The growing power of US electric utilities – insights from our trip

The growing power of US electric utilities – insights from our trip

Over the next few years, many US electric utilities are expected to grow at an unprecedented pace as significant electrical infrastructure is required to keep up with forecasted load growth. The Edison Electric Institute (EEI) estimates that US investor-owned electric utility capital expenditures will total $1.1 trillion over the next 5 years, nearly equivalent to the $1.3 trillion spent in the past 10 years. The growth is primarily driven by the need for new generation, transmission and distribution to serve new large load data centers, manufacturing and to facilitate ongoing electrification.

With this backdrop, we travelled to the US to meet with a range of utility companies, data center developers, renewable developers, utility regulators, industry associations and several others to gain insights into these trends. Overall, there was a real positive sentiment on the ground among the industry participants given the opportunities presented by the significant anticipated load growth, although this was somewhat tempered by an increased focus on affordability issues that remains prominent in certain states.

Data centers displaying unrelenting growth

The data centers we met with told a very consistent message of the power constraints that they were seeing in the US over the next few years. While speed to market remained a top priority for their customers, some viewed power constraints as a positive in limiting the pace of the buildout to reduce the risk of overbuilding. Many believed that the buildout of data centers were still in the early innings.

While transmission constraints in some areas have driven an increase in behind-the-meter (BTM) solutions – where generation is installed on the property of the data center – these do not fundamentally change the long-term need for the grid. There was acknowledgement that ultimately data centers want to be connected to the grid due to the increased reliability and to eventually transition towards lower emitting sources of generation. We view this as reinforcing the long-term value of regulated electric utilities and the long-dated nature of investments required to support the growth.

Near-term additional generation will be driven by renewables and gas

It was clear that to meet load growth forecasts that a range of generation resources will need to be called upon, although the pace of deployment, costs and risks associated with developing these were among the key considerations among utilities and independent power producers. Among the options, new renewables – specifically solar and storage assets – were seen as the most readily available to deploy given improved clarity on tax credits after the One Big Beautiful Bill Act was passed and continued confidence on being able to successfully permit the projects. All utilities and renewable developers we spoke to had safe harbored their backlog through to 2029/30, with some looking to pull-forward additional capacity to qualify for the tax credits.

Given the intermittent nature of renewables, there is broad agreement of the need to ensure reliability through ongoing support for baseload generation sources. Utilities have favoured new gas generation, as seen in recent updates to utilities’ Integrated Resource Plans (IRPs), which is a primary driver of growth in the capital expenditures of vertically integrated utilities. Despite the cost of building gas generation having increased substantially, many utilities have now de-risked a large component of the costs further increasing by securing turbine slots to support the anticipated growth over their plans, but execution remains key going forward. Entergy described how they have applied a consistent design of 754MW combined cycle combustion turbines (CCCT) across the entire group to enable learnings and improvements from prior iterations of construction.

Discussions around new nuclear generation were still in very early stages, and was largely met with hesitation from regulated utilities to bear the risks of potential cost overruns without a reliable backstop provided by the government, a well-capitalised customer or a sovereign wealth fund.

Dominion Energy’s offshore wind project

Dominion Energy’s 2.6GW offshore wind project is at the center of powering the largest concentration of data centers in the US. We met with management and visited the Portsmouth Marine Terminal (PMT) where staging activity for the project’s construction is currently taking place. Upon arriving it is immediately apparent from the size of each piece of equipment why the project has taken over a decade of planning and development since the company executed its lease agreement with the Bureau of Ocean Energy Management (BOEM) to get to where it is today at an expected cost of nearly $11 billion.

Despite several other US offshore wind projects facing set-backs this year under the Trump administration, there were no signs from our discussions with stakeholders that this project was at any immediate risk. Management reinforced the differentiated nature of being the only fully-regulated offshore wind project, which customers are already paying for, the strong support from local politicians from both parties at both the state and federal levels and the lack of opposition from the commercial fishing industry, among other reasons.

From our perspective, construction was proceeding broadly in line with management’s most recent guidance. All 176 monopiles were installed, transition pieces were staged and awaiting installation, the second offshore substation was loaded up on the Orion ready to be installed and the Dominion-owned Charybdis offshore wind installation vessel had arrived at the PMT in preparation for the installation of the turbines. It is a massive just-in-time logistical challenge to ensure that execution proceeds safely and smoothly, although weather remains an ongoing uncontrollable variable.

Top left to bottom right: 1. Staged (yellow) transition pieces; 2. Offshore substation 2 loaded on the Orion; 3. Inside of a transition piece; 4. Jacked up Charybdis offshore wind installation vessel.

Managing affordability remains critical to sustainable growth

The strong growth in regulated utilities capital expenditures and earnings is only possible if customer affordability can be managed well. Among our conversations with industry players, it was clear that the issue of affordability was growing among residential customers, regulators and politicians in some states more than others. Considering these concerns, most utilities have designed specific large load tariffs for data centers with the intent of protecting existing customers from the cost of building new infrastructure to serve these new loads. The terms of the tariff commonly include minimum contract terms, minimum demand thresholds, early termination fees and some form of credit guarantee.

Indiana was particularly topical after Governor Braun pushed for lower utility rates in the state.  This has the potential to conflict with the utilities’ increased investment needs to serve expectations of increased load growth, particularly from data centers. Although the utilities we met with were broadly comfortable with the risk following their meetings with the Governor, a departing Indiana Utility Regulatory Commission (IURC) commissioner we met with shared some concerns around the IURC potentially becoming more political with the Governor’s upcoming appointment of three new commissioners.

In summary

US regulated electric utilities appear to be in the early stages of a long build out of infrastructure to serve ongoing demand driven by the significant growth in large loads. However, we remain highly aware of the need for utilities to manage the pace of growth given challenges around affordability.