"Electrification of everything" sparks demand for utilities

Electric utilities, especially those producing renewable energy from wind, solar, and nuclear sources, are poised for strong growth, according to Fidelity's Douglas Simmons.

  • As demand grows for greener energy options to combat climate change, consumers and businesses have increasingly turned to electricity to power vehicles, homes, workplaces, and factories, in turn sparking growth for electric utilities, says Fidelity Portfolio Manager Douglas Simmons.
  • "Electric utilities are among the prime beneficiaries of the world's nascent transition from fossil fuels to renewable energy resources," says Simmons, who manages Fidelity® Select Utilities Portfolio. "This evolution is the best thing to happen to utilities since the advent of air conditioning."
  • In helming the sector-focused fund since 2006, Simmons has long emphasized shares of companies focused on developing the renewable-energy segments of their businesses. He favors companies with solid fundamentals and high dividend growth that are often undervalued by the market. And opportunities in this space abound right now, he acknowledges, following the worst-ever performance of utilities stocks versus the S&P 500® in 2023.
  • Electric vehicles, heating systems, and factories that are run off electricity generated by wind, solar, and nuclear power have begun to proliferate in the marketplace, fueling a trend Simmons and others refer to as the "electrification of everything."
  • According to Simmons, growth in sales of electric vehicles offers an early illustration of the trend, which he expects to expand to other categories, such as home heating. In 2022, 10 million EVs were sold globally, and that figure grew 46% in 2023.
  • To provide perspective on the scale of this growth, in 2020 EVs represented about 4% of total car sales, Fidelity research shows. In 2022, EV sales soared to 14% of overall sales, and that percentage climbed to 19% in 2023.
  • "As the world looks to decarbonize as many facets as possible of everyday life with clean energy, I am trying to position the fund to benefit from this long-term trend," says Simmons.
  • In line with this theme, the fund has owned three California-based electric utilities—PG&E, Edison International, and Sempra—as well as Maryland-based nuclear energy provider Constellation Energy. Each of these utilities was among the fund's largest holdings as of January 31.
  • "All are well-positioned for surging electric demand as the world increasingly turns to greener options to combat climate change," says Simmons. "And I believe we'll see solid profit growth here as these firms continue to build out their capabilities to meet rising demand."
  • He sees each as beneficiaries of onshoring and the U.S. Inflation Reduction Act of 2022, which prompts the government to incentivize and invest heavily in efforts to promote clean energy.
  • "There has been a real inflection point in U.S. power demand that we have not seen in two decades," says Simmons. "Utilities are the major beneficiary of this demand, and they are at the epicenter of the shift in the U.S. away from coal and toward renewable energy sources," Simmons says. "Looking out several years, this energy transition has the potential to fuel faster earnings growth for certain utilities over an extended period."
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.

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