Electricity hunger in the age of AI: energy sector on the brink of a new boom

• 

  Serge Nussbaumer
  Chefredaktor

When millions of screens flicker in the evening and data centers around the globe are constantly processing data, the enormous demand for electricity becomes tangible. Digitalization is driving global energy consumption to unimagined heights – above all artificial intelligence (AI) with its enormous computing requirements. The tech giants’ data centers already require around 48 terawatt hours (TWh) of electricity every year. That’s more than the entire annual consumption of some countries. And demand continues to grow. According to the International Energy Agency (IEA), global electricity consumption could more than double between 2022 and 2026.

Global demand for electricity has risen more sharply than it has for decades. Last year, consumption rose by 4.3%, which in absolute terms is the largest increase of all time; and the curve continues to point upwards. The drivers are the electrification of transport and heating on the one hand and the digital revolution on the other. More and more electric cars, heat pumps and factories are being powered from the socket, while at the same time billions of networked devices and AI algorithms are moving enormous amounts of data. The share of this electricity in total energy consumption has now exceeded the one-fifth mark.

Nuclear renaissance

Nuclear energy is back in the spotlight to meet the growing demand for electricity. For decades, nuclear power was considered a discontinued model in many places, but in view of climate change and the need for reliable base load, nuclear energy is making a comeback and is now an important cornerstone of modern electricity grids. Its advantages: CO₂-free generation, high security of supply and continuous output. These are characteristics that are becoming increasingly important in an energy system dominated by data centers and e-mobility.

According to the International Energy Agency (IEA), the global fleet of around 420 nuclear power plants will reach a new high this year. Nuclear energy produces almost a tenth of the electricity generated worldwide and is the second largest source of low-emission electricity after hydropower. In addition, innovations are changing the landscape of nuclear technology, including
many small modular reactors (SMRs), which are still in the early stages of development. These “mini-nuclear power plants” are experiencing high demand, particularly from the private sector, in order to meet the growing demand for electricity from data centers. In a scenario where tailored policy support for nuclear and optimized regulations for SMRs and robust industry supply coincide in new projects and designs, their capacity could reach 120 GW by mid-century. The investment required to achieve this is estimated to be USD 670 billion by 2050.

However, countries are not only focusing on large nuclear power plants, but also have their eye on SMRs. Around a year ago, the British government declared the SMRs developed by Rolls-Royce to be its preferred technology. Three units of the 470 MW reactor are due to be connected to the grid in the 2030s. According to forecasts, however, the Chinese will be ahead in the construction of small reactors by the middle of the century.

Digitization as a billion-euro driver

The signs are therefore pointing to a nuclear restart. Their role as the lifeline of the AI economy is increasingly coming into focus. The experts at McKinsey assume that AI data centers, cloud services and e-mobility will require an additional 50 gigawatts of capacity in the USA by 2030. By then, the US data centers alone will require more electricity than Europe’s largest economy, Germany. Speaking of Germany, investment in digitalization is also increasing here. Deutsche Telekom and NVIDIA are currently planning to build an AI data center in Munich worth billions, with Europe’s largest software company SAP as the anchor tenant. This project is part of a European race to catch up. At the beginning of the year, the EU Commission announced a 200 billion euro program to triple the AI infrastructure in Europe within five to seven years. According to McKinsey, global power requirements for data centers will triple to 218 GW by 2030. Investments of around USD 1.3 trillion in new power plants are also forecast. These figures make it clear that digitalization will become a billion-dollar driver for the energy industry.

Private companies are also investing heavily. For example, the four US technology companies Microsoft, Amazon, Alphabet and Meta have doubled their investment budgets since the start of the AI boom in 2022. This mainly involves data centers and the necessary infrastructure. One example is the gigantic AI data center of the joint venture between OpenAI, Oracle and SoftBank in Texas, which will consume as much electricity as a medium-sized city. Projects of this magnitude naturally require the expansion of nuclear power capacity in the region, which in turn brings the utilities onto the scene.

