Surging AI Power Demand Meets America's Largest Electric Utility Stock

The consultancy Bain recently issued a stark warning: unprecedented power demand - driven by the boom in U.S. data centers - will outstrip supply later this decade. 

By 2028, Bain expects electric utilities will need to boost annual power generation by as much as 26% from 2023 levels in order to meet surging power demand. That’s far more than any supply increase the U.S. grid has achieved in the past two decades.

The end result will be massive upside pressure on electric utility rates to consumers that will likely exceed inflation. Here’s why…

U.S. utilities will need an additional $900 billion in revenue to invest in new generation sources in order to meet demand.

Your Electric Rates Are Going Up

Another consultancy, ICF, said in September that the expected surge in electricity demand from electrification and data centers for artificial intelligence (AI) risks driving up U.S. power prices.

ICF released a report forecasting a 19% increase in wholesale prices for electricity from 2025 to 2028 from rising power demand. While households don’t buy power off the wholesale market, the wholesale price of electricity influences the rate they ultimately see in their utility bills.

Like Bain, ICF expects a “sea change” in U.S. power demand, with expectations that electricity consumption will increase 9% by 2028, up from less than 1% annual growth for most years since 2010.

A recent power auction from PJM Interconnection, which includes Virginia’s Loudon County - the data center capital of the world - resulted in prices nearly 10 times the level set at its last auction two years ago, thanks to tight supply.

This rapid load growth comes after power demand has remained virtually flat in the U.S. for two decades. Bain expects data centers to make up 44% of all demand growth through 2028, as companies rush to develop the next generation of AI.

Electric Demand Growth is Good News for NextEra Energy

All of this is fabulous news for the electric utility stock that I named as an undiscovered winner of the AI boom in early May, NextEra Energy (NEE). The stock has already jumped by about 19% since then.

The company’s CEO, John Ketchum, said in June that he expects an almost 40% rise in U.S. power demand over the next two decades, compared with just 9% over the previous 20 years.

NextEra owns Florida Power & Light Company, which is America’s largest electric utility, and sells more power than any other utility. NEE also owns a clean energy business, NextEra Energy Resources, which is the world’s largest generator of renewable energy from the wind and sun, and a world leader in battery storage. Plus, NextEra also runs seven nuclear plants.

NextEra Energy Resources has shown itself to be a best-in-class renewable energy operator and developer. The company was an early adopter of wind generation, building a competitive advantage by securing some of our country's most desirable locations and locking in 20-year contracts with price escalator clauses.

Its current plans shift the focus to solar energy, with the biggest solar power building plan in the U.S. More than half of its planned renewable energy growth through 2026 will be solar and energy storage. The rest is onshore wind.

The company will need every bit of that generated power. In July, NextEra Energy said it expects demand for new renewables power to triple over the next seven years to meet the quickly rising electricity demand from technology and data center customers.

NextEra sees its total renewables portfolio with technology and data center customers, including assets in operation and in backlog, standing at 7 gigawatts (GW). Its renewables segment saw a rise of 3 GW worth of renewables and storage projects in its last quarter.

Buy NEE Stock

NextEra Energy's high-quality regulated utility in Florida and fast-growing renewable energy business give investors the best of both worlds: a secure dividend and industry-leading renewable energy growth potential.

The company has a solid balance sheet, a record of above-average dividend increases, and growth potential. With regard to dividends, NEE's dividend increases average annual growth of 12% over the last five years. The current yield is 2.5%.

I anticipate three-year (2024-2027) earnings per share and dividends increasing at around 8% and 9% compounded annual growth rates (CAGRs), respectively. NextEra has matched or beaten the top of its EPS guidance range in each of the past four years. Its current guidance is for 6% to 8% growth.

NEE stock is now trading near a new 52-week high, after falling sharply in response to completely misunderstood guidance with regard to distributions for its limited partnership - NextEra Energy Partners LP (NEP) - back in September 2023.

NextEra stock is still a buy below $87.

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On the date of publication, Tony Daltorio had a position in: NEE. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.