AI wakes up the sleepy US power sector

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0:33Good morning from the Financial Times. Today is Monday, June 29th, and this is your FT News Briefing. The sleepy U.S. utility sector is getting more exciting. And the U.K. prime minister-in-waiting is going to make some big economic promises. Plus, can the U.S., Mexico and Canada agree to renew their trade deal? There has been growing concern from U.S. officials in Washington that other countries, mainly China, have been taking advantage of the deal. I'm Sonia Hudson and here's the news you need to start your day.

1:20American energy and utility companies are closing bigger deals than ever before. Mergers and acquisitions in the sector have hit$204 billion in value for the first five months of this year. That's 40 % higher than all of last year. The uptick in deals is part of the corporate race to build AI data centers. Energy companies are providing the massive amounts of power these centers need to operate. Here with me to break things down is the FT's U.S. Energy Editor, Jamie Smith. Hi, Jamie. Hi. Hi. So what did you find when you were looking into these deals? So we had a huge deal earlier this year. NextEra agreed to acquire the utility dominion.

2:06And that got me thinking as to what's happening across the whole utility and power sector. So we asked Deloitte, an accountancy firm, to crunch the numbers on this. And really, what we're seeing is that in all the utility and power sectors, you know, covering gas generation assets, renewables, and electricity networks, we're just seeing lots of transactions there. Value is a lot higher than you normally get. And really, we think this is due to this AI power demand that we're seeing. Yeah, tell me more about the connections between these deals and AI data centers. It's really because AI data centers, use a ton of electricity.

2:51So analysts are forecasting that electricity demand in the United States is going to rise as much as 25 % by 2030. Now, that's really an incredible number when you think in the previous two decades that electricity demand in the United States was basically flatlining. So that's really changed the game for utilities and power companies here. And they're having to invest huge amounts of capital to try and build the new generation and grid networks that are required to support this surge in construction of AI data centers. So I think what's happening to really catalyze all these M &A deals is it's a combination of, you know, companies seeing new growth opportunities, but also an urgent need for them to raise money to build new infrastructure.

3:41You know, typically the utility sector was considered a rather sleepy and actually quite a boring sort of part of the energy sector. But this AI boom is really changing that, and it's attracted a lot of companies looking to do deals. Now, American utility companies are mostly monopolies that are highly regulated by the government. Could that complicate these deals? I think what's going to happen is that these companies will remain monopolies and potentially become bigger monopolies if the deals are allowed to go through. One thing about a monopoly is typically you see less competition and that could raise prices for consumers.

4:23Now, what the companies are saying when they're doing some of these deals is that they're arguing that by being bigger, they can raise money at lower costs than rivals and that they can actually lower the electricity prices for the consumer. consumer advocates and some politicians, they do not agree with NextEra and the utilities arguments. So they're likely to closely scrutinize these utility deals. And in fact, senators, including Elizabeth Warren, have already begun an investigation into the rollout of all these AI data centers and the impact they're having on raising electricity costs. So regulatory scrutiny will remain a high bar for some of these transactions.

5:06Well, looking ahead, Jamie, do you think that we can expect to see a lot more of these deals? I think it's going to really come down to the local regulators in the power markets where these things are happening. So, you know, if NextEra's deal to take over Dominion sails through and it has to pass local regulators in each of the states that the companies operate, So that will be no mean feat. Then perhaps it will give a green light for these larger utility style transactions. Now, the other potential, you know, hold up to enabling this huge amount of M &A to continue is that actually the amount of deals isn't rising that much.

5:49It's just the value of them is rising. As we consolidate more, there may be less targets to actually go after. So that could mean that, you know, this is a temporary boom in M &A. Jamie Smith is the FT's U.S. Energy Editor. Thanks, Jamie. Thanks a million.

