Elon Musk said in April that while the development of artificial intelligence (AI) had been “chip constrained” last year, the latest bottleneck was “electricity supply.” Those comments are in agreement with those from the Amazon (AMZN) CEO Andy Jassy earlier this year. He said there was “not enough energy right now” to run new generative AI services.
At the World Economic Forum in January, Sam Altman of OpenAI said: “We do need way more energy in the world than we thought we needed before. We still don’t appreciate the energy needs of this technology.”
The reality is that the burgeoning AI industry is facing a dilemma: where do we build the data centers, and how do we get the power? The current limitations of the electric grid could easily get in the way of AI.
Explosive Growth in Data Centers
Data centers — very large industrial buildings that house the physical infrastructure of AI, such as cables, chips and servers — are the very backbone of the new AI economy.
The estimate is that global data center capital expenditure will surpass $225 billion in 2024. Nvidia (NVDA) CEO Jensen Huang said earlier this year that $1 trillion worth of data centers would need to be built in the next several years to support generative AI.
Such rapid growth would require huge amounts of electricity, even if AI systems become more efficient. According to the International Energy Agency (IEA), the electricity consumed by data centers globally will more than double by 2026 to more than 1,000 terawatt hours. For comparison, the U.S. consumed about 4,000 terawatt hours in all of 2023.
Electricity consumption at U.S. data centers alone is poised to triple from 2022 levels, to as much as 390 terawatt hours by the end of the decade, according to Boston Consulting Group. That’s equal to about 7.5% of the nation’s projected electricity demand. That may even be too conservative of an estimate - the AI industry is forecast to expand “exponentially” and consume at least 10 times its 2023 demand by 2026, according to the IEA.
This could translate to the U.S. facing a future of rolling blackouts if infrastructure improvements keep getting delayed. Estimates are that at least $20 billion annually needs to be invested in new long-distance transmission lines. But virtually nothing is being spent on them now.
Electric Utilities: Time to Buy
Investors looking for a relatively undiscovered way into the stock market’s AI boom may want to consider investing into what has traditionally been the most boring corner of the stock market: utilities.
High interest rates led to the S&P 500 utilities sector falling 10% in 2023. That was its worst year since 2008, massively underperforming the S&P 500 Index's ($SPX) overall gain of 24%.
The group has recovered somewhat in 2024, rising more than 6% as cost controls offset record capital spending. The change in sentiment for utilities - that surging demand from data centers required for AI will be a big driver for the industry - also has helped.
Here is something else I’ve noticed: the improvement in forward power prices has outpaced the movement in regional natural gas hub pricing. This indicates tightening conditions in the power markets, validating investors’ growing optimism about utilities.
Utilities, including Constellation Energy (CEG), Vistra Energy (VST), and NextEra Energy (NEE), are forecast to experience a 33% increase in earnings per share compared to the previous year.
In addition, NextEra - with nearly 60 GW of renewable generation capacity - will benefit from the increasing electricity needs of data centers. Most tech firms prefer using renewable energy instead of fossil-fuel energy.
For example, on May 1, we saw the announcement that Microsoft (MSFT) agreed to back an estimated $10 billion in renewable electricity projects to be developed by Brookfield Asset Management (BAM) and Brookfield Renewable (BEP).
The “global framework agreement” is a commitment to bring 10.5 gigawatts of generating capacity online. Brookfield said the capacity was about eight times larger than the previous single biggest corporate renewable electricity purchase agreement.
Buy NextEra Energy Stock
That’s why I believe a company like NextEra Energy is a good investment now.
The company owns Florida Power & Light Company, which is America’s largest electric utility, and sells more power than any other utility. NextEra Energy also owns a clean energy business, NextEra Energy Resources, LLC, which is the world’s largest generator of renewable energy from the wind and sun, and a world leader in battery storage.
NextEra Energy Resources has shown it is a best-in-class renewable energy operator and developer. The company was an early adopter of wind generation, building a competitive advantage by securing some of our country's most desirable locations and locking in 20-year contracts with price escalator clauses.
NextEra's current plans shift the focus to solar. More than half of its planned renewable energy growth through 2026 will be solar and energy storage. The rest is onshore wind.
During the earnings conference call on April 23, NextEra CEO John Ketchum said: “We believe renewables and storage are a key enabler to help meet this increased demand [from data centers]. The U.S. renewables and storage market opportunity has the potential to be 3x bigger over the next seven years compared to the last seven.”
He also reaffirmed the 6% to 8% annual earnings growth expectations through 2026.
NextEra Energy's high-quality regulated utility in Florida and fast-growing renewable energy business give investors the best of both worlds: a secure dividend and industry-leading renewable energy growth potential.
NEE stock is a buy below $75.
