Citi spotlights opportunities in Utilities as power grid demand increases

Citi Research said on Thursday that power grids are key to the energy transition, and parts of the world that support the best renewables resources are most often far from demand centers. As a result, the institution spotlighted the growth prospects of renewables and power grids in key regional markets.

“In the US, some utilities plan to spend 20%-50% of total capex in next few years on regulated renewable and transmission spending. The scale of the challenge is enormous: There are more than 2,600GW of projects in the queue currently, larger than the capacity of all electrical plants in operation,” Citi Research said.

The investment firm added: “In Europe, to achieve the EU’s target of 45% renewables share in 2030, around €180bn in investments into the high voltage electricity grids is required.”

The S&P 500 (SP500) Utility sector has gained more than 9% so far this year, and has been the fourth-best performing among the 11 S&P sectors. Its accompanying Utilities Select Sector SPDR Fund ETF (NYSEARCA:XLU) has done even better, climbing more than 10%.

The advance has been helped by a growing perception that the Utilities sector has become an artificial intelligence (AI) play.

AI is expected to drive a 160% increase in data center power demand by the end of this decade, according to a research report published by Goldman Sachs in May. US utilities will need to invest around $50B in new generation capacity just to support data centers alone, Goldman predicted.

For investors that are tracking the investments into and around the power grid, they may look to further analyze utilities-based stocks and exchange-traded funds. Outlined below are some popular names along with each year-to-date performance.

Utilities Stocks: NextEra Energy (NEE) +15.9%, Southern Company (SO) +11.1%, Duke Energy (DUK) +3.1%, Constellation Energy Corporation (CEG) +88.5%, American Electric Power Company (AEP) +7.8%, Dominion Energy (D) +5.1%, Vistra Corp. (VST) +127.3%, and PG&E Corporation (PCG) -1.7%.

Utilities ETFs: Vanguard Utilities Index Fund ETF (NYSEARCA:VPU) +9.4%, Fidelity MSCI Utilities Index ETF (NYSEARCA:FUTY) +9%, iShares U.S. Utilities ETF (NYSEARCA:IDU) +10.4%, and the Invesco S&P 500 Equal Weight Utilities ETF (RSPU) +7.5%.