Utility stocks rate rally comes early, thanks to AI data boom
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One of Wall Street’s most treasured traditions is that utility stocks tend to rise when interest rates fall and decline when rates rise, and the past few years have played right to form as rates rose. But even though rates haven’t yet started falling, utility stocks have had an early rally this year, courtesy of the AI data boom.
The insatiable demand from tech giants such as Amazon AMZN 0.00%↑, Google GOOGL 0.00%↑, Facebook META 0.00%↑ and Salesforce CRM 0.00%↑ for clean energy and more electricity to fuel new data centers around the U.S. has lit up several utility stocks this year under the expectation that grid improvements and electricity delivery will be the next big wave of the AI boom.
Constellation Energy CEG 0.00%↑ shares are up almost 89% so far this year, as the company benefits from expectations its fleet of 21 nuclear power plants will benefit from the soaring demand for clean energy. Public Service Enterprise Group PEG 0.00%↑ is up almost 20% , as well as NextEra Energy NEE 0.00%↑. Shares of GE Vernova GEV 0.00%↑ , which broke off in a split from General Electric GE 0.00%↑ in April, are up 37% in the past two months.
As a sector, utilities are up more than 8%, according to S&P Global. That’s more than the 5% for the energy sector, which includes the oil companies, but less than financials (9%), communications (23%) or top sector information technology (31%), which is the tech companies themselves.
With rates set to start coming down later this year, it’s possible there is still room to run on some of these stocks, as investors tend to favor dividend plays at a time when yields on fixed-income investments are going down. The estimated price-to-earnings ratio of the S&P utility sector is about 19.8% this week, which is high, but not way overvalued by any means.
All of which points to a better outlook for both utilities and energy companies, as long as the summer stock rally holds.
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Thursday’s subscriber insights
UK’s Octopus reaches out with U.S. renewables push
. . . . One of fastest-growing electricity suppliers in the UK, Octopus Energy, is taking its digital strategy to the U.S., announcing this week it is buying two solar farms in Ohio and Pennsylvania, as part of a plan to invest $2 billion into renewable energy projects in the next six years.
The eight-year-old company, partially funded by big climate names such as Al Gore’s Generation Investment Management and Tom Steyer’s Galvanize Climate Solutions, also said it is moving into Texas, where it plans to work with the state’s independent power grid to experiment with its digital usage technology.
The investments bode well for U.S. renewables, which have had a tough time attracting investments the past few years amid rising interest rates and renewed focus on fossil fuels following Russia’s invasion of Ukraine. New regulations such as the Inflation Reduction Act have also helped attract foreign investment into the U.S.
Octopus made a name for itself here in the UK, where we’re visiting this week, by bringing smart digital practices to energy consumption, monitoring usage and slowing down power supplies at times when demand falls. How it competes in the highly regulated U.S. markets, particularly against the monopoly utility companies, will be a real test of renewables and grid innovation. . . .
The global energy transition is slowing, and the U.S. isn’t helping
. . . . Four years of global inflation, Russia’s invasion of Ukraine, and political attacks on environmental forces have slowed the momentum of the clean energy transition in most countries, the World Economic Forum said in its annual energy report this week.
Not helping is the U.S., which ranked 19th out of 20 countries doing the most to migrate from fossil fuels to renewable energies such as solar and wind. The U.S. was effectively tied with China, Spain and Luxembourg, and behind Brazil, according to the report, titled Fostering Energy Transition 2024.
Not surprising, European countries filled the top 10 rankings, with Sweden No. 1, followed by Finland and Denmark. The UK was 13th. Among 120 countries ranked, African ones performed the worst, with Congo taking the last spot.
While geopolitical tensions aren’t falling, inflation has come down dramatically in the past two years in many countries, and supply chain woes caused by Covid have also started to fade. But a shift to the right among European Union leaders in last week’s elections threatens hard-earned gains in Europe and portends drama in the U.S. presidential election later this year.
While governments play a large role in setting momentum, markets and investments in innovative technologies drive progress. To that extent, it’s likely the latest report lags this year’s gain in global markets. How the rally and the elections this year combine to impact momentum will become clearer the closer we get to November. . . .
Making sense of international climate reporting standards
. . . . Time was, just a few years ago, there were only a handful of climate reporting standards, with many sustainable executives looking to the Sustainable Accounting Standards Board (SASB) for guidance on how or what to report. Now, according to a quick Google search, using its AI engine, there are more than 600.
The list of acronyms is amazing. Besides SASB there are ISSB, TCFD, CSRD, and on and on. John Jeffcock’s Winmark, the London-based consultant and operator of the Chief Sustainability Officer Network, is conducting a search to find the top three dozen or so standards that most companies use in the U.S., Europe and Asia, and in particular, how they are being applied at the individual company level.
This seems particularly useful and might turn up some surprising results. For example, a story in ESG Today last week said more than 70% of U.S. companies still use spreadsheets to tally and retain their climate networks, despite the proliferation of more advanced software products.
To any readers willing to contribute some thoughts or examples on this, or just want to learn more about Winmark and its CSO, please email back to us and we’ll be sure to pass you along. . . .
Editor’s picks: First day of summer and a massive heat wave
From CAL FIRE via X: ‘We have seen more acres burned in our Lake-Napa counties unit (in Northern California) over the past three days (11,209 acres) than we saw in the previous three years combined (4,442 acres from 2021-23).’
Astronomically hot for 135 million Americans
Today is the official start of astronomical summer, with the summer solstice occurring at 10:50 a.m. Eastern/1:50 p.m. Pacific. It’s also the longest day of the year. More than 100 million Americans are sweltering in a dangerous heatwave, Michael Loria reports for USA Today. Citing AccuWeather, the report says that from the Ohio Valley to the mid-Atlantic to New England, temperatures will reach the 90s, and some places could soar to over 100°F. “Pockets of the U.S. not accustomed to extreme heat were already feeling the effects Wednesday, such as Caribou, Maine, where records go back to 1939. The heat index at Caribou currently stands at 103°F, the weather service said in a social media post. That’s an unofficial all-time record.” The National Weather Service said the heat index in parts of the state could rise even higher — to 105°F — on Thursday.
Latest findings: New research, studies and projects
Climate change fuels a thirst for sweet drinks
In the current syndemic of obesity and climate change, little is known about the effect of extreme temperatures on dietary behavior, say the authors of this paper from Kilts Center at Chicago Booth Marketing Data Center, titled How Is Climate Fueling the Thirst for Sweetness? Exploring Drivers and Adaptation?. Using exogenous daily variations in weather and a nationally representative consumer panel in the U.S., they find that extreme heat increases the volume purchased of sugary drinks, with persistent impacts even after accounting for intertemporal purchase shifts. Results reveal higher impacts among the most vulnerable households and no evidence of long-run adaptation by historical heat exposure. They combine estimates with output from climate models for 2080-2099. Projections indicate that climate change may increase sugary drink purchases. Authors: Laure de Preux, Imperial College Business School; Maxime Roche, Imperial College Business School.
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Words to live by . . . .
“Change or be changed, right? And what we mean by that is that climate change, if we don't change course, if we don't change our political and economic system, is going to change everything about our physical world.” — Naomi Klein, Canadian author, social activist, and filmmaker.