Several announcements this week made it clear that the artificial intelligence revolution will not burst like the internet bubble of 25 years ago. 

On Thursday, Taiwan Semiconductor, the dominant semiconductor fabrication company for AI and other advanced chips, released its June quarter results. The numbers easily beat expectations. Moreover, the company raised its revenue forecast.

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In the current September quarter, TSMC projects 38% growth, including 8% sequential quarterly growth, which would be many multiples more than a typical company in the United States. Clearly, the AI industry continues to grow very rapidly.

Meta also just announced that it will build multiple data centers, which will require several gigawatts of electricity to power the AI chips located in those data centers. Meta’s Hyperion data center cluster, scheduled for late this decade, is projected to be the size of Manhattan Island and generate up to 5 gigawatts. One gigawatt of electricity is sufficient to power 750,000 homes.

And in Georgia, regulators approved a plan that will enable Southern Co., a large public utility, to increase capital investment by around $15 billion to meet a large increase in demand for electricity for AI data centers and other business markets. The additional electricity load is projected at 8 gigawatts, enough to power about 6 million homes.

Goldman Sachs explained why AI has an insatiable appetite for electricity: “On average, a ChatGPT query needs nearly 10 times as much electricity to process as a Google search. Demand for electricity is undergoing a dramatic change.” 

Goldman Sachs believes that data center electricity demand will expand by 160% by the end of the decade. This could be a conservative projection given Meta’s plans and the rapid shift in attitudes toward AI. The overall growth rate for electricity to power the demands of households and businesses, including data centers, will approach 3%. That may not seem like a lot, but electricity demand was essentially flat prior to the AI revolution. Data center electricity demand has been consuming between 1%-2% of overall demand, but by 2030, that percentage of overall demand attributable to data centers will probably double.

So, with demand for electricity booming, an obvious question is whether electricity utilities are now growth stocks and should carry higher valuations?

The short and commonsense answer is that it depends on the utility. Most U.S. utilities are regulated by state governments because the utilities are perceived to be natural monopolies.

As a general rule, state governments in the South are pro-business and recognize that in order to ensure an adequate supply of electricity, utilities must generate strong returns on capital. They recognize that cash flows are needed for investment. It is not a coincidence that the largest data centers are located in and being constructed in pro-growth geographies.

The utilities of Texas, Georgia, the Carolinas, and Virginia seem to offer attractive growth opportunities. However, utilities in so-called blue states arguably offer subpar investment opportunities. Too many regulators in those jurisdictions do not understand basic principles of economics and capitalism. Stringent price caps on electricity rates that do not provide for an adequate return on capital invested inevitably lead to rationing of electricity when the weather is unusually cold or hot. 

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Climate is always a problem. Utilities in geographies where hurricanes, torrential rains, or frequent wildfires occur are probably not good investments.

In plain words, to make money by investing in a utility, an investor must look at the fundamentals of each specific company. Stock performance of different utilities can vary widely. Independent research companies are a good place to start when considering investing in a utility.

James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].