The utilities sector has evolved into a formidable growth engine over the last few years, quietly becoming an indispensable infrastructure layer of an increasingly AI-driven economy. Interestingly, US electricity consumption was essentially flat from 2005 to 2021, but it reached a new high in 2022 and has continued to do so in each subsequent year. Power demand is now projected to grow every year over the next decade. The growth trajectory shifted from over a decade of stagnation to about 2.2% annual growth in 2021-2024, with an estimated 1.9% annual growth forecast through 2024-2034.

While a 2% growth per annum may sound unexciting to equity investors, this structural demand growth has contributed to earnings growth of over 70% for the US utilities sector in the last five years. In the same period, total returns for the sector exceeded 60%. Thus, we currently view US utilities as an attractive investment opportunity and remain bullish on the sector.

Feeding AI’s appetite for power

Much has been written about AI’s explosive demand for electricity. Data centres and AI workloads require continuous, high-density electricity. I previously noted in October 2024 [see AI’s huge appetite for energy – October 2024] that an AI query requires 10x the electricity of a traditional Google query. As AI reasoning models become more sophisticated, the demand for computation rises. Moreover, AI agents that can perform tasks autonomously continue to grow in usage, typically generating significantly more computation demand than a human user. Utilities provide the essential backbone that enables this growth.

Besides AI, the electrification of an economy contributes to power demand through higher digital data storage needs and the greater adoption of electric vehicles. However, this ‘steady’ increase was largely offset by efficiency gains for many years. This is exemplified by Koomey’s Law, which suggests that as computing devices advance, the amount of energy necessary for a set amount of computing falls by half every two-and-a-half years. The extent of these efficiency gains contributes to the uncertainty around forecasts of power demand. To complicate the forecaster’s job further, the Jevons paradox suggests that efficiency gains can actually lead to higher overall consumption of a resource.

Suffice to say, forecasting is never easy, but it appears very likely that the step-change driven by AI demand will catalyse sustained growth in power consumption.

A defensive hedge amid volatility

Apart from the demand tailwind, utilities also infuse defensive qualities into an investment portfolio. It is no surprise that the demand for electricity is fairly stable through the economic cycle, given it is a necessity. The US utilities sector’s earnings growth profile over the last decade has remained positive, unlike that of the broader markets, which saw negative earnings growth during the pandemic-induced recession. This implies that in a broad market sell-off due to recession or stagflation fears, utilities should hold up better than the broader market.

On the valuation front, we believe the sector remains reasonably attractive, with around a 19x price-to-earnings ratio (on consensus 12-month forward earnings). This is broadly in line with the five-year average of around 18x. Furthermore, the sector offers a dividend yield of around 2.7-2.9%.

Beneficiaries of the structural growth

We have seen Big Tech companies – the primary users of AI – proactively seeking out power supply to fulfil their requirements. We believe this demand favours independent power producers capable of negotiating their own power contracts, including long-term purchase agreements. Nuclear power operators are also well-positioned in this environment.

Looking ahead, we expect substantial investments into the US electricity network, driven by an ageing infrastructure, digitalisation, energy transition needs and capacity expansion. Industrial companies that support the upgrade and maintenance of the electricity network stand to enjoy a tailwind. Utilities, as owners and operators of the power grid, sit at the centre and should also benefit from these capital investments.

We are bullish on the overall US utilities sector, where electric utilities form the bulk of the sector (65%), while multi-utilities (26%) often supply electricity and gas. Pure gas and water utilities remain a minority in the sector.

Nonetheless, there are some downside risks to our view and they include a potential significant slowdown in AI investments or weaker-than-expected economic growth that curtails investments into technology. Another risk would be a significant rise in electricity prices, which could impact consumers and result in regulators reducing the allowed returns for regulated utilities. Such a move would effectively force the regulated utilities to charge lower prices.

It wouldn’t be an exaggeration to call electricity the lifeblood of the AI age. We believe the US utilities sector offers investors a rare mix of reliable growth and portfolio protection.