Dominion Energy (D +0.62%) has transformed its business over the past decade or so and is now just a regulated utility. Don't write this company off, however, because its generous 3.8% dividend yield and plans for dividend growth of around 6% over the next few years are actually quite an impressive combination in the utility space. Data centers will be a key part of the growth here, yet these energy-intensive customers are straining the company's capital investment plans.
Slow and steady
After shedding oil production and pipeline assets, Dominion Energy is basically just a large regulated electric and natural gas utility. It has operations in 15 states serving some 7 million customers. One of the company's larger markets is the state of Virginia. It has a number of major projects in the works there, including a massive offshore wind farm that it hopes to construct despite some recent regulatory setbacks.
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That said, the state of Virginia also happens to be one of the largest data center markets in the world. Specifically located in Northern Virginia, the density of data centers makes some sense. The area is close to Washington D.C., the seat of government in the United States. And it is close to key infrastructure, like transportation and overseas fiber optic cable links. Regardless of the reasons, however, there are a lot of data centers producing demand for electricity in Dominion's business footprint.
Too much too quickly
A region that is seeing substantial growth in electricity demand is a very good thing for a utility, given that some areas of the country are seeing demand flatline or worse. So Dominion is quite happy to serve the needs of a growing customer base. Dominion Virginia estimates that data centers alone account for 20% of its normalized electricity sales. That's a huge piece of the overall pie in this division.
CEO Bob Blue discussed the Virginia data center business during Dominion Energy's second-quarter 2022 earnings conference call:
In aggregate, we've connected nearly 70 data centers with over 2,600 megawatts of capacity since 2019. This is roughly equivalent to over 650,000 residential homes. Data center volumes today represent about 20% of total sales in Virginia. Last year, this growth began to accelerate in orders of magnitude, driven by: one, the number of data centers requesting to be connected on to our system; two, the size of each facility; and three, the acceleration of each facility's ramp schedule to reach full capacity.
That was all meant to help create the backdrop for why the utility was having a hard time keeping up with demand. To put this into context, the company expects demand in 2027 to increase by 2.6 gigawatts compared to the current draw. That, according to management, is equal to the entire production expected from the planned offshore wind farm noted above.
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Key Data Points
Although having so much demand for electricity building up is a good thing in some ways, it is also a major problem in other ways. In fact, Dominion Energy has been forced to pause new data center connections. It needs to find the capacity to supply these data centers and build the transmission assets to get power to where it is needed. That's not as simple as it sounds. The company is trying to rush capital investment projects it had planned in the future so it can get this data center-heavy region back on the growth track.
A mixed blessing
If you own Dominion Energy, you'll want to keep an eye on the data center business. Right now, the rapid data center growth in the company's Virginia operation is causing problems, but solving them will likely lead to desirable levels of growth for the utility. And, if it can keep growing along with the demand, it might even see more demand in the future. The question is how well Dominion Energy manages the spike in data center development, and that's just not clear yet.
Shareholders should listen to the quarterly updates to make sure this issue is resolved positively. That said, if you are looking for a utility to add to your portfolio, the unique positioning of Dominion's Virginia business with regard to data centers could end up being the tipping point in your decision process.
