The Utility Sector in the AI Era: New Opportunities for Growth

The recent AI infrastructure investment frenzy by Big Tech companies is breathing new life into the utilities sector. Traditionally viewed as a defensive sector, utilities are now facing interesting growth opportunities. At the core of this change is the increase in power demand due to AI. Let's take a closer look.

1. Increasing Investor Interest

• $1.7 billion flowed into utilities funds in May and June

• An additional $1.1 billion went into the SPDR Select Sector Fund-Utilities (XLU) in July

• Continued investment in utilities funds is expected until the end of this year

2. AI and Power Demand

• AI search services (e.g., ChatGPT) consume about 10 times more power than a typical Google search (2.9Wh vs. 0.3Wh)

• Data center power demand is expected to reach 1,000 terawatt-hours by 2026 (double the 2022 level, equivalent to Germany's total power demand)

• Microsoft is opening a new data center every 3 days

3. Power Demand Outlook

• According to Goldman Sachs, U.S. electricity consumption is expected to grow by 2.4% annually from this year to 2030 (compared to less than 0.5% annual growth over the past 20 years - about a 5x increase)

• Utility companies are readjusting their investment plans to build new generation and transmission infrastructure

4. Sector Transformation

• Evolving from a traditional defensive sector to one with growth opportunities

• Macroeconomic factors and structural demand changes (AI Power, electric vehicles, etc.) are driving this transition

5. Investment Opportunities

• Focus on related stocks such as XLU, Edison International, Vistra Corp, Constellation Energy, NRG Energy

• Falling interest rates are positive for utility companies with high debt dependence

6. Cautions:

• Dramatic increases in returns may be limited due to factors such as regulatory environment, capital-intensive nature, and intensifying competition

• Performance differences between companies within the sector can be significant, requiring a long-term approach

Conclusion:

The advent of the AI era is bringing new growth opportunities to the utilities sector. Along with increased power demand, investor interest is rising, but the utilities sector is generally considered a more stable, lower-growth sector. While growth opportunities may increase, achieving high returns like Big Tech companies would be highly unusual for this sector.

While future structural changes in customer demand could lead to higher growth in the utilities sector, it's necessary to have realistic expectations considering the following:

• High growth potential: Structural changes (increased electrification, renewable energy adoption, grid modernization, etc.) could lead to higher growth rates than the sector has traditionally experienced

• Regulatory environment: Utilities are still heavily regulated, which can limit profit margins and growth rates even in times of increased demand

• Capital-intensive nature: Meeting increased demand requires significant infrastructure investments, which may offset some revenue gains in the short to medium term

• Competitive landscape: As the sector becomes more attractive, it might draw more competition, potentially affecting returns

• Market expectations: As these trends become widely recognized, they may already be priced into stock valuations to some extent

While some utility companies may see higher returns than they have historically due to these structural changes, it would still be unusual to see "dramatic" returns (especially compared to growth sectors). A realistic expectation would be moderately improved growth rates and potentially higher dividends over the medium to long term.