The utility sector has been a sleepy place for the past couple of decades. Power demand has barely grown as energy efficiency gains helped keep a lid on electricity consumption.
However, this sleeping giant is about to awaken. Forecasters expect power demand in the country to surge in the coming years, fueled by several catalysts. While that rising tide should lift all boats, no utility stock is in a better position to capitalize on the sector's unprecedented growth than NextEra Energy(NYSE: NEE).
The coming power surge
CEO John Ketchum discussed the outlook for the U.S. power industry on the company's third-quarter conference call. He stated:
We face a period of unprecedented growth in power demand. Over the last 80 years, our sector has experienced many demand cycles, from growth emerging out of World War II and the Industrial Revolution to multiple decades of essentially little to flat demand. That's all changed. Today, there are forecasts for an approximate 6 times increase in power demand growth in the next 20 years versus the prior 20.
That's a staggering amount of incremental demand. Ketchum noted that "on a national level, we expect we are going to need to add 900 gigawatts (GW) of new generation to the grid by 2040." For perspective, the currently installed capacity of the entire U.S. electric grid is about 1,300 GW, much of which the country will need to replace in the future due to emissions and costs.
Several factors are powering the need for so much more energy capacity. Ketchum noted that the "significant projected shift in fundamental demand is across industries, driven in large part by 7/24 loads from data centers, reshoring to manufacturing, and electrification of industry, including oil and gas and chemicals, to name a few." He highlighted, "U.S. data center power demand alone is expected to increase substantially, adding approximately 460 terawatt hours of new electricity demand at a compound annual growth rate of 22% from 2023 to 2030, which could potentially enable 150 GW of new renewables and storage demand over the same period."
In a prime position
The country will need power from all sources, including renewable energy, natural gas, and nuclear power. However, given the roadblocks for nuclear energy and natural gas in many regions of the country, renewables will do much of the heavy lifting.
Ketchum noted, "Forecasts are projecting a tripling in renewables growth over the next seven years compared to what we've seen over the prior seven." That's right in NextEra Energy's wheelhouse. Ketchum said:
No one is better positioned to capitalize on that demand growth [than] NextEra Energy, and we have the track record to prove it. Since 2021 at Energy Resources, we have originated more than 33 gigawatts of renewables and storage,while placing nearly 18 GW into commercial operation. We have advanced from originating on average 8 gigawatts per year from 2021 to 2023 to approximately 11 GW over the last four quarters.
The company has signed several major renewable energy deals in recent quarters. For example, in June, it announced an agreement with Entergy to accelerate the development of up to 4.5 GW of new solar and energy storage projects. That was in addition to the more than 1.7 GW of projects NextEra is developing with Entergy. Meanwhile, the company recently unveiled framework agreements with two Fortune 50 companies to develop up to 10.5 GW of renewable energy by 2030.
The company believes its growth potential will expand as it increases its scale. Customers will view it as the partner of choice to develop new renewable energy capacity. On top of that, it will have a built-in expansion opportunity to layer in battery storage in the future. These factors help drive NextEra Energy's expectation it can deliver robust growth and returns in the coming years.
A supercharged growth stock
NextEra Energy has grown briskly over the last 20 years despite the lack of electricity demand growth by being an early leader in developing renewable energy to replace coal-fired power plants. Because of that, it's now in the driver's seat as demand for power (and renewables) accelerates. The company should grow briskly as it captures opportunities to expand its leading portfolio, which should producepowerful returns for its investors. That upside makes it a top stock to buy to capitalize on this megatrend.
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Matt DiLallo has positions in NextEra Energy. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
