Electricity Prices Are Soaring. Six Stocks to Fix the Problem.

Americans might feel like pulling the plug on several electrical appliances after reading their current utility bills. (Dreamstime)

Key Points

• Average U.S. city electricity prices are 19 cents per kilowatt-hour, a 43% increase since late 2019.
• The rise in electricity prices is 18 percentage points higher than the increase in overall consumer prices.
• Artificial intelligence, manufacturing reshoring, and intermittent renewable energy contribute to higher electricity costs.

These days, electricity prices are, well, shocking, with “pain at the pump” rapidly being replaced by “pain at the plug.” Electricity price inflation is a warning sign for regulators and an opportunity for investors.

“For decades, gasoline prices served as the barometer of economic health and political stability,” says William Blair analyst Jed Dorsheimer. Electricity bills are assuming, or about to assume, that role. “We expect pain at the plug to be a hotly debated issue in midterm elections and utility resource planning meetings as electricity prices pit AI against constituents.”

The average electricity price in U.S. cities sits at roughly 19 cents per kilowatt-hour, up 43% since the end of 2019, 18 percentage points greater than the jump in overall consumer prices. While everything feels more expensive since Covid, the pandemic can’t explain all that’s happened to electricity bills.

Created with Highcharts 9.0.1Pain at the PlugAverage cost of electricity in U.S. CitiesSource: Federal Reserve

Created with Highcharts 9.0.1'05'10'15'20'251980'85'90'9520000.0250.0500.0750.1000.1250.1500.1750.200 $ per kilowatt-hour

Yes, artificial intelligence bears some of the blame. Power-hungry data centers are driving demand for electrons that utilities are just now planning to meet. There are other factors too, adds Dorsheimer, including the reshoring of manufacturing as well as over investing in new, intermittent generation technology such as solar and wind.

He isn’t arguing against clean technologies, just for balance. The stability that traditional power generation provides to the grid has allowed “variability to hide in the closet until now,” he says. Investors can think of this way: Variable power production from, say, a solar facility, results in high-cost peaker power plants running more often. The cost of those plants never gets counted in the cost of solar generation. With more variable power on the grid, those extra costs are starting to affect the whole.

Solar and wind power generation now accounts for roughly 20% of the U.S. total, up from less than 10% 20 years ago.

Fixing the problem is possible. Dorsheimer, for his part, has a five-step plan, which includes investing in “firm power,” adjusting market incentives, developing the domestic energy supply chain, ensuring capital is available to upgrade U.S. infrastructure, and keeping transformation moonshots funded.

“Firm power” includes relatively low environmental impact technology that is always ready, including nuclear energy, natural gas, and battery storage. Incentivizing those technologies could mean making tax credits available for clean, reliable production, as they have been for developing solar and wind technology.

“Baseload is more valuable than peak,” says Dorsheimer. “It should be treated that way.”

As for moonshots, Dorsheimer lists three: nuclear fusion, as in the process the sun uses that produces energy, geothermal power, and new nuclear technologies.

There aren’t a lot of ways for most investors to play fusion. Virginia’s Dominion Energy is developing a grid-scale fusion power plant with Commonwealth Fusion Systems. That might be one backdoor way to play fusion development.

Dorsheimer currently has Buy ratings on gas turbine and grid technology provider GE Vernova , nuclear fuel provider Centrus Energy, nuclear reactor technology company Oklo , and nuclear technology company BWX Technologies .

Those stocks have soared, up an average of 376% over the past year, coming into Friday trading. Dorsheimer still sees outperformance ahead. William Blair doesn’t have price targets for recommendations. A Buy for Blair essentially means it expects the stock to outperform the market.

Tesla is a leader in battery storage, he points out, but he rates Tesla stock Hold, noting that some volatility lies ahead for the electric vehicle business with the $7,500 federal EV tax credit gone.

Those are six stocks to consider. The goal isn’t only stock market gains. Grid development done right means more manageable electricity prices for households and businesses. And ample low-cost power means more economic growth.

That’s an outcome everyone can get behind.

Write to Al Root at allen.root@dowjones.com