Data Centers and Power Demand

#104: Assessing the impact of computing growth on America's electricity markets.

The story of Energy in America, in the 21st century has been dynamism. Technological advances unlocked vast oil and natural gas resources across the country leading to a dramatic turnaround in domestic fossil fuel production. Meanwhile improving machinery, generous subsidies, and climate considerations have led to significant growth of wind and solar power generation. In the course of two decades, the United States has transformed into an energy production powerhouse, exporting its