Why Electricity Demand Is About to Get a Jolt

Andrew Bischof: U.S. electricity demand has flatlined during the last decade, but we think it is set to spring to life. Energy efficiency will remain a drag on electricity demand, but those gains face diminishing returns. We think three emerging electricity demand sources--electric vehicle charging, data centers, and cannabis cultivation--will approach 6% of total U.S. electricity demand by 2030, offsetting energy efficiency and supporting our 1.25% annual electricity demand growth forecast through this time period.

Utilities will have to work hard to benefit from these new demand sources. The most successful utilities must attract these industries by investing in grid expansion, smart networks, safety, reliability, and renewable energy during the next decade. Utilities that slack on investment now could face slowing earnings and worse, dividend growth. Worst case, utilities that miss out on this new demand might face the so-called death spiral, leaving investors with disappointing future returns. We highlight three utilities that should benefit from our forecast.

Wide-moat Dominion energy's usage based distribution rates at its utility are a positive, given our projection that electricity demand in the state will grow nearly 2% annually over the next decade. Virginia regulation is also more constructive than average for investors. Dominion's service territory is also positioned on top of data center alley, providing a significant electricity demand boost.

Duke relies primarily on usage-based rates, which we expect to be a positive since its service territory covers states with above-average electricity demand growth. Our long-term demand growth forecasts for North Carolina, South Carolina, and Florida are higher than the national average. Duke also benefits from regular, constructive rate decisions in Florida and a supportive regulatory environment in the Carolinas. Continued demand growth could add more growth opportunities to Duke's already robust capital plan.

Edison's decoupled rate structure makes it one of the few U.S. utilities that have no direct exposure to demand. That should be a relief to investors since we forecast California will have the slowest electricity demand growth in the country during the next decade. In fact, Edison could benefit from keeping this growth down because of the energy efficiency incentives it can collect. Edison could also benefit from more grid investment to integrate distributed generation. Finally, Edison should benefit from investment opportunities related to California's progressive public policies on electric vehicles and cannabis use.