Data centre boom drives surge for utilities investors

An “insatiable demand” for data centres – the backbone of the digital economy and powerhouse of the generative artificial intelligence (AI) boom – is creating attractive investment opportunities in the US power sector, according to boutique investment firm Maple-Brown Abbott.

Data centre growth is rapidly outpacing the growth of the energy-producing infrastructure necessary to meet supply, creating a significant opportunity for energy investors.

“Data centres form the backbone of the digitalised world, supporting various services from cloud computing to e-commerce and artificial intelligence – but they are voracious consumers of electricity,” said Georgia Hall, ESG analyst, global listed infrastructure at Maple-Brown Abbott.

Citing figures from the International Energy Agency (IEA) report, estimates suggest global power demand from data centres could surpass 1,000 terawatts per hour (TWhs) by 2026 – roughly the equivalent of Japan’s entire electricity consumption.

The US accounts by far for the most data centres, playing host to more than a third of the world’s data centres – and considerably more than the rest of the top 10 countries combined.

Hall said the US electric utilities sector presents a “compelling valuation” prospect, with emerging opportunities around data centre growth, digitalisation and decarbonisation.

While data centres are driving electricity consumption to unprecedented levels, Maple-Brown Abbott wrote, expanding their customer base and revenue streams, their growth will also lead to a likely acceleration in the energy transition.

This, Hall added, would ultimately spread energy transition costs across more consumers.

“This is especially true in the US, where landmark policy incentives such as the Inflation Reduction Act are turbocharging investments in renewables and grid infrastructure,” Hall said.

“We believe underappreciated structural growth tailwinds will persist for decades to come but are not yet reflected in the market prices for these assets.

Data centre interconnection will depend on increased energy capacity, more and more being delivered through the energy transition.

“Integrating large quantities of variable solar and wind generation, whose peak output may not match moments of peak demand, requires significant investment and the sophisticated management of electrical grids.”

This will create significant opportunities for investors in the energy transition and utilities more broadly.

Hall added that the long lead time of grid planning versus the shorter timeframe to plan and build data centres creates a potential shortfall of capacity, thereby placing pressure on utilities and regulators to accelerate investments.

She concluded that the investment firm’s allocation to US electric and multi-utilities is now 37% in its Global Listed Infrastructure fund, “[reflecting] our conviction in the sector”.