US utilities poised to benefit from AI-led power demand, price increases: UBS

US utilities with the most exposure to renewable energy could face headwinds under the second Trump administration, but power demand growth led by artificial intelligence and other drivers is expected to increase power prices, benefitting deregulated utilities in particular, global banking giant UBS said Nov. 21.

"When you look back at the first half of the decade, we've had healthy economic growth, strong equity market returns and even improving signs of productivity and you look at this past year and this trend continues," Mark Haefele, UBS' chief investment officer, said during a conference call with reporters to discuss the firm's report titled "Year Ahead 2025 - Roaring 20s: The next stage."

Time will tell if the US political environment is a headwind or a tailwind, but "when we look at the commitments around lower taxes, deregulation and the potential for trade deals on top of the solid growth and AI investment, we still think we're more likely to finish the decade in a roaring 20's fashion," Haefele said.

However, risks exist around higher tariffs, higher deficits and geopolitical tensions that could lead to higher inflation, weaker growth, and more volatility, he said.

Regarding investment strategies in the US, the firm expects AI, technology, financials, and utilities "to drive further upside," according to the report.

Unsurprisingly, AI was featured heavily throughout the report, with UBS saying that structural trends around AI and power grid resources "bolster the outlook."

Companies tied to AI that cover semiconductors, cloud service providers, devices, and data centers account for over one-third of the S&P 500 by market capitalization and the firm expects around 11% S&P 500 earnings per share growth in 2024 and 8% in 2025 from the companies.

Utilities outlook

"Although utilities companies with high renewables exposure could face near-term pressures, we also expect significant growth in AI data centers to fuel power demand, leading to higher power prices," UBS said, adding that about 20% to 25% of the sector has "material exposure" to these trends.

Asked which US power markets could see higher power prices in 2025, Nadia Lovell, senior US equity strategist, said that a lot of power demand is coming from data centers in areas like Pennsylvania, Virginia, and even parts of Texas where the facilities are being built.

Semiconductor stocks have done well this year but one of the better performing stocks has been utilities and "you will see some of the unregulated utilities that are best to positioned to benefit from this will get price appreciation and we think that will continue," she said.

One of the report's main investment themes was "power and resources." UBS said it expects the power and resources field is prepared for "transformational growth," with significant investment opportunities "across power generation, grid infrastructure, and natural resources as the world adapts to increasing electricity demand."

Globally, UBS forecasts data center power demand to grow from about 200 TWh in 2018 to roughly 1,000 TWh by 2030.

Indeed, the outlook is similar in the US. Data center load forecasts from PJM Interconnection market participants indicate substantial power demand growth over the next two decades, with Dominion Energy expecting data center power demand to increase from 3.6 GW in 2024 to 17.3 GW by 2045.

Dominion Energy's territory includes Virginia which is the largest data center market in the world. The investor-owned utility recently said that 10 of its 53 data center customers account for 87% of year-to-date power demand and forecast 2024 billing demand is 3,562 MW.

UBS estimates that electrifying the economy will require $3 trillion annually by 2030, "benefiting companies in power and resource innovation."

The electrification value chain includes raw materials, power generation, energy storage, transmission, distribution, and consumption from things like data centers, transport, heating, and cooling.

"Currently, we believe the best opportunities are in transmission, distribution, data centers, transport, and energy storage," UBS said.

Total US battery storage capacity jumped 81% year on year to 26.398 GW by the end of third quarter 2024 with an additional 5.5 GW planned to come online by the end of the year.

There was 2.6 GW of capacity added during Q3, an increase of 11% from Q2, according to an S&P Global Commodity Insights compilation of various government filings.