AI Energy Boom Jolts US Utilities Sector

Andrew Gilbert, Partner at Energy Capital Partners, breaks down the reasons behind higher electricity prices and what can be done to correct them.

The formerly sedate and rather sleepy utilities sector in the US has been jolted by the boom in energy demand from artificial intelligence.

As the hyperscalers plow ahead with eye-watering levels of capital expenditure for AI, power companies are following suit.

The sector’s capex will jump to $1.1 trillion in the second half of this decade from $765 billion in the past five years, according to industry group Edison Electric Institute.

Such a splurge could be good news for investors as well as consumers. As Raymond James analyst Pavel Molchanov puts it: “The nature of the utility business model is the more they invest, the more they make.”

But throwing gargantuan amounts of cash at a problem like the projected shortfall in electricity supply was never going to be straightforward.

For one thing, there’s danger from the “affordability narrative,” as Jefferies analyst Julien Dumoulin-Smith describes it. Rising energy bills are already a mainstream political issue, with AI’s explosive growth pushing up wholesale power prices and, by extension, charges for consumers.

That puts utilities in a bind. As highly regulated entities, there’s a risk in trying to pass much of the cost of all those new power plants and transmission lines on to residential customers.

“That’s how you get upside down with the regulators,” Dumoulin-Smith said. His advice to utilities: Keep your bill hikes close to the level of the Consumer Price Index.

Then there’s the tricky question of where to allocate all that capex. Utility executives must weigh badly needed expansions of generation capacity and power lines against upgrades of local infrastructure. Robust substations, for example, are crucial to keeping the lights on during storms.

So when US utilities begin reporting quarterly earnings later this month, expect plenty of headlines on lofty spending plans. But pay close attention to the details of where all that money is going — and who’ll be on the hook for it.

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