Utilities are among the major borrowers in the credit markets, which are now crucial to financing the investments in the massive artificial intelligence surge driving US economic growth.
In the process, they might make one of the corporate bond market's safest segments marginally riskier. Businesses will take out more loans, increasing the supply of bonds and perhaps affecting valuations. In the meanwhile, as regulators work to limit rate hikes, industry earnings may be under pressure.
This year, US utility bond sales increased by 19% to a record $158 billion, supporting the explosive rise in power demand brought on by the artificial intelligence boom.
The industry association Edison Electric Institute projects that over the next five years, electric companies would spend over $1.1 trillion on power plants, substations, and other grid infrastructure, an increase of almost 44% from the preceding period. It will be financed in part by debt.
For a straightforward reason, investors don't anticipate utilities experiencing financial difficulties: in the US, producing and supplying power is mostly a regulated industry, which sets the prices that the businesses can charge their clients.
Electric businesses typically wait to begin construction until they have both a strong rate of return and regulatory authority to recover expenditures from customers.
However, because so much more debt is on the horizon, the industry may become at least somewhat riskier for investors. JPMorgan Chase & Co. recently predicted an 8% increase in utility-bond issuance for the upcoming year, citing expenditures to strengthen the resilience of the electric grid as well as new data centers. Increased sales may result in larger spreads and lower valuations.
In recent months, investor concerns about an AI bubble have also grown, raising the possibility that investments in the electricity sector may not be as secure as they once were.
A major slowdown or contraction in AI-related spending would undermine the growth story utilities have been selling investors, even if they are somewhat protected from a tech pullback by power contracts that mandate minimum payments and termination fees.
And there is a political danger for investors: According to government data, electricity costs increased 5.1% nationwide in the 12 months ending in September, approaching a record.
In several elections held in November, candidates ran on platforms of lowering utility costs. According to Tim Winter, an equity portfolio manager at Gabelli Funds, regulators are under pressure to maintain relatively mild rate rises, which might reduce investor returns.
"It's very simple to say, 'Let's beat up the utility, they're making life hard for you guys,'" he remarked. "The likelihood that there will be a difficult regulatory environment and that you won't receive the desired returns on your investment increases with public concern and customer dissatisfaction."
The best defense against this kind of pressure for bond holders may be to continue purchasing notes from the regulated utilities themselves rather than the holding corporations that are farther away from the assets that generate income.
According to Andy DeVries, an analyst at the bond research firm CreditSights, the franchise to serve clients in a specific service territory and real assets like power plants and transmission lines serve as collateral for debt issued by operating firms.
"No bondholder has lost principal in 50 years with operating companies," DeVries stated. "Some people have holding companies." Pacific Gas & Electric's parent business, PG&E Corp., has declared bankruptcy twice in the past 25 years. There is a benefit to this investment: utilities' profits will probably increase as a result.
According to Brian Savoy, chief financial officer of Duke Energy Corp., "the utility sector is investing way more money than the cash flow it's generating."
"Knowing that utilities are expanding, investors are content with the risk they are taking." Demand for large utility bonds has been high this year.
According to data gathered by Bloomberg, Florida Power & Light, a division of NextEra Energy Inc., sold $1.15 billion worth of 2066 bonds earlier this month that were five times oversubscribed.
Demand for some of the notes that Duke and Evergy Inc. issued in November exceeded offerings by more than six times. According to the data, the average book coverage for dollar-denominated high-grade bonds issued in 2025 was 3.9 times.
