Electricity consumption is expected to soar over the next few years. What does increased demand mean for stock market investors?
“I don’t know if the average person realizes how much electricity we use.
“As we move away from traditional fossil fuels, we're going to need and consume more oil over the next five to 10 years,” said Mike Taylor, chief investment officer at Pi Funds.
“It goes without saying that AI will have an impact on electricity demand.”
There was probably a better understanding that an all-electric fleet would require a lot of electricity, but while the world has been rushing to adopt AI over the past two years, there wasn't a good understanding of how much electricity would have to be generated to run it, he said.
“A very simple way to think about this is that if you compare an average Google search and its energy consumption to an AI Chat GPT search, the AI search requires 10 times more power or energy than a regular Google search,” Taylor said.
There has been an explosion in data center growth, he said.
“All of this work happens in the background on our servers and data centers.”
In the United States, for example, data centers currently consume about 3 percent of total electricity, but that figure is projected to rise to 7 percent by 2030, Taylor said.
“On top of the fact that the whole economy is electrifying, utilities have to source that extra power. So in the U.S., estimates are that we're going to need as much as 40 percent more electricity over the next decade.”
Taylor said this would put the debate about building more nuclear power in the Northern Hemisphere back on the table.
He said there had been rumors that Meta CEO Mark Zuckerberg was looking to build an entire power plant just to run his data centers.
Over the past few weeks, New Zealand's power grid has struggled to keep up with demand as winter arrived early.
Meanwhile, we were promoting our economy as a great place for data centers and encouraging companies like Microsoft.
Coupled with the rise in electric vehicles, Taylor said that could create problems locally unless major investment begins.
“We need to be a little careful about what we wish for. Obviously having a data centre here is good for data sovereignty, but we also need the power to operate it,” he said.
“If we want to get away from fossil fuels, I'm not sure we can generate the extra electricity we need to do that in the short term, because not all of the electricity generated here is renewable.”
New Zealand still relies on coal to some extent and while it's good to see solar and wind power continuing to take off, it's not on a significant scale yet, Mr Taylor said.
“For reference, New Zealand uses about 43,500 gigawatts of electricity a year. A new solar farm has been built in the Bay of Plenty. It has about 60,000 solar panels and only produces 54 gigawatts. This is just a drop in the ocean. [with regard to] This will cover the additional electricity we will need over the next 10 years.”
For consumers, this could mean even higher prices, but what does it mean for investors?
“As an investor, you always want to invest in things that have strong tailwinds, and from a utility and power company perspective, it looks like those tailwinds are coming in the near future,” Taylor said.
In fact, the market was already aware of this, he said.
The utilities sector has been the best-performing sector in the U.S. so far this year, even as interest rates remain high and dividend stocks aren't typically the fastest-growing.
“Typically they trade around bond yields, but now that investors are aware of that, they're going to get growth as well as yield,” Taylor said.
“Suddenly it's become a very attractive place.”
In addition to traditional large power companies, there were also investment options in alternative and green energy startups.
But perhaps more overlooked are money-making small-cap stocks focused on improving energy efficiency, Taylor said.
“There are a lot of smaller companies around the world that are investable that are focused on providing data centers, buildings and other energy-efficient components.”
Liam Dunne is New Zealand HeraldHe is a senior writer and columnist, also presents and produces videos and podcasts, and is a best-selling book author. Barbecue EconomyLiam Herald 2003.
The Market Watch video show is produced in partnership with Pie Funds.
