AI Is Driving Up Power Costs and Upending Utilities Markets. Is That a Problem for Tech and Utilities Stocks?

Key Takeaways

• With electricity bills rising for everyday Americans, President Trump has called for tech giants to pay for the power costs associated with AI data centers.
• These data centers generate massive energy bills, but analysts don’t expect those extra costs to make a material difference on the bottom lines of hyperscalers like Microsoft and Amazon.
• Utilities providers may face greater regulatory risk over the long term, but the outlook is little changed in the short term.

Artificial intelligence doesn’t come cheap, and power-hungry data centers are being blamed for driving up electricity bills for everyday Americans. Consumers are complaining, politicians are responding, and some of the biggest AI stocks are caught in the crosshairs.

Microsoft MSFT President Brad Smith recently pledged that the company will ask utilities and public commissions to set its electricity rates high enough to avoid impacting residential customers. Other tech giants have made similar assurances, and firms like Meta Platforms META and Amazon AMZN are in the middle of a media blitz touting the benefits of data centers. It all comes as President Donald Trump assures Americans that the tech giants driving the data center boom will have to pay their own way. Also coming to the fore are questions around the ultimate profitability of the stocks at the center of the AI buildout. Will big tech’s bet on data centers pay off?

Overall, Morningstar analysts say ballooning energy costs won’t dent the balance sheets of companies like Microsoft, Meta, and Amazon. And while proposed regulatory changes to electricity capacity markets may muddy the outlook for utilities providers like Vistra VST and NRG Energy NRG, the near-term outlook remains the same. Regulatory pressures on utilities are building, and while the near-term outlook for increased electricity demand remains intact, utilities stocks look overvalued.

Electricity Demand Is Surging

Current forecasts suggest electricity demand is set to surge in the coming years as AI adoption gains steam, and that the cost associated with the extra capacity is set to soar alongside it—potentially to the tune of 10 times previous levels in the Mid-Atlantic region, where many data centers are concentrated, according to recent estimates. That’s true even as deep-pocketed mega cap tech firms contract directly with utilities providers for power.

“This is a whole different dynamic,” says Morningstar senior equities analyst Travis Miller, who covers energy and utilities stocks. He explains that data center customers are pushing up both demand for electricity and the capacity prices in certain markets.

In the Mid-Atlantic, President Trump has an emergency auction that would leave tech firms on the hook for funding the building out of extra power capacity those data centers require.

Power Bills Are No Big Deal for Big Tech

The target of Trump’s proposed changes are the so-called “hyperscalers”—mega-cap technology firms like Meta, Amazon, Microsoft, and Alphabet GOOGL/GOOG which provide the cloud computing resources that power AI applications. These are the firms building the new data centers that are straining the US power grid, and they’re already contracting with utilities providers to secure long-term bulk rates for the electricity they’ll need.

Morningstar equity analyst Malik Ahmed Khan, who covers Meta and Amazon, says that while higher power costs associated with AI will show up on these firms’ balance sheets, he doesn’t expect them to move the needle, thanks to an important offset. He says tech giants are moving their computing operations from older paradigms to newer ones, which will make data centers more efficient and help balance out higher power bills.

Khan also makes a distinction between fixed and variable electricity costs. He says that in the years ahead, fixed costs could become an issue for Meta and Amazon if AI implementation is slower than expected, because those firms will have locked in spending on electricity capacity. On the other hand, variable costs can be scaled down if AI utilization rates are slow.

Senior equity analyst Dan Romanoff, who covers Microsoft, holds a similar view. “I don’t think power costs associated with AI will make a difference,” he says. “At least right now.” He thinks the picture could change in a decade or so if there is more stress on the electric grid. But data center projects take years to get off the ground, and Microsoft and its peers are “well-versed in the process.”

Morningstar equity analyst Luke Yang, who covers Oracle ORCL, says he doesn’t expect high power costs to make much of a difference for that firm either, since the major cloud providers (Amazon, Microsoft, and Alphabet) tend to use the same type of processor made by Nvidia NVDA. “The power cost of providing the same amount of computing is roughly the same across all major cloud providers,” he says, meaning the playing field is relatively even. For Oracle, Yang says the risk of falling short of revenue goals outweighs the risk of rising power costs if the data center buildout is slower than expected.

Utilities Stocks Face More Risk, but Near-Term Outlook Looks Steady

On the other side of the equation are the utilities. For Vistra and NRG, Miller says the potential changes to the regional power market floated by Trump introduce more uncertainty and regulatory risk but won’t change the near-term outlook. He adds that the companies have other businesses outside the Mid-Atlantic, which could help insulate them from policy changes. At the same time, the “emergency auction” proposed by the White House could take years to implement.

Both Vistra and NRG carry a High Uncertainty Rating from Morningstar and are trading in 1-star territory, meaning they are significantly overvalued. Shares of those firms shot up over the past year as electricity demand estimates soared, but they have leveled off more recently as regulators introduced price caps and those demand estimates moderated.

For now, Miller believes investors are underestimating the regulatory risks utility stocks face, as well as the potential pressure on long-term margins that could come from changes in the utilities market. “We think US power producers’ stocks are overvalued,” he says.

He notes that historically, Vistra and NRG’s businesses have been volatile, which is good because they can adjust capacity (and earn more revenue) when demand is higher. “It’s why investors invest in these and not regulated utilities,” he says. They’ve also operated outside of major scrutiny from regulators.

Miller thanks that if long-term contracts with hyperscalers become the norm, that could eliminate a lot of volatility in the industry. Recent contracts between Vistra and Meta would lock in capacity prices for decades and increase Vistra’s cash flow by 8%-10% in 2027, according to Morningstar’s analysis. But they could also limit upside for revenue and returns. Vistra “won’t benefit from electricity prices going up” at its Meta-contracted plants “because they’ve already locked up all their electricity sales.”