Bill Bullington

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4/27, 11:29 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Citigroup, Inc.
CMS Energy Corporation
Exelon Corporation
Alphabet Inc.
Goldman Sachs Group, Inc.
Microsoft Corporation
NextEra Energy, Inc.
Southern Company
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Key Takeaway

  • AI's expansion drives unprecedented utility demand, with data centers potentially increasing power needs by 900% in Chicago.
  • Goldman Sachs' Power Up America basket surged 28%, outperforming the S&P 500 tech sector's 8.3% gain in 2024.
  • Utilities like Southern Co. and NextEra Energy are key players, benefiting from the shift towards renewable energy sources to meet AI-driven demand.

AI Fuels Utilities Sector Revival

Investors are turning their attention to the utilities sector as a gateway to capitalizing on the artificial intelligence (AI) boom, a move that's reshaping the traditionally stable equities market. The surge in AI development and deployment by leading tech firms like Alphabet Inc. and Microsoft Corp. has significantly increased energy demands, particularly for data centers, which are crucial for AI's computational needs. Alphabet's recent market valuation soared past $2 trillion, while Microsoft also saw gains, underscoring the tech sector's robust growth driven by AI advancements.

Utilities, having faced a challenging year with a 10% decline in 2023, are witnessing a resurgence with a 4.4% increase in 2024, thanks to strategic cost controls and the burgeoning demand from AI-powered data centers. Citigroup Inc.'s Ryan Levine highlighted AI as a pivotal growth driver for the utilities industry, with companies across the US ramping up electricity production capabilities to meet the anticipated demand.

Powering the AI Revolution

The exponential power requirements of AI technologies have positioned utilities at the forefront of this new industrial wave. Exelon Corp. and Southern Co. are among the utilities preparing for a historic surge in electricity demand, with projections of a 900% increase in power needs for data centers in the Chicago area alone. This demand is expected to contribute significantly to utilities' growth, with Southern Co. forecasting a 6% annual increase in electricity sales, predominantly from data centers.

Goldman Sachs Group Inc. has responded to this trend by creating investment baskets like Power Up America and Data Center Equipment, aiming to offer investors alternative avenues to engage with the AI boom. These baskets, focusing on utilities and data center equipment, have outperformed traditional tech sectors in 2024, with nearly 28% and 18% increases, respectively.

Strategic Investments and Renewable Energy

As data center operators seek locations with ample power supply, utilities like Georgia Power have gained regulatory approval to expand capacity, highlighting the sector's strategic importance in the AI era. Renewable energy sources are also playing a crucial role, with companies like NextEra Energy Inc. investing in renewable generation to meet the growing demand. This shift towards sustainable energy sources not only supports the AI industry's expansion but also aligns with broader environmental goals.

The Midwest is emerging as a key hub for data center development, benefiting utilities like CMS Energy Corp. that operate in regions with lower land costs. This geographical shift underscores the strategic considerations of power availability and cost-effectiveness in the AI-driven demand for utilities.

Street Views

  • Manju Naglapur, Unisys Corp. (Neutral on utilities and AI power demand):

    "Power demand from data centers has already been humongous, then came the AI hype and the need for power skyrocketed... With all the money spent on data centers, the power consumption will increase massively."

  • Ryan Levine, Citigroup Inc. (Bullish on utilities due to AI):

    "The AI narrative is capturing the biggest amount of investor interest... It has the potential to be the biggest driver of the industry."

  • Faris Mourad, Goldman Sachs Group Inc. (Bullish on Power Up America and Data Center Equipment investment themes):

    "We consider these themes, along with Goldman’s Broad AI basket, to be the most popular in the next few years."

  • Aaron Dunn, Morgan Stanley Investment Management (Bullish on NextEra Energy Inc. and CMS Energy Corp.):

    "We believe renewables and storage are a key enabler to help meet this increased demand... That also benefits a company like CMS Energy Corp., which operates out of Michigan."

Management Quotes

  • Calvin Butler, CEO of Exelon Corp:

    "Artificial intelligence is poised to help drive a 900% jump in power demand from data centers in Chicago area..."

  • John Ketchum, CEO of NextEra Energy Inc:

    "The U.S. renewables and storage market opportunity has the potential to be 3x bigger over next seven years compared to last seven."