Canada Needs Far More Electricity: The Best TSX Power Stocks Won’t Wait for the Headlines

Canada’s rising electricity demand could reward the companies getting paid to generate power and expand the grid.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 31, 8:45 pm EDT

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Key Points

Electricity demand may surge from electrification and AI data centres, driving huge investment in generation and transmission.
Capital Power already has an AI catalyst, signing a long-term deal to supply Meta’s Alberta data centre and yielding about 4.2%.
Hydro One benefits from regulated grid expansion in Ontario, with major transmission projects underway but a lower ~2.5% yield.

The Canada Energy Regulator estimates electricity demand could rise anywhere from 26% to 85% between 2023 and 2050, depending on how quickly electrification develops. Data centres add another hungry mouth. The federal government estimates artificial intelligence (AI) data centres alone could require three to five gigawatts (GW) of electricity by 2030.

For context, that isn’t power companies preparing for another hot July. Canada needs more generating capacity, transmission lines, substations, storage, and grid connections.

Investors don’t need to predict exactly which technology wins. They can own the businesses getting paid to build and supply the system.

Electricity transmission towers with orange glowing wires against night sky — Source: Getty Images

Move that power

Electricity investing really has two sides. Generators produce electricity using natural gas, hydro, nuclear, wind, solar, and other sources. Transmission and distribution companies then move that power from generating plants to homes and businesses.

Rising electricity demand can benefit both. Generators may sign larger or longer contracts, while regulated utilities can justify billions in new infrastructure. Regulators generally allow utilities to earn an approved return on those investments, meaning a bigger grid can eventually become a bigger earnings base.

That makes this bigger than another AI trade. Canadian manufacturing, housing growth, and transportation electrification all require more power, too. Investors looking at Canadian dividend stocks can therefore get exposure to a growth trend without abandoning cash flow. Two TSX stocks stand out to me.

CPX

Capital Power (TSX: CPX) owns electricity-generating facilities across Canada and the United States, including natural gas, wind, solar and battery-storage assets. Then Meta came on the scene. Capital Power stock recently signed a greater-than-10-year agreement to supply 250 megawatts of capacity and energy for Meta’s planned Alberta data centre. The project is expected to start taking power during the second half of 2028.

Meanwhile, second-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose to $351 million from $322 million last year, while adjusted funds from operations (AFFO) reached $328 million. Capital Power stock also increased its dividend for the 13th consecutive year, bringing the quarterly payment to $0.7048. At a recent share price of around $67, that creates a yield of roughly 4.2%.

The risk is that building and acquiring generating assets requires plenty of capital. Debt, financing costs, and weaker wholesale power prices can pressure returns. Still, long-term contracts increasingly give Capital Power stock something power investors adore almost as much as electricity itself: visibility.

H

If Capital Power stock produces electricity, Hydro One (TSX: H) owns much of the road it travels on. Hydro One is Ontario’s largest electricity transmission and distribution provider. That puts it directly in the middle of the province’s need to connect new homes, businesses, factories and generation projects.

Its latest quarter gave us a taste of what that can mean. Earnings per share (EPS) increased to $0.62 from $0.54 a year earlier as approved rates and higher peak demand lifted revenue. More interestingly, Hydro One is pushing several major transmission projects forward. That includes an approximately $1.9 billion Northeast Power Line and a $1.2 billion Longwood-to-Lakeshore project designed to increase electricity capacity in southwestern Ontario.

Hydro One invested $812 million during the second quarter alone and put $644 million of new assets into service. As more regulated assets enter the system, they can expand the base from which Hydro One earns returns. The stock offers a smaller yield than Capital Power stock, roughly 2.5% at recent prices, though Hydro One recently lifted its quarterly dividend from $0.3331 to $0.3531.

Bottom line

Neither stock is dirt cheap. Hydro One trades around 24 times trailing earnings, while Capital Power stock has already benefited from growing excitement around data centre demand. That creates valuation risk if growth disappoints.

Yet investors buying stocks in Canada shouldn’t assume the easiest opportunity arrives when Canada finally starts talking about an electricity shortage on the nightly news.