Chronicle - Sep 16, 2024
Opportunities in the Coming Power Shortage
For nearly two decades, U.S. electricity consumption has held steady, barely reaching 4,000 terawatt-hours annually, driven by energy efficiency improvements. However, this stability may soon end. Converging trends, including climate change initiatives and the AI revolution, could lead to unexpected challenges. The U.S. might face shortages, struggling to meet its electricity demands.
A recent Federal Energy Regulatory Commission (FERC) report revised U.S. electricity growth projections for the next five years from 2.6% to 4.7%. This figure may still be conservative, as electricity consumption from January to July 2024 rose by 4.2% compared to the same period last year.
Demand Side
There are various reasons for this acceleration in electricity consumption. First, over the past two years, producer spending on capital equipment has surged, reflecting a shift toward domestic manufacturing. As these new facilities are completed and come online, their energy demand are significantly increasing, further straining the power grid.
Another factor is the electrification of transportation and buildings in the U.S. The adoption of electric vehicles has surged, growing nine-fold in the last eight years, while the smart home market has expanded by over 20% annually in the past five years. Both trends are expected to significantly increase electricity demand.
Extreme weather is also one factor driving electricity demand. During heatwaves or cold snaps, the use of air conditioners and heaters spikes, straining the grid. A recent study revealed that from 2012 to 2021, extreme heat coincided with power outages in every U.S. region. It also explain why power outages have become more frequent and widespread nowadays.
Another major factor is the growing demand from AI data center. These data center require 7 to 8 times more electricity than conventional ones due to their intensive processing needs. By 2030, data center are projected to account for 9% of total electricity demand in the U.S., putting additional strain on the nation's power supply.
Supply Side
Despite the growing demand for electricity, U.S. power production has remained flat at just over 4,000 terawatt-hours annually for the past two decades. Efforts to combat climate change have exacerbated the issue, as reliable coal and nuclear plants have been retired, replaced by wind and solar energy. These renewable sources are less reliable during unfavorable weather.
Opportunities
Despite the dire state of the power supply-demand balance in the U.S., power shortages are rarely discussed unless there’s a major outage. The issue remains under the radar, even as the risk of disruptions grows. This creates opportunities.
Take, for example, the VanEck Semiconductor ETF (SMH 0.00%↑) and Vanguard Utilities ETF (VPU 0.00%↑) . Historically, they have traded closely, with only a slight difference in price-to-earnings (P/E) multiples. However, since early 2023, when AI gained widespread attention, SMH’s P/E multiple has surged far ahead of VPU’s, even though both ETFs benefit from AI developments.
Up to this writing, Utilities is the best performing sector versus 10 other sectors in 2024.