AI Is Reshuffling the Ranks of Utilities Stocks. Here Are the Likely Winners.
Once known as safety plays, shares of electricity suppliers are getting a jolt from AI data centers.
Utility stocks have had a strong year, rising 20% after a difficult 2023. Now the industry is dividing—between names that can profit from the explosive demand from artificial intelligence, and those likely to grow more slowly. Some probable winners include Louisiana-based Entergy, Indiana’s NiSource, Idaho’s Idacorp, Pennsylvania’s PPL, Arizona’s Pinnacle West, and Minnesota’s Xcel Energy.
Utility stocks have had a strong year, rising 20% after a difficult 2023. Now the industry is dividing—between names that can profit from the explosive demand from artificial intelligence, and those likely to grow more slowly. Some probable winners include Louisiana-based Entergy, Indiana’s NiSource, Idaho’s Idacorp, Pennsylvania’s PPL, Arizona’s Pinnacle West, and Minnesota’s Xcel Energy.
Historically, utility stocks have offered havens for investors seeking steady quarterly dividends and protection from economic downturns. Even when consumers are hurting, they tend to pay their electric bills. Those attributes still matter, but they’re not the main reason to buy utility stocks today.
That’s because the utility industry has hitched a ride on one of the biggest investing themes of 2024—artificial intelligence. Utilities provide electricity for giant AI data centers going up around the U.S. For most of the past year, the trend was a boon for a very small and specific subset of the electricity-generating industry. Stocks of a handful of so-called independent power producers, such as Constellation Energy, Vistra, and Talen Energy, have doubled or tripled. Those companies own natural-gas and nuclear plants and sell power into competitive markets. They can make direct deals with big tech firms and aren’t hamstrung by a regulated rate structure that limits earnings for most utilities.
By comparison, regulated utilities are overseen by public commissions tasked with keeping electricity prices low for consumers and making sure service is reliable. They limit utilities’ earnings potential. But some utilities are starting to figure out ways to profit from the AI craze, too, by inking special deals with big tech companies to power their data centers.
New Orleans–based Entergy, for instance, just announced an agreement with Facebook owner Meta Platforms to build three natural-gas plants that will serve a $10 billion data center in rural Louisiana, which will be almost twice the size of the Superdome. This is no average electricity deal. In utility commission filings, Entergy said Meta has already paid upfront to reserve gas turbines and transmission lines for the project, and has agreed to bear the cost if the project falls apart. In addition, the tech giant will pay a minimum monthly charge to cover “the full annual revenue requirement for the planned generators” for 15 years.
With Meta carrying so much of the financial load, Entergy can grow its “rate base”—the value of assets and operations that sets the baseline for the company’s legal rate of return—without burdening existing customers. The Meta transaction will allow Entergy to boost its earnings growth rate from 6% to 8% this year to 8% to 9% starting in 2026.
Not every utility can sign deals like this. In much of the country, utilities control wires, transformers, and poles that make up the grid, but not the assets that generate the power such as nuclear or natural-gas power plants. And some states have barriers to getting power on the grid quickly. In New York and Massachusetts, stringent environmental goals make it difficult to add new natural-gas plants. Companies that face restrictions on how they can provide power have trailed this year; Massachusetts-based Eversource is down 12% in 2024, New York’s Consolidated Edison has dropped 4%, and Illinois’ Exelon is flat.
Entergy doesn’t face those same restrictions. The company has environmental goals and may eventually add renewable power and carbon-capture technology to serve the Meta project. But its goals aren’t as ambitious as they are for other utilities. And it’s working in states that welcome new data-center investment—and even give out tax breaks to attract it. Louisiana recently started offering rebates for sales and use taxes on data-center equipment. And Mississippi put together a lucrative package for Amazon.com to build a similarly enormous data-center complex there, exempting the company from corporate income taxes for 10 years and waiving sales and use taxes on equipment.
“In other parts of the country, this wouldn’t happen,” says Rodney Rebello, an analyst covering power stocks at Reaves Asset Management.
Reaves invested in this trend early, tilting its portfolio toward utility stocks most likely to benefit from data-center trends. That’s why its Virtus Reaves Utilities exchange-traded fund is up over 40% this year, trouncing the return of the average utility. Rebello thinks there’s more momentum ahead, with several utilities disclosing that they’re in conversations with major tech names. He’s focusing on companies with the right regulatory structure that are small enough that a few data-center deals will change their earnings trajectory. Entergy is still one of his favorites, despite already rising 44% this year. Other names that can benefit include Idacorp, NiSource, Pinnacle West, and Xcel Energy, he says. For some of those, access to clean-energy sources are a big draw for data-center customers; Idacorp, for instance, benefits from Idaho’s abundant and cheap hydroelectric power.
Other analysts are also warming to the trend. J.P. Morgan and Morgan Stanley both like PPL, a utility serving Pennsylvania, Kentucky, and Rhode Island, for its potential to profit off data-center deals.
Regulated utilities have been considered play-it-safe stocks for years, and many still offer that downside protection. J.P. Morgan thinks “utilities have the best risk-reward of all the defensive bond proxies” heading into 2025. But several are on offense now, too. Morgan Stanley likes utilities because of their “underappreciated growth upside.”
It’s rare for one sector to offer both risk protection and growth potential. This looks like one of those opportunities.