The investment landscape is changing rapidly as electricity demand accelerates at a pace few anticipated. Michel Sznajer, Portfolio Manager within the Ecofin investment team at Redwheel, shares his insights on electricity growth.
Moving at Electrifying Speed
After years without electricity demand growth in the US and Europe, demand is inflecting upward as substantial new sources of electricity demand are more than overcoming efficiency gains that offset any growth in the past. What is important to realise is the speed and magnitude of the change we are witnessing: a 1GW-equivalent Datacenter that every hyperscaler intends to develop over the next few years is likely to have the electricity consumption of the cities of Philadelphia or more than half of London.
Imagine each hyperscaler adding these cities in a matter of years, we have not seen that scale and speed for a very long time. On the electric vehicle front, in China in 2025, 56% of cars sold and 29% of heavy-duty trucks were electric1, and that’s before petrol prices spiked this year and more buyers abandoned petrol and diesel cars. Electric car penetration is fast gaining share around the world as battery costs have fallen dramatically and so have electric car prices, and battery performance has improved substantially with the latest CATL 1,500km battery range charging at 98% in 6.5 minutes2.
Growth is real
Those expectations are real because there are huge amounts of money being deployed: the 4 hyperscalers Amazon, Google, Meta and Microsoft expect to spend over $700bn in capex in 2026 (vs. approx. $226bn in 2024)3. Directly related to that, Caterpillar announced a record order book with especially strong growth in its power business. If we accept that the hyperscalers are spending money to buy chips and develop datacenters, Caterpillar and peers are getting the orders to build the datacenters, the infrastructure around and the necessary power plants, we have to recognize that power generation companies are also seeing substantial growth to power these chips.
To illustrate that transmission mechanism, in the past, Nextera, the largest electric utility in the US, used to guide the market by saying it expected to grow EPS by 6-8% for the following 3 years4 because that was the timeframe for which it had good visibility. In December 2025, the company announced that it now expected to grow EPS over 8% per year for the next decade and that 8%+ was revised upward to 9%+5 after the announcement of the acquisition of Dominion. Can we get a clearer message than the largest company in the sector being confident to grow faster for much longer? And the same is happening across our investment universe.
Interestingly, despite faster for longer growth, valuation multiples have not adjusted upward.
What does it mean for investors in the energy and utility sectors?
Energy underperforms electricity
According to EIA data in May this year, the US have experienced a 0.4% decline per annum in fossil fuels consumption over the past two decades -a testament to advances in energy efficiency6. Notably, electricity demand has grown by 0.5% per annum over the same period. Importantly, with this apparently small difference in consumption growth between energy and electricity, electric utilities have outperformed the energy sector by about 300bps per annum over the past 10 and 20 years7. This is not an insignificant relative performance!
In light of the acceleration in growth in electricity demand discussed above, which is partly driven by substitution away from fossil fuels, we expect the same trend to continue: a declining share of fossil fuels and a rising share of electricity in energy consumption.
This should see electricity companies grow even faster than fossil fuel companies going forward and capture a larger share of market capitalisation in absolute terms and/or at the expense of energy companies. The risk of further underperformance of energy vs electricity companies therefore rises in the future. As such, we believe that investors should look at their overall energy allocation and overweight the electricity bucket in their portfolios (electric utilities as well as Independent Power Producers and renewables developers/operators).
Tactically, this year’s dislocation in fossil fuel prices driven by the war in Iran has driven the energy sector to outperform year-to-date but the long-term trend has not changed: more substitution to electricity, less dependence on unreliable sources of energy (volumes and prices), more localised energy sources. We see the event-driven strength in the fossil fuel sector as a great opportunity to take some profit and rotate strategically into the electricity sector.
The electrification of energy is set to reshape the energy industry landscape: Watchout for indices
Today, the energy weighting in the S&P500 is around 3.3% vs utilities at 2.1% (including electric utilities at circa 1.38% and IPPs 0.09%)8. The energy weighting has been shrinking over the years, yet most investors have exposure to energy/oil majors and not electricity majors. Utilities have long been considered a defensive sector that could be substituted or ignored in portfolios. However, we believe that it will be an increasing mistake going forward given the substantial growth in the sector. We therefore would encourage investors to get exposure to electricity companies that will become the energy leaders in the future: the new energy majors.
There are many investment approaches to get exposure to the electricity sector. From our more than a decade experience investing in the space, focusing on electric infrastructure companies has proven a winning recipe to outperform while taking lower levels of risk than the market and sector.
The views expressed are those of the author at publication and may not represent Redwheel. No strategy or risk management method can guarantee returns or eliminate risk in any market environment.
