The surge in data center construction, driven by artificial intelligence (AI), is causing a monumental increase in electricity demand, creating a growth opportunity for electric utility stocks. Goldman Sachs projects global data center electricity usage to grow 175% by 2030 compared to 2023.
For electric utilities, this means increased capital expenditure (CAPEX) for new power generation and upgraded grid infrastructure, which can translate into higher earnings. However, it also introduces risks related to forecasting accuracy, infrastructure costs, and regulatory scrutiny.
How data centers are impacting utilities
- Historic demand spike: The decades-long trend of flat electricity demand in the U.S. is over. Data center and AI growth are primary drivers of demand, which is projected to grow by up to 2.6% annually through 2030. By 2028, some estimates predict data centers could consume up to 12% of total U.S. electricity.
- Infrastructure investments: Utilities are responding by expanding capacity. For example, Duke Energy has increased its five-year CAPEX plan to $83 billion to accommodate new demand. However, some utility executives caution that the tech companies pushing the demand need to pay their "fair share" of the grid's expansion costs.
- Fueling new generation: To meet continuous, 24/7 power needs, utilities are turning to reliable generation sources like natural gas and nuclear power. Nuclear energy, in particular, is being explored through technologies like small modular reactors (SMRs).
- Financial tailwind for stocks: Once seen as slow-growth investments, electric utility stocks are outperforming the broader market, with the Utilities Select Sector SPDR ETF (XLU) up 20% year-to-date as of October 2025. Investors are excited by the high-certainty growth trajectory tied to the AI buildout.
- Regional hot spots: Data center construction is heavily concentrated in certain areas, particularly Northern Virginia's "Data Center Alley". This regional focus means utilities operating in these zones are experiencing the most dramatic effects. Other markets like Texas and Las Vegas are also attracting developers.
- Ratepayer impact: With utilities investing billions in new infrastructure, there is growing debate over how much of the costs should be borne by residential and small-business customers. Some jurisdictions, like Oregon, have passed legislation to create separate rate classes for large energy users to prevent cost-shifting.
Utility stocks positioned to benefit
Stocks of utility companies in regions with high data center activity are well-positioned for potential growth.
- NextEra Energy (NEE): A major utility with significant investments in renewable energy, benefiting from data center growth. It is also a top holding in several utility ETFs.
- Southern Co. (SO): Well-positioned for the rising demand and a top holding in key utility ETFs.
- Constellation Energy (CEG): An independent power producer with diverse generation capacity, including nuclear, which is highly sought after for data center energy needs.
- Entergy (ETR): This utility is located in the U.S. Gulf Coast, a prime area for industrial and data center expansion.
- Pinnacle West Capital (PNW): A utility stock that Morningstar analysts say is well-positioned for the rise in electricity demand.
- Vistra Corp. (VST): A power company with a diverse generation portfolio that is benefiting from the AI-driven demand boom.
Investment risks and challenges
- Overbuilt infrastructure: If projected data center demand does not fully materialize, ratepayers could be left footing the bill for excess infrastructure that is not fully utilized.
- Uncertain forecasts: The rapid and speculative nature of data center development is creating uncertain demand forecasts. Some developers have made "phantom" interconnection requests to secure grid access that may never be built, distorting resource planning.
- Environmental impact: Data centers rely heavily on fossil fuels in many regions, raising concerns about increased carbon emissions. They also use massive amounts of water for cooling.
- Supply chain limitations: There is a shortage of critical infrastructure components like transformers, extending construction timelines and hindering the speed at which utilities can connect new projects.
- Big tech's growing influence: Major tech companies are now investing in their own power generation or making deals directly with suppliers, creating a dynamic where they are both large customers and potential competitors.
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Morningstar |
