I toured a massive 600-megawatt power plant a few weeks ago and was amazed. It seemed to me like an engineering marvel straight out of the History Channel. Not only does it power my home, but it also provides energy to businesses that employ hundreds of thousands of people in my city.
Energy is the key to the future, and power companies are starting to be significant players in the future of Artificial intelligence.
Stocks are having a great May so far, up just over 5% as of the May 22, and investors seem to be pouring money into a wide variety of stocks. One of the most surprising is utilities, which is usually a slow, steady, unexciting sector. But not in the past three months.
It is strange but true that your boring power company sector has increased by 18% during the past three months. This sector includes regulated utilities like Dominion Energy and Southern Company. It also includes wholesale power groups like Constellation Energy and Vistra.
People usually invest in the utility sector when looking for slow and steady returns through above-average dividends, but utilities were hit hard last year by competition from treasuries that looked more attractive because of high interest rates. Rates are still high this year, so what is all the fuss about?
You guessed it: Artificial intelligence. These warehouse-size data centers, full of servers, routers and computers working on AI, need huge amounts of electricity to operate. The amount of energy that data centers are expected to use in the U.S. is expected to reach 35 gigawatts (enough energy to power more than 26 million homes) by the end of the decade, almost double its 2022 level.
When considering investments, remember that not every utility company will benefit from AI data centers. Utility company products and services include gas, water, electric and telecom utilities. In terms of benefiting from AI data centers, the winners will be those that use natural gas to produce electricity and are in the right location.
Location is key. The utility companies in the areas where these new or restructured data centers will be located will have a chance to ride the AI boom.
Texas and California are typical data center locations but might not benefit as much. Texas is struggling with energy because of rising population demands and a lack of connection to the national energy grid. California is, as usual, a mess. It didn’t keep up with the necessary infrastructure and is still suffering the effects of a few years of drought that strained its hydroelectric production. So, neither Texas nor California are a good fit for a flood of new AI data centers.
Follow the locations of current and future data center sites to see which companies will benefit from the rising AI energy boom. Places like Virginia, Georgia and the Carolinas, which are the fastest-growing states for new AI data centers. As usual, investors will need to dive deeper into the holdings of the companies they want to invest in to see which ones will benefit the most.
As soon as I finished the power plant tour, I immediately called my wife and told her I would turn around and take it again if I could. It was so cool. The size and importance of the plant were impactful. (By the way, don’t tour it if you are afraid of heights.)
I don’t know exactly how AI works, but I know it will take a lot more power plants than America has right now to reach its full potential.
Have a blessed week.
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