Winner of the hunger for electricity

With regard to the beneficiaries of these developments, various industry players are coming into focus: from traditional utilities and uranium companies to developers of new mini-nuclear power plants. While energy suppliers were traditionally regarded as solid dividend payers, they are now being traded as growth stocks and are even among the stars on the capital markets. The share price of NRG Energy, a large independent power producer, has risen by 85% since the beginning of the year, making it one of the top 10 stocks in the S&P 500. Constellation Energy, the leading US nuclear power producer, and Vistra Corp, which own extensive power plant parks, are also on a steep upward trend. The energy plants of GE Vernova, a company that emerged from the split-up of the conglomerate General Electric, are also in high demand.

Energy suppliers in Europe are also becoming increasingly popular. Examples include France’s Engie and Finland’s Fortum, which not only combine security of supply with decarbonization, but can also score points with nuclear energy. Eastern European utilities such as CEZ and Orlen are also coming into focus, as they could benefit from the planned expansion of nuclear power in the region. Ultimately, the “classic” utilities are becoming more attractive both in the USA and on the old continent, as they can now also score points on two fronts thanks to stable cash flows and growth prospects: On the one hand, they are positioned defensively and independent of the economy, while on the other hand they are benefiting from the AI boom.

Profiteers alongside the utilities

The uranium industry is a clear beneficiary of the new nuclear age. The prospect of hundreds of new reactors worldwide has caused the price of uranium ore to skyrocket and at the same time catapulted uranium shares higher. The VanEck Uranium and Nuclear Energy ETF, which invests in global uranium producers and nuclear technology companies, has more than doubled in price within a year. This index includes, for example, the second-largest uranium producer Cameco Corp. from Canada and the component manufacturer BWX Technologies. The developers of SMRs are also a special segment with a lot of potential in the nuclear sector. Prominent names include Rolls-Royce from the UK and NuScale Power from the USA. TerraPower, a company founded by Bill Gates, also wants to build advanced reactors. Oklo, a US start-up with micro-reactors that went public in 2023, shows how sought-after the industry is by investors. The share price rose by more than 400% within one year alone.

The fact that nuclear and utility stocks are currently among investors’ favorites can also be seen in various sector indices. These are either setting historic records or are constantly reaching new highs. The STOXX Europe 600 Utilities Index, for example, is outperforming the market as a whole and has already lost 15 percentage points this year. Its US counterpart, the S&P 500 Utilities, has gained around 44% since the end of 2023, making it the third-strongest sector in the S&P 500. Never before has this benchmark achieved a return of over 20% for two years in a row.

Seize opportunities, consider risks

The sector therefore remains exciting for investors. Further share price opportunities will arise if the utilities are able to implement their new projects profitably and demand for electricity continues to grow as forecast. Nuclear energy-related companies in particular could benefit disproportionately, as nuclear power is gaining in value in a green future and offers lucrative margins thanks to high capacity utilization. If innovations such as SMRs become marketable, this would open up another profitable business area. However, it remains to be seen whether the current hype is sustainable. “If the AI story cracks, these shares will also be punished,” warns Brad Conger, Deputy Chief Investment Officer at Hirtle Callaghan & Co. Furthermore, the risks in the nuclear energy sector should not be overlooked. The construction of new reactors is complex and expensive. Delays and cost overruns have been the rule rather than the exception in the past. Nevertheless, from today’s perspective, the opportunities outweigh the risks. For example, the global trend towards electrification and digitalization is likely to be irreversible and increase the demand for electricity in the long term. True to the motto “high-tech boom meets energy boom”, the current stock market rally reflects a leap of faith that could be of a sustainable nature.

In the table below, we have put together a selection of different investment solutions that differ both in terms of their underlying assets and their mode of operation. While some products enable disproportionately high profits through leverage, other structures offer attractive return opportunities even in sideways markets. This means that there is a suitable solution for every investment strategy and risk appetite.