US Utilities Sector Landscape for 2024

The utilities sector in the United States plays a crucial role in our everyday lives, powering homes, businesses, and industries. Beyond providing electricity, water, and gas, utilities are pivotal in shaping the energy landscape of the future.  

Given the rapid advancements in renewable energy and increasing regulatory pressures, understanding the current state and future direction of US utilities is more important than ever for investors.  

Download our comprehensive report and explore the outlook on utilities stocks' profitability and illustrate the evolving nature of this vital sector. 

One of the most significant shifts in the US utilities sector is the rapid growth of renewable energy sources. Over the past decade, falling costs for wind and solar projects and state-mandated renewable energy targets have spurred significant investments in clean energy. By 2024, renewable energy, excluding hydropower, is expected to surpass coal for the first time, making up over 16% of power generation. 

This growth is not just a steady drumbeat—it's an acceleration. Solar energy, in particular, is positioned to expand at the fastest rate, driven by technological advancements, tax incentives, and increasing consumer demand for sustainable energy solutions.  

This shift presents both opportunities and challenges for utilities stocks. While renewable energy offers a cleaner and often cheaper alternative to fossil fuels, it also requires substantial grid upgrades and storage solutions to ensure reliability.

Utilities must continue to innovate and invest in smart-grid technologies and battery storage to accommodate this growing influx of renewable energy. These advances will ensure grid reliability and efficiency as renewable energy's share of the generation mix increases.

Historically, US electricity demand has mirrored economic growth, averaging around 2% annually. However, since 2000, this relationship has weakened due to improvements in energy efficiency and a decline in industrial electricity use. Consequently, electricity demand has remained flat since 2007.  

Yet, we are on the cusp of a revival. 

Several factors are poised to drive renewed growth in electricity demand: 

• The proliferation of electric vehicles, or EVs. 

• Diminishing returns on energy-efficiency advancements. 

• The surge of data centers fueled by advancements in artificial intelligence. 

We expect demand to grow 1-2% annually. These factors represent significant opportunities for utilities to expand their services and infrastructure to meet growing electricity needs. 

For utilities, this means preparing for increased demand by investing in grid capacity and reliability. Additionally, utilities might explore partnerships with EV manufacturers and charging network providers to capitalize on the expanding EV market.  

By aligning their strategies with these emerging trends, utilities can position themselves as leaders in the transition to a more electrified and data-driven economy. 

Income-focused investors have long favored utilities due to their stable cash flows and high dividend payout ratios. Traditionally, utilities' dividend yields closely tracked the yields of 10-year US Treasury bonds. However, following the 2008 financial crisis, utilities' dividend yield premium peaked in mid-2020 as interest rates plummeted. 

Utilities continue offering attractive yields relative to bonds today, although the landscape is shifting. With interest rates normalizing, we expect utilities’ dividend yields to align more closely with bond yields. This adjustment reflects a return to pre-2008 norms, where utilities provided a reliable income stream with relatively lower risk. 

This makes utilities a defensive play for investors during economic downturns, offering steady returns even amidst market volatility. Additionally, utilities' focus on sustainable energy investments and grid modernization creates opportunities for long-term growth, further solidifying their appeal as income-generating assets. 

Most utilities have narrow moats but no wide moats.  

One major component of these moats is the regulatory framework that utilities operate within. The need for regulatory approval and oversight to set customer rates limits competition but also limits utilities’ earnings. This regulatory environment acts as both a barrier to entry for new competitors and a safeguard for existing utilities, ensuring their ability to continue operating with predictable cash flows. 

Another aspect of utilities' economic moats is their large capital investment requirements. Building and maintaining the infrastructure necessary for electricity, gas, and water distribution is capital-intensive and regulators limit the returns utilities can earn on these investments. 

Rate regulation and the need for reliable energy supply in the economy typically lead to stable demand and predictable revenue streams for utilities. This stability attracts investors seeking low-risk, steady returns. 

As the sector evolves, utilities that effectively navigate regulatory landscapes, invest in infrastructure, and embrace innovation will likely sustain their competitive advantages.

The US utilities sector is undergoing a transformation driven by renewable energy expansion, increasing electricity demand, and stable investment returns. These dynamics underscore the critical role utilities play in shaping the nation's energy future. For those looking to engage with and benefit from these changes, our platform offers insights and tools to help you make informed decisions. Learn more about how Morningstar can empower your analysis of the utilities sector with our Data & Analytics. 

Exclusive Morningstar ratings give investors a starting point for analyzing investment opportunities. The Morningstar Rating for Stocks assesses a stock’s current price relative to its fair value estimate.

Investors can dig deeper into dividend stability and growth with timely investment data.

• Dividend per share/earnings per share can indicate relative dividend payout.
• Capital expenditures/depreciation shows capital investment flexibility. While net new investment usually translates into dividend growth, sometimes utilities must retain more earnings to fund investments.
• Average net debt/EBITDA can show financial flexibility. Most utilities must keep leverage below 6 times EBITDA to maintain a healthy dividend.

For our analysts’ four key themes driving this sector, download the outlook.