It’s not hard to find a headline these days touting the massive demand growth for electricity in the U.S. and how that energy demand is likely to be met by natural gas-fired electricity and the power plants that generate it.
Big picture, we can thank artificial intelligence (AI) data centers, onshoring of more complex manufacturing and growing adoption of electric vehicles (EVs) for the bulk of the power demand boom.
Smaller use cases, like electric heat pumps, air conditioners, battery-powered tools & equipment and all the other “electrification” trends in the economy are also adding up to a considerable demand increase.
But in an industry prone to boom-and-bust cycles, the big question facing investors today is less about what the drivers are and more about how sustainable it is.
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Booms & Busts
In the last twenty-five years, there have been two significant bust cycles. The first, and biggest one, was in the early 2000s, while the second was in the mid-to-late 2010s.
These downturns were severe enough that a number of the construction and engineering firms specializing in building the power plants that produce natural gas-fired electricity went out of the market entirely. This has contributed to some hesitancy within the industry to overcommit and created some of the supply-demand imbalance.
But if we listen to management at companies like GE Vernova (GEV), it sounds like the current market is a lot more like the post-World War II industrial boom and less like the shorter-lived drivers (overbuilding, dot-com crash, natural gas spike, rise of renewables, shale boom, etc.) of the more recent downturns.
And if we look at projections from the EIA and Bloomberg NEF (BNEF), we see a very bullish case for U.S. capacity additions for gas-fired electricity over the next five years, with both groups forecasting somewhere between 85 to 90 net new GW added.
The biggest demand driver is, of course, data centers.
In fact, BNEF data suggests that, if data centers were a country, by 2035 they would be the fourth-largest consumer of electricity in the world, falling only behind the U.S., China and India.
Out with the Old, in with the New
This megatrend is shaking up the energy industry in a big way and catalyzing a gold rush-type boom for a wide variety of companies, including those that make components for natural gas power plants – like GE Vernova’s gas turbines – and those involved in the design, engineering and building of these complex facilities.
The reason is simple.
The sharp rise in demand is straining the country’s aging fleet of traditional power facilities, many of which are at or nearing the end of their operational lives.
With the risk of electricity shortages growing throughout the country, and the pace of retiring traditional power plants also growing, new power sources are sorely needed.
While renewable energy sources like utility-scale solar and wind are expanding – thanks in large part to falling capital costs and better energy storage systems that enhance grid reliability – the long-term outlook for renewables has recently become cloudy due to shifts in energy policy and regulatory frameworks.
The other challenge for renewables is that they just can’t provide the constant, around-the-clock power generation of the old school thermal plants.
The bottom line is that, over the next decade, the bulk of U.S. energy capacity additions will come from natural gas-fired power plants. These plants are cost-effective, reliable, and provide continuous power.
Investment Implications
One of the ways investors can play this trend is to invest in the companies that build and supply parts to these plants.
GE Vernova has clearly been a winner. But there are many other, lesser-known players that are worth digging into to see if they make sense for your portfolio.
For anybody who wants to just skip the work and get the name of my favorite stock in this space, you can get it through a trial subscription to Cabot Small-Cap Confidential.
Just last week, I added a small company poised to grow rapidly from natural gas power-plant demand. All the details on that company and why it has a bright future can be found here.
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