Move Over, Tesla Solar. These 2 Energy Stocks Are Powering The Future of AI

U.S. electricity demand is surging, fueled by electric vehicles (EVs), data centers, and extreme temperatures. As reliable coal and gas plants retire faster than replacements are built, the grid is becoming dependent on variable wind and solar power. To bridge the gap, utilities are turning to virtual power plants (VPPs).

VPPs are a cloud-based networks that use thousands of small energy resources, including smart thermostats, EV chargers and home batteries as a single power source. During times of peak stress, VPPs activate by discharging power, signaling thousands of interconnected home batteries, such as those used by Tesla (NASDAQ: TSLA) or Enphase Energy (NASDAQ: ENPH), to send stored energy back to the grid. VPPs can also reduce overall demand by adjusting smart appliances, nudging smart thermostats by a couple of degrees, or by pausing EV charging.

Two of the bigger VPP operators, National Grid (NYSE: NGG) and Sunrun (NASDAQ: RUN), benefit from grid operators' need to meet energy demand during peak times. That's especially true now, as power-hungry data centers multiply, driven by the rise of artificial intelligence (AI). Both companies are seeing additional revenue and profits from offering VPPs.

National Grid poised to grow along with power demands

National Grid is a multinational power company based in London. In the UK, it is a monopoly that manages the high voltage electricity transmission network in England and Wales. In the U.S., it is an electricity, natural gas, and clean energy company that serves more than 20 million customers in New York and Massachusetts.

Over the past year, its shares have risen nearly 40%. As an added bonus, it offers an above-average dividend with a yield of around 3.7%. National Grid has been active in VPPs, launching its ConnectedSolutions program in under four months, which now has 250 megawatts of peak shaving capacity.

In its half-year report, National Grid reported an underlying profit of £2.29 billion (underlying earnings don't count certain non-recurring items), up 12% year over year, which works out to roughly $3.1 billion. Underlying earnings per share rose 6% over the same period last year to 29.8 pence (around $0.39).

Two concerns about the company are the cost of meeting rising energy demand and the stability of its dividend. It trimmed the annual payout of its twice-yearly dividend by 54% this year. Its increased expenditures may mean a short-term hit, but spending nearly $82 billion across its service territory over the next five years will enable it to reap greater long-term profits.

Sunrun sees rising benefits from VPP

Sunrun, based in San Francisco, is the nation's largest home-to-grid distributed power plant operator, with 106,000 customers enrolled in 17 home-to-grid virtual power plant programs. In a test last July in California, the company collaborated with three utilities to provide a 500-megawatt virtual power plant. The idea is that the company can help prevent rolling blackouts at peak times.

Sunrun's stock has risen more than 100% over the past year. In the third quarter, it reported $725 million in revenue, up 35%, year over year. EPS was $0.06, compared to an EPS loss of $0.37 in the same period a year ago.

The main concern with Sunrun's stock is that the company is a smallish mid-cap with a market cap of $4.64 billion and has not become consistently profitable. However, it is well-positioned to grow. Solar power's energy generation in the U.S. has increased from 1% to 8% in the past 15 years, which means there are a great deal of homes that don't yet have solar power.

Sunrun announced in early January that it had entered into a partnership with HA Sustainable Infrastructure Capital (NYSE: HASI) that is expected to finance an additional 300 megawatts of capacity across more than 40,000 home power plants. HASI is throwing in $500 million over 18 months to help Sunrun finance the project while Sunrun retains ownership of the project.

A long growth cycle ahead for these first movers

The need for VPPs has already become obvious as aging grids face increasing power demands. In 2024, utilities in Puerto Rico and 34 states expanded or initiated VPP programs. The U.S. Department of Energy has set a goal of 80 gigawatts to 100 GWs in VPPs by 2030, from the current level of 30 GW to 60 GW.

The companies that are already ahead of the curve with VPPs stand to benefit the most because they already have the technology and expertise to use them. By leveraging decentralized assets such as home batteries and smart appliances, National Grid and Sunrun are providing a flexible, cost-effective alternative to traditional power plants. This model not only addresses the immediate threat of blackouts during peak demand but also creates a more resilient infrastructure capable of supporting the massive power requirements of AI data centers and electric vehicles.

While the sector faces challenges, including high capital expenditure and the inherent volatility of transitioning energy markets, the financial growth of companies that can provide VPPs is easy to predict.

James Halley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Enphase Energy and National Grid Plc. The Motley Fool has a disclosure policy.