6:12UK MP Andy Burnham seems set to be the country's next prime minister. And today, he'll lay out his economic vision for the next decade. The former Greater Manchester mayor is pledging to deliver good growth in every postcode and pushed to end years of turmoil at Westminster. Burnham could enter Downing Street as soon as July 20th and would be the seventh UK prime minister in a decade. But his specific policy proposals are facing more and more criticism, like his push to decentralize power and invest in less prosperous regions. Some say that sounds a lot like Starmer's and former Prime Minister Boris Johnson's approach.

6:56Burnham will also confirm plans to set up a new No. 10 North based in Manchester. It's meant to act as a counterweight to Whitehall's poll.

7:11The U.S.-Mexico-Canada trade agreement expires on Wednesday. President Donald Trump's North American trade deal is up for a 16-year extension. but Trump has said he isn't sure he wants to renew it. Representatives of both Canada and Mexico have said they want to re-up the pact, which regulates one of the world's largest free trade zones. And this week, they'll be meeting with their U.S. counterparts to discuss it. Amy Williams is the FT's U.S. trade correspondent. She joins me now to talk about what to expect from that meeting. Hi, Amy. Hi, Sonia. So let's start with the basics. Tell me about what the USMCA is and why it's important.

7:54Well, the USMCA is a massive trade deal between the U.S. and two of its top three largest trading partners, Mexico and Canada. It was struck by Donald Trump in 2020, and it covers the vast majority of all trade between the three countries. So it slashes tariffs on things like meat, food, car parts, medicines. So there are many, many businesses that take advantage of this deal. So why haven't the three countries re-signed the deal? There has been growing concern from U.S. officials in Washington that other countries, mainly China, have been taking advantage of the deal to build up manufacturing capacity in Canada and Mexico and using the preferential tariff terms to export Chinese goods into the U.S.

8:47at lower tariff rates. This is particularly a problem in the auto industry. Car parts cross the border between Mexico and the U.S. and Canada many, many times in the making of one car. So U.S. officials have started to notice that companies like BYD, which is a big Chinese car manufacturer, have had a growing presence in Mexico and have started taking part in this supply chain. And they're not happy with that. Is there some sort of compromise that the three countries are working on to address that? Definitely changes are being looked at. One of the more top level ones would be setting a percentage of the content of a car that has to come from North America.

9:32And U.S. officials are also pushing for a high percentage, as high as 50 percent of the car to come from U.S. manufacturing plants. So that would mean that if too much of your car, as measured by the value of its parts, comes from outside the North American region, it will not qualify for low tariffs under the deal. Amy, we have this July 1st deadline to re-up the deal. That's on Wednesday. Do you think it's possible that the three countries can come to an agreement by that point? And if they don't, what happens after that? I would be incredibly surprised if the three countries came to an agreement at that point.

10:15U.S. and Canada haven't formally kicked off talks. U.S. and Mexico have been having quite intense talks, actually, but they have dates set to continue talking well beyond this July 1st deadline. So they've already signaled their intention to keep going. If they don't agree on something by Wednesday, which we don't think they will, they simply keep talking. The deal continues as is. There's a very long multi-year sunset clause. So the deal just keeps going until they agree to make changes, and they're going to have to review it every year from now on. And if they can't work something out in the long term, though, who's most vulnerable?

10:57I think potentially from the business side, it would be the automakers. As I mentioned, car parts go back and forth multiple times in the making of a single car. So if we lived in a world where, let's say, a car part faced a 25 % tariff, which we know is a number Trump has threatened before, every time it crosses the border, those guys would be in deep trouble. And I think the other thing is that there's potentially a hit to the U.S. consumer, right? So U.S. does import food and energy and other stuff from both Canada and Mexico. And if those goods start to face high tariffs, then that will, of course, be felt in the prices on supermarket shelves and so on.

11:41Amy Williams is the FT's U.S. trade correspondent. Thanks, Amy. Thank you.

11:50Before we go, another reminder that we want your input on a Saturday edition of the briefing. We're running a short five-minute survey, and if you take it, you can be entered to win a pair of fancy headphones. We've got the link to the survey in the show notes. Thanks so much. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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13:20of discipline and judgment. You can listen to the full episode of The Next Five wherever you get your podcasts.