The Zhitong Finance App learned that Huatai Securities released a research report saying that US electricity supply and demand expectations are undergoing profound changes. The emergence of new AI momentum, an increase in the electrification rate, and the recovery of traditional energy use through re-industrialization may cause the US electricity demand to come out of a ten-year period of stagnation. Electricity supply is becoming a bottleneck in development. In regions with a high degree of marketization of electricity in the US, electricity price increases can be used to attract investment in power plants or solve the battery bottleneck for AI. It is recommended to focus on the three main lines of investment logic.
The main views of Huatai Securities are as follows:
The probability of power shortages in Texas rose first. Peak electricity prices and rising ignition price differences brought flexibility to the performance of power generation companies
The Texas region's advantages of low electricity prices (benefiting from abundant natural gas resources), low taxes (no corporate and personal income tax is levied at the state level), and fast access (weak federal regulation, faster power connection to the grid) may continue to attract new electricity demand, including AI data centers, industry, etc., while the supply side faces a fragile balance due to limited external connectivity.
ERCOT electricity demand has shown signs of tightness in the short term. The peak electricity price this year was brought forward significantly to January and May. The average electricity price during this period was +77% and +59% compared to the same period. ERCOT's latest assessment predicts that the probability of implementing an orderly power limit during the peak of 9 p.m. in August this year has increased to 12%. The US National Weather Service predicts that the US will usher in one of the hottest summers on record this year.
In the medium term, electricity supply may become a bottleneck in demand growth. The new load in the ERCOT region only takes 0.5 to 1 year from application to connection, 1.5 to 2 years on the power supply side, and 3.5 to 6 years on the transmission side. Although ERCOT has shortened the source network side project application process to a certain extent through “connect to the network first, then control”, it still falls short of the speed of load launch. ERCOT expects the compound growth rate of electricity load in 2023-29 to 0.8% (benchmark) to 8.7% (optimistic, considering incremental load with transmission service providers but not yet signed a grid connection agreement), while the compound growth rate for nominal electricity installations is 2.6% (pessimistic, considering units that have not officially notified ERCOT but have decommissioning plans) to 2.8% (benchmark). We estimate that the compound growth rate corresponding to controlled installations is only 0% to 0.3%, which is significantly slower than the growth rate of demand, leading to peak power shortages.
The ERCOT region previously experienced a situation in 2017, 18, and 23 where a drop in controllable margin led to the expansion of peak electricity prices and ignition spreads. A 10% drop in controllable margin can drive ignition spreads to expand 1 to 10 times. Huatai Securities anticipates that ERCOT's manageable margin will continue to decline at a rate of 0.01 to 0.08/year, driving the ignition price spread to continue to expand. The electricity sales price portion of power generation companies is locked in advance through bilateral agreements or financial hedging, and the exposure portion will benefit from the increase in spot electricity prices and ignition price differences.
Based on 2024, the electricity price locking ratio for power generation companies in the current year, the second year, and the third year is generally 90% +, 50% to 80%, 25% to 50%. A 10% increase in spot electricity prices may bring about 1-8%, 4-9%, and 5-13% EBITDA elasticity for power generation companies. If electricity prices are not locked at all, the elasticity is 9 to 22% (based on the guidelines of the four market-based power generation companies).
What other investment logic is worth paying attention to in the US electric utility sector?
The increase in electricity prices brings about an increase in the return on investment in power plants is a market-based method to solve the bottlenecks in AI development and power supply, bringing investment opportunities in the US electricity sector. However, in the past, the long-term downturn in electricity supply and demand in the US has made it even more scarce to sell market-based power generation assets. Focus on three main logical lines:
1) Competitive electricity sales companies in the ERCOT region, with the peak summer demand season approaching, electricity prices will rise or drive the fundamentals; 2) PJM, CAISO and other markets other than ERCOT are improving load forecasts. If forward electricity prices rise, it will drive improvements in the elasticity of traditional power generation assets in the region, as well as improvements in electricity price expectations for new energy generation assets; 3) Looking at the extended cycle, the US utility index in the past two years has failed to fully reflect the increase in utility rates. If the US interest rate cut cycle begins, regulated utility companies in regions where electricity demand is expected to rise may take the lead Let's reevaluate.
Risk warning: Electricity demand is growing less than expected, and electricity supply is being released faster than expected. The content of unlisted companies or individual stocks covered in this research report is a compilation of objectively disclosed information on them, and does not reflect the recommendation or coverage of this company or stock by this research team.