Pavel Molchanov, Managing Director, Energy Analyst, Equity Research
Whether or not you enjoy sitting in front of a computer and conversing with a human-seeming artificial intelligence platform (i.e. a chatbot), the AI boom will, if nothing else, affect your energy bill. AI is set to become a game changer for the electric power industry — especially, though not solely, in the United States. Principally as a result of AI, US electricity demand is about to start posting meaningful growth for the first time in two decades. Enabling the power grid to manage this growth in demand, while simultaneously shutting down ageing coal-fired power plants, will require an all-of-the-above strategy. At Raymond James, analysis of this trend has involved a collaborative, cross-industry effort between the technology and energy research teams.
DEMAND FOR ELECTRICITY SET TO SKYROCKET
It may come as a surprise to some of our readers that electricity demand in the United States and across developed economies more generally has been flattish over the past quarter-century — even as population and GDP have continued to grow. The reason is energy efficiency: everything from lightbulbs to air conditioners is more efficient than the older equipment being replaced. US electricity demand in 2023 was up only 10% from 2000, equating to average growth of only 0.4% per year. But AI is about to change that in a big way.
We forecast that US electricity demand will grow at an average of 2.8% per year through 2030, with AI-related demand comprising two-thirds of incremental demand. The other one-third comprises electric vehicles and, well, everything else! Data centres supporting the AI boom are extremely energy-intensive, even more so than data centres that have been around since the early days of the internet. Simply put, whenever someone engages with a chatbot — and this is happening countless times every day — a hefty
amount of electricity is used. Furthermore, data centres provide a textbook example of mission-critical electricity users: they cannot afford to lose power even for a minute. Data centres run by the large third-party providers and hyperscale cloud companies typically have sufficient on-site generators and temporary battery backup to remain operational during grid outages.
So, is this good news or bad news for the electrical power industry? The short answer is: good. Utility companies obviously want to sell more electricity to their customers, and as mentioned earlier, they
have had very little organic growth (on the whole) for a long time. That said, utilities also face the risk of managing a power grid that is unprepared for the increasing demand. In the worst-case scenario, it could lead to systematic load shedding — deliberate power outages affecting a large proportion of the population, such as experienced most notably in South Africa — as a way of reducing the stress on the grid. We are not the only ones who see the risks. In its latest Report Card for America’s Infrastructure, the American Society of Civil Engineers gave electric power infrastructure a lacklustre C– grade and forecasted an investment shortfall of $200 billion by 2029.
“In its latest Report Card for America’s Infrastructure, the American Society of Civil Engineers gave electric power infrastructure a lackluster C– grade and forecasted an investment shortfall of $200 billion by 2029.”
Where will the electricity come from? First, let’s look back at the past two decades. During a period of stable electricity demand, coal’s share of the US electricity mix plummeted from 50% to 16% and was displaced by a combination of natural gas and renewables (mainly wind and solar). In 2023, natural gas provided the largest portion of US electricity (43%) followed by renewables at 23% and nuclear power (which is slowly trending down) at 19%. Looking toward 2030, coal is set to continue shrinking, plus overall demand is set to grow. Natural gas, wind and solar all must expand, by significant amounts — there is no single panacea here. In thinking about these various sources of electricity, there are geographic considerations to keep in mind. The AI data centre buildout is predominantly taking place in the eastern US, notably Virginia and Ohio. The proximity to the giant Marcellus shale resource in the
Appalachian Basin makes natural gas an excellent choice to supply the turbines and fuel cells that will be needed for these data centres. While there is lots of wind and solar development taking place all across the country, an outsized proportion of the wind and (especially) solar development is taking place in the western half. Not as many data centres are being built there, but on the flip side, states such as Colorado and Wyoming have coal plants that need to be shut down.
“As part of infrastructure upgrading and modernisation across the board, what needs to happen is for connectivity between the regional grids to be greatly bolstered.”
POWER GRIDS IN DEPTH
An important but not always understood feature of the US electric grid is the extent of its geographic bottlenecks. The two major grids — Eastern and Western Interconnections — have minimal connectivity, for reasons that go back to the first half of the 20th century. As it stands, there is very little transfer capacity between them. Data centre operators in the east need to rely upon physical electricity supply that is also in the east. Likewise, coal plants being shut down in the Rocky Mountain region will be mostly replaced by the wind and solar projects located in the west. Texas, the ERCOT grid, is largely isolated from both the Eastern and Western Interconnections. This presented a major problem during the snowstorm in early 2021, when, despite sky-high power prices, Texas was unable to source urgently needed electricity from its neighbours. In the long run, as part of infrastructure upgrading and modernisation across the board, what needs to happen is for connectivity between the regional grids to be greatly bolstered.
AROUND THE WORLD
Let’s also look at the situation internationally. Just as the AI boom is proceeding at varying speeds in different parts of the US, the same applies to different parts of the world. The US has approximately one-third of the world’s data centres, followed by 16% in Europe and 10% in China. Meanwhile, the baseline growth rate of electricity demand can also be very different: since 2010, it was 6% in China, -1% in Europe, and 2% for the world as a whole. The mission-critical attributes of data centres face heightened challenges in many emerging markets. Above and beyond grid-related mishaps, there are parts of the world where electricity supply and demand are chronically out of balance, such as South Africa’s long-running problems with load shedding, and the periodic drought-related difficulties facing hydropower in Brazil.
A MARATHON, NOT A SPRINT
What we have discussed in this article encompasses a multi-decade story. In the electric power industry, nothing changes on the spur of the moment — in other words, do not expect any immediate transformation. Utility management teams and policymakers alike are aware of what needs to be done, but complex infrastructure projects are always prone to delays. The capital to make these investments is available, and so is the technology, though labour can be a constraint. This is a proverbial marathon rather than a sprint, which means that a wide range of companies stand to benefit from these opportunities for decades to come.
