Data Centers Power Demand Fuel U.S. Utility Q1 Earnings Discussions

US utility analysts anticipate that discussions on first-quarter 2024 earnings calls will continue to be driven by artificial intelligence (AI) and data center power demand. Analysts highlighted data centers as a key theme, expecting talks on various aspects surrounding it. 

Data Centers Powering Up Utility Investor Excitement

Data centers are power-hungry and their exploding energy needs create ripple effects on the power sector. The International Energy Agency estimates that power use in data centers will increase from 200 terawatt-hours (TWh) in 2022 to 1,050 TWh in 2026, the same energy demand as Germany.

The company serving the largest data center market in the world, Dominion Energy Inc., currently focuses on building the Coastal Virginia Offshore Wind project, the nation’s largest once operational. The company has proposed delaying fossil fuel retirements and adding gas capacity due to anticipated growth in its service areas. 

Dominion has also outlined a $43.2 billion capital plan for 2025–2029 following a 16-month business review.

Another analyst at Scotia Capital (USA), Andrew Weisel, noted that data centers’ robust demand for continuous power generates excitement among utility investors. However, questions remain about how customers will pay for increased capital expenditure (capex) and how companies will raise capital. These concerns arise from stubbornly high interest rates. 

While Scotia Capital lowered target prices across the US utility sector due to rising interest rates, analysts expect companies to stick to their 2024 and long-term financial forecasts. Moreover, experts emphasized that utilities are generally in a good financial position and are likely to reaffirm their growth plans.

NextEra Energy Inc., the largest electric utility based on market cap, reported first-quarter 2024 adjusted earnings that surpassed expectations and reaffirmed its 6% to 8% long-term earnings per share (EPS) growth rate. The company expects adjusted EPS of $3.23 to $3.43 for 2024, followed by adjusted earnings of $3.45 to $3.70 per share for 2025 and $3.63 to $4.00 for 2026.

Analysts at BMO Capital Markets noted that the improvement in forward power prices has outpaced the movement in regional gas hub pricing. This indicates tightening conditions in the power market and validating investors’ optimistic outlook on the sector. 

BMO expects Constellation, NRG Energy, and Vistra Corp. to experience a 33% increase in EPS compared to the previous year. Additionally, NextEra Energy, with nearly 60 GW of renewable generation capacity, could benefit from the increasing electricity needs of data centers.

Capitalizing on AI Boom and Surging Energy Demand

Among independent power producers, analysts anticipate a significant focus on strategies to capitalize on the growing demand for AI. This follows Talen Energy Corp.’s affiliate Cumulus Growth Holdings LLC’s sale of a hyperscale data center campus in Pennsylvania to Amazon Web Services Inc. for $650 million.

The facility boasts a capacity of up to 960 MW for data centers and will be powered by Talen’s 2,494-MW Susquehanna Nuclear power plant in Luzerne County, Pennsylvania. 

Recent reports from Morgan Stanley suggest that similar deals could emerge, highlighting the potential for merchant nuclear power plants to provide on-site generation for tech companies constructing data centers in the US. The reports identify generation assets totaling nearly 22 gigawatts (GW) as well-positioned to take advantage of this trend.

• RELEVANT: Could Merchant Nuclear Plants be the Savior of Power-Hungry Data Centers?

The reports also projected that AI power demand causing massive growth of data centers will rise to an annual average of 70% through 2027. Thus, electric utilities, particularly the regulated ones would invest in renewable energy and storage initiatives to cope with the demand. 

In fact, renewable energy developers secured contracts for at least 4,012.6 MW of capacity in the 12 months. Tech companies will use them to power US data centers partially or entirely, per S&P Global Commodity Insights data.

Lagging Behind the Quick Pace 

While some utilities are racing to power data centers, some may not be quick enough to keep pace. 

Rudy Garza, CEO of CPS Energy, highlights the urgency of meeting the massive power demands of these facilities, which often require hundreds of megawatts of electricity in short timeframes, unlike traditional industrial plants with longer lead times. 

This immediate need for power presents a formidable challenge for utilities striving to keep pace with the relentless growth of data-driven industries.

Philip Nevels of AES Corp. echoes this sentiment, emphasizing the monumental task of accommodating the anticipated surge in capacity needs driven by AI and data centers. Nevels further acknowledges the inherent limitations in scaling up renewables fast enough to meet the escalating demand. 

• RELEVANT: America to See a Surge in Renewable Capacity in 2024

Meanwhile, Kevin Chandra of Austin Energy underscores the importance of collaborative planning to address the spatial distribution of data center loads effectively. Shaun Hoyte of Consolidated Edison Inc. emphasizes the critical role of redundancy and resiliency in grid planning to mitigate potential disruptions caused by the increasing concentration of data centers. 

Sunny Elebua of Exelon Corp. acknowledges the benefits of load growth in advancing decarbonization efforts and optimizing grid utilization. However, Elebua also highlights the challenges posed by the retirement of baseload generation and the evolving supply stack, emphasizing the importance of ensuring resource adequacy amidst these transitions.

In navigating these complexities, utilities recognize the need for state-level support to streamline regulatory processes and facilitate the rapid deployment of energy infrastructure to meet data center demands. 

In summary, the proliferation of AI and data centers is reshaping the energy landscape, presenting both opportunities and challenges for utilities worldwide. As the demand for data-driven services continues to escalate, proactive collaboration, strategic planning, and innovative solutions are essential to ensure a resilient and sustainable energy future.