Here’s How The Next Chapter of the Energy Transition is Coming from Inside Your Computer
“Are you using ChatGPT?”
I get asked that question all the time. I’m not, but it seems that I’m in the minority.
According to a recent survey, a whopping 180.5 million people use the popular AI platform. The website had 1.6 billion visits in February 2024 alone!
The new tool set a record with 100 million active users just two months after it launched. And that could have a massive impact on power demand. Here’s what I mean…
According to the U.S. Energy Information Administration (EIA), the U.S. consumed 3.9 million gigawatt (GW) hours of electricity in 2023. To put that into better perspective, that’s roughly equal to the power consumed by 357 million homes.
And that really hasn’t changed in more than 20 years. In 2001, the U.S. consumed 3.4 million GW hours. That works out to about 0.6% growth per year. It’s practically flat.
That’s interesting because, according to the EIA, crypto “mining” added about 2.3% (on the high end) to the overall power demand. And that data also includes the nearly 4 million new electric vehicles added to the system since 2020.
However, a new technology is here that will further spike electric power demand…artificial intelligence (AI).
This month, we’re going to analyze the potential impact of AI on the power grid. And we’ll dig into a giant power company that will be supplying a lot of the new power demand.
The Next Five Years are Critical for Power Demand
According to a recent survey by Grid Strategies, grid planners doubled the 5-year forecast for power demand. It forecasts the growth in power demand to more than 1.1% per year. Part of this growth will come from investments in conventional manufacturing and industry.
However, a significant part will come from data centers used to generate AI.
That’s a problem because we are coming from a period of underinvestment in the power sector. Capital expenditures dropped from $9.2 billion in 2021 to $8.8 billion in 2023. There were fewer miles of transmission lines built, at a time when we need more. And these giant infrastructure projects take years to plan and build.
Here are some of the drivers of growth electricity demand:
- Federal legislation provides tax incentives to new industry and manufacturing in the U.S.
- Data center growth spurred by the rise of AI.
- Electrification of transportation and appliances.
- Extreme weather events drive peak demands.
According to a survey of eight power companies (including Texas’ ERCOT, Duke Energy, Georgia Power, etc.), seven see data centers and AI driving larger than expected increases in the five-year power demand growth.
And there is some concern that these forecasts are underestimating the demand. AI is growing far faster than expected. According to the Boston Consulting Group (BCG), generative AI will drive 2 GW of load in the next five years and 7 GW by 2030. BCG’s total data center demand growth forecast is 13 GW over the next five years.
In March 2024, Tesla founder Elon Musk made a bold prediction about AI and power demand:
Next year, you will see that they just can’t find enough electricity to run all the chips.
This is a trend that we are just starting to see in utility prices. According to Financial Visualizations (FINVIZ.com), all of the large utility stocks are down over the past 12 months.
That means we can buy them today for less money than we could a year ago. And that’s good news because we want to be in this sector.
Investing for a Boom in Power Demand
Next Era Energy (NYSE: NEE) is a $134.2 billion market cap electric utility company.
It operates in 49 states. The company is a massive contributor to electric power infrastructure growth. And it returned 651% to shareholders over the past fifteen years.
Yes, NextEra Energy was one of the original recommendations of Mangrove Investor Spotlight. So some of you may own the stock. And that’s great. But for the rest of you, here’s why we are re-recommending it.
It’s the best electric utility in the sector.
It has everything we want in a utility: solar, wind, nuclear, and grid-scale batteries. It has an excellent corporate culture. It has massive investments in new infrastructure and power production. And it operates in 49 states, which gives it exposure to power demand, no matter where it occurs.
So, if you already own it, this is a refresher on why. And if you sold it when it fell or you haven’t bought it yet, read on to see why we believe it’s a great idea right now.
As you can see, the company peaked in August 2022, just before we recommended it in December 2022. Then its shares fell during 2023 as investors fled. You can see what we mean in the chart below:
However, we believe that down trend is over.
It was initially driven by the interest rate hikes. Higher interest rates are bad for utilities. It makes borrowing money more expensive. It also pulls away investors looking for yield. In a 2% rate market, utilities can generate more income than a bond (NextEra currently pays 3.2%). But in a 7% rate market, bonds pull investors away.
That period is now behind us. And we have the positive force of rising electricity demand. That should attract investors back to this sector.
The company has 72 gigawatts of power in operation and $177 billion in total assets. It provides electricity to more than 12 million people across Florida. It is the largest electric utility in the U.S. by retail sales and number of customers. The company will invest between $85 billion and $95 billion into U.S. infrastructure by 2025.
NextEra Energy has an ambitious plan to pass by “net zero” and achieve “real zero”. Net zero is the path most companies take. It involves buying carbon “offsets” that effectively zero out their carbon emissions. However, Next Era
The company also owns a clean energy business, NextEra Energy Resources, LLC. The company is the world’s largest generator of renewable energy from wind and solar. It’s also a world leader in battery storage. Through its subsidiaries, NextEra Energy generates clean, emissions-free electricity from seven commercial nuclear power units in Florida, New Hampshire, and Wisconsin.
NextEra Energy is ranked No. 1 in the electric and gas utilities industry on Fortune’s 2022 list of “World’s Most Admired Companies.” It was recognized on Fortune’s 2021 list of companies that “Change the World.” And the company received the S&P Global Platts 2020 Energy Transition Award for leadership in environmental, social and governance.
The company reported its first quarter 2024 earnings on Tuesday, April 23. The results blew the doors off estimates:
- Revenue of $5.7 billion
- Net income of $2.3 billion
- Earnings per share of $1.10
- Quarterly dividend of $0.89 per share
John Ketchum, chairman, president, and chief executive officer said:
“Both FPL and NextEra Energy Resources delivered solid financial and operating performances to start off the year. FPL placed into service 1,640 megawatts of new, cost-effective solar, while NextEra Energy Resources added approximately 2,765 megawatts of new renewables and storage to its backlog, marking its second-best origination quarter ever and its best quarter for both solar and storage origination. Our two businesses are well positioned to meet future power demand with renewables, storage, and transmission, while leveraging our combination of enterprise-wide scale, decades of experience and investment in technology to drive long-term value for customers and shareholders. We will be disappointed if we are not able to deliver financial results at or near the top of our adjusted earnings per share expectations ranges in each year through 2026, while maintaining our strong balance sheet and credit ratings.”
These results bolster our opinion that the energy space could emerge as a great place to invest over the next two years. And we see NextEra Energy as the undisputed leader in the sector.
Here’s the company’s financial breakdown over the past three years:
The first quarter of 2024 had mixed results. The company beat estimates. However, the results were below the same period last year.
Action to Take: Buy NextEra Energy (NYSE: NEE) up to $70 per share. Use a 25% trailing stop. That means, if you paid $70 per share, you would sell it if it closed below $52.50 per share. This position will pay us 3% per year in dividend yield.
If you already own NextEra, you can continue to monitor your trailing stop. If you are new to the stock, set your trailing stop at your purchase price and go from there.
We see NextEra Energy as the industry leader in energy utilities. It is an example of the future of electric utilities. And it is in position to benefit from the growth in electric demand from this latest chapter of the energy transition.
