Higher Rates Ding Utilities as Power Investments Gain Traction

The utility sector has been a laggard among S&P 500 (SPX) sectors and is down 0.7% this week.

The Federal Reserve interest rate hike means higher borrowing costs for sectors including utilities. And borrow they must, with U.S. power grid upgrade requirements and a surge in power demand expected from new AI data centers. Also, in a rising interest rate environment, regulated utility dividends are competing with other income investments.

But the pace of data center construction is rapid, from small sites and co-location facilities to mega-scale generative AI locations, which can require more than a gigawatt of power. Global electricity demand growth could rise by more than one trillion kilowatt-hours per year through 2030, and data centers could account for about 20% of that growth, according to the Morgan Stanley 2026 energy market outlook. Data center power consumption could reach nearly 126 GW annually through 2028 – nearly as large as Canada’s total power demand, the report says.

Off-grid power generation and storage can bypass connection delays and offset possible U.S. power shortfalls. From traditional utilities’ solutions, microgrids and hybrid systems, to power generation equipment, and more, here is what the options markets are saying about some stocks addressing surging U.S. and global power demand.

Data is as of the close Wednesday, Sept. 22; option information reflects the Oct. 23 weekly expiration. This information may be notable to traders as utilities are typically regarded as having lower volatility while industrials are often more cyclical in nature.

Bloom Energy (BE), a provider of onsite fuel cell systems that generate power. Its customers include “data centers, semiconductor manufacturing, large utilities and other commercial and industrial sectors, as well as mission-critical organizations in local communities, such as hospitals, college campuses and retailers.” Bloom Energy shares are up 218% this year. The options market is pricing in a possible +/-$50 (18%) move.

Constellation Energy (CEG), whose shares are down 25% this year, is a utility spun out of Exelon (EXC) in 2022 that provides power generated with nuclear energy, renewables, and natural gas. It serves more than 2 million U.S. customers. Shares rose 3% Monday after Constellation said it signed a 15-year contract to provide Toyota (TM) in North America with renewable energy certificates from a Texas solar project. The options market is pricing in a possible +/-$25.85 (9.8%) move.

Generac (GNRC) sells generators and backup power supply for residential and commercial use. Its shares are up 50% this year. The stock jumped 18% last Thursday after announcing a major long-term supply agreement with Amazon.com (AMZN). Generac is expected to provide an estimated $2.4 billion in initial backup power generator deliveries to Amazon in 2027 and 2028, as part of an $8 billion long term agreement. The options market is pricing in a possible +/-$22.62 (11%) move.

GE Vernova (GEV) is the 2024 energy spinoff from General Electric. Its power business includes gas, hydro, nuclear and steam; its wind business includes turbine blades; its electrification business includes grid solutions and power conversion and storage; and it provides related services. It estimates that its customers generate approximately 25% of the electricity in the world. GE Vernova shares are up more than 45% this year. The options market is pricing in a possible +/-$101 (10.6%) move.

SpaceX (SPCX) earlier this year acquired power provider APR energy, which makes mobile gas turbines and power plants. SpaceX shares, which went public in June, have declined 31% from their June 16 high of $225.64, but are up nearly 48% from their low of $104.83 on Aug. 3. The options market is pricing in a possible +/-$18.56 (12%) move.

See Will Natural Gas and Solar Compete to Meet AI Power Demand?

For this week’s economic and earnings calendar, see Week Ahead: Heavy Economic Data as U.S.-China Summit Looms

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