When companies reported earnings over the past two weeks, the utility sector glimmered. Southern Company boasted $13 billion in new capital expenditures. FirstEnergy Corp.’s estimates for transmission investments surged by as much as 20%. CMS Energy announced real progress on building out power for data centers. Xcel Energy beat analysts’ estimates on strong operational performance.
These second quarter results, the investment bank Jefferies wrote in a note to clients, have the makings of a new “golden age of utilities.”
“It’s a remarkable time for electric utilities,” Chris Seiple, VP of power and renewables at the consultancy Wood Mackenzie, told Latitude Media. “For 20 years, they haven’t had load growth and now, for the first time in a long time, they have load growth. For some of the utilities, they have a lot of load growth.”
As a result, many of these power companies were caught “flat-footed,” forced to “build the plane while flying it,” according to a recent report Seiple authored. Finance chiefs who just a year ago dismissed the idea of major capital expenditures are now scrambling to present ambitious new investment strategies as Wall Street clambers for growth. They face the challenge of constructing enough of the right kinds of generation, all while keeping rates from soaring to levels that trigger a political backlash and correctly predicting just how much power is needed for the future.
Data centers to support artificial intelligence software make up much of the unexpected growth in demand. That’s partly why many of the new server farms are located in Texas, where adding new power generation is relatively easy and cheap compared to more tightly regulated markets, and Virginia, where the federal government’s cybersecurity investments are clustered.
For years, utilities’ investment model was largely about cleaning up generation with cheap renewables. For utilities in deregulated markets, where different companies own the power plants and the distribution lines, that meant signing power purchase agreements with, for example, a wind farm, at costs less than the rates customers were paying. As a result, the primary pressure driving up rates was the cost of building new power lines or upgrading the distribution infrastructure to better deal with extreme weather.
But the need for more 24/7 baseload power to keep data centers running is spurring so much demand for new gas turbines that the backlogged orders at major manufacturers such as GE Vernova and Siemens Energy now stretch into years. That’s good news for other costly generating sources that have struggled to find willing investors in recent years, such nuclear power developers or hydropower owners who want to upgrade older dams — though those technologies in many cases are also years away.
Too much growth?
Last month’s rate hikes in grid systems like the PJM Interconnection, the largest system in the country, are already spurring political pushback, becoming a key campaign issue in the New Jersey gubernatorial race. Charles Hua, the founder of the advocacy group PowerLines that focuses on utility regulators, told Latitude Media that there is “absolutely a risk” that utilities could exhaust the public’s willingness to pay higher rates.
“We’re playing with fire to test the limits of that right now, which is very much happening with a record year of rate increases,” Hua said. “We’re already at two-and-a-half times the amount of rate hikes we had last year, with months to go.”
A vertically integrated utility has an advantage in a regulated, traditional monopoly market such as in Georgia or North Carolina, Seiple said, because they have control over the entire market. That may be why Southern Company, which owns Georgia Power, has been able to respond to the surge in demand by putting up such big investment numbers in the last quarter. But the ability to meet the moment by spending big means a company could be left with stranded assets if the demand forecasts shift again.
“This is a fundamental reshaping of the risk profile,” Seiple said. “The utilities that are going big on this are going to have a very big chunk of revenue tied to one industry. If 10 years from now quantum computing comes along and substantially decreases the energy needed to do the same amount of computing, it could leave a lot of people with stranded investment. Maybe that never occurs, but it’s a real change in the risk profile.”
The risk of overbuilding energy infrastructure is tempered by the fact that non-data center demand is also expected to grow: electrification of buildings and transportation, air conditioning, green hydrogen production and even direct air capture.
But forecast demand growth from electric vehicles remains relatively tiny compared to data centers, air conditioning in the U.S. is already widely used, and the ability of green hydrogen and carbon removal tech to scale is still unclear. And in the nearer-term, Hua said, there definitely is a risk of “overbuilding too quickly,” and causing bills to go up too fast for the public to endure.
There’s no potential shortage of applications for electricity if too many new power plants come online — but the only technologies on the horizon that could use as much power as data centers are still far off from reaching commercial scale.
“The things that could move the needle — green hydrogen and DAC — are very, very, very expensive,” Seiple said. “So it’s very challenging to see that materialize as a big source of demand growth over the next five to 10 years. But on the AI side, with data centers, that’s a lot of risk both that there could be a lot more demand than today and a lot less demand. It could go both ways.”
