BREAKINGVIEWS-Utilities facing AI power drain will plug together

By Robert Cyran

NEW YORK, Aug 27 (Reuters Breakingviews) - It’s getting tougher to keep the lights on. Amid the rush of economic modernization and a chase for cost-cutting through scale, the number of listed public utilities in the United States fell from around 1,000 in the early 20th century to fewer than 200 today. Regulatory pushback and a lull in demand growth subsequently slowed the pace of consolidation. Now, artificial intelligence has sparked a new hunger for electrons. As capacity expansion returns to the agenda, the number of providers will again dwindle.

Last week’s merger between western utilities Black Hills BKH.N and NorthWestern Energy NWE.O — along with recent transactions like Constellation CEG.O buying Calpine for $16.4 billion, or Blackstone Infrastructure buying TXNM TXNM.N for $11.5 billion — tops off $89 billion of announced deals year-to-date, according to LSEG data. That’s more in eight months than any calendar year in the past 20 save for 2007, which ended only slightly higher.

It comes as a decade of stagnant electricity demand growth ends. The rise of electric cars and a push to onshore manufacturing led to a rush of new factories, edging up power needs. AI represents a wild new acceleration. Server farms will be an estimated 12% of U.S. grid demand by 2030, or nearly three times as much as currently, according to McKinsey. Total demand is forecast to increase 50% by 2050, according to the National Electrical Manufacturers Association.

Combine this with local mandates to transition to green energy and decrepit transmission in need of upgrades, and the result is a lot of spending. Energy utility capital expenditure should be about 50% higher this year than in 2021, S&P Global reckons, and the industry will invest over $1 trillion between 2025 and 2029. The toll is already heavy: discretionary cash burn at regulated utilities has exceeded $100 billion a year since 2020.

Here’s where deals help. Economies of scale make it cheaper and more reliable to generate and distribute power to more consumers at the same time.

Regulators fear companies will hand deal spoils to shareholders while consumers are saddled with the cost of empire-building. This produces odd outcomes. Take Duke Energy DUK.N, which completed a merger in 2012 but remained as two largely separate entities. It is now asking for approval for full consolidation, dangling up to $3 billion in savings and claiming an increased ability to invest.

Any new deal similarly promises cost-cuts, improved balance-sheet strength and the ability to shoulder more debt for expansion. The rise of AI may force regulators’ hands: regulated utilities pass along investment costs onto rate payers, but if a merger promises to ameliorate bill hikes, that will be tempting to officials. After all, the demand is coming. The question is whether consolidators will win free rein to respond.

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CONTEXT NEWS

On August 19, Black Hills and NorthWestern Energy Group said they would merge in an all-share transaction, creating a gas and electric utility with a pro-forma market capitalization of $7.8 billion.

There have been $89 billion of announced U.S. utility deals in the year to date according to LSEG.