One of the essentials to modern life is to have a reliable source of electric power. However, that key ingredient to everyday life is moving into shaky ground here in the U.S.
As every day goes by, the U.S. power grid is under growing stress.
U.S. Electric Grid Stress
Power outages are much more common than they were two decades ago. One reason is simply the weather, which has grown more extreme thanks to climate change.
Another important factor is the age of the U.S. electric grid, much of which was built in the 1960s and 1970s.
In addition, electric utilities are under pressure to connect renewable energy sources, which require building even more transmission lines to carry electricity, and more substations to regulate voltage. The U.S. Department of Energy estimates that the country will need two-thirds more transmission lines, including the high-voltage ones that send energy over long distances.
And electricity consumption is suddenly climbing — or is about to — in many parts of the country. Some utilities are doubling their demand forecasts for the next five years. One main reason is the rapid adoption of artificial intelligence (AI), which requires power-hungry data centers.
The end result will be much higher prices for electricity paid by consumers. Here’s one very recent example…
PJM Interconnection is the administrator of the regional grid stretching from the mid-Atlantic to the Midwest, covering 13 states and about 20% of Americans. It held an auction for supplemental electricity to be delivered in 2025 and 2026.
The clearing price was $270 per megawatt-day, nearly 10 times the level set at the last auction ($29) two years ago. The consensus expectation was for about $60 to $100 per megawatt-day.
The market has spoken, and it's saying that you're going to have to pay a lot more for reliable electric power.
Utilities Power Ahead
This is, of course, great news for the utilities in the region that will be supplying the power. For example, the auction results drove up the share price of Constellation Energy (CEG), which immediately soared more than 11%.
Constellation should net an extra $600 million of Ebitda in 2025, according to the utilities analysts at CreditSights. That’s equal to a 13% boost to the consensus forecast.
Independent power producers also surged, thanks to the PJM auction.
Talen Energy (TLN) and Vistra Corporation (VST) came public after emerging from Chapter 11 bankruptcy. They have become among the biggest winners of the new reality in U.S. energy: not enough production amid rocketing demand.
Talen said its winning commitments in the PJM auction would raise its annual revenue by $670 million, or 40%, with most of that falling to the bottom line as profit. Its market cap jumped $800 million or 12%, while Vistra’s market cap rose $3.5 billion, or 15% after the auction.
It’s Not Too Late to Buy Utilities
Some investors have already piled into utility stocks, as the emergence of power-hungry AI drives a surge in electricity demand and transforms growth expectations for the once-staid sector.
More than $1.7 billion poured into U.S. utilities funds in May and June - their best showing in nearly two years, according to data from Morningstar Direct. Another $1.1 billion was expected to come into utilities funds in July. Utilities funds saw outflows of $7.4 billion the prior 12 months.
Utilities had traditionally served as a safe-haven investment in turbulent times, so the inflow into utility stocks during a strong bull market is noticeable, but not surprising. The stocks provide a cheap way for investors to gain exposure to the AI boom, compared to buying more expensive tech stocks.
Shares in the biggest utilities surged in recent months, with the S&P 500 Utilities index up nearly 13% since the beginning of the year versus -7.1% for 2023 and 1.6% in 2022. The Utilities Select Sector SPDR ETF (XLU) has risen more than 16% year to date.
And in a shock to some investors, three utility companies — Vistra, Constellation Energy, and NRG Energy (NRG) — are among the top 10 performers on the S&P 500 Index ($SPX) so far this year.
It’s easy to see why…
Data from the U.S. Energy Department shows that aggregate power production in the U.S., at 4.2 trillion kilowatt hours, is virtually unchanged in the last 15 years. PJM pointed out that one purpose of the auctions is to incentivize power producers to meet demand by giving them clear market signals.
On the other side of the supply/demand equation, over the past 20 years, domestic electricity consumption edged up by less than 0.5% annually, according to Goldman Sachs (GS). Between this year and 2030, however, it is expected to grow at 2.4% a year.
One main reason — the International Energy Agency (IEA) estimates power demand from data centers globally could top 1,000 terawatt hours by 2026, double 2022 levels.
Some of the numbers that utilities are putting out in terms of electricity demand over the next 10 years are numbers the industry hasn’t seen in a generation. In effect, the electric utility business has become a whole new industry, and a growth industry as well.
That makes it a buy. I prefer to play the industry broadly, so an ETF is perfect. My preference is not for the large XLU ETF, though.
I like the Virtus Reaves Utilities ETF (UTES), which is up 21.4% year to date. Its top four positions are four of my favorite utility stocks: NextEra Energy (NEE), Constellation Energy, Vistra, and Talen Energy. They account for nearly 45% of the portfolio.
UTES is a buy anywhere in the mid-$50s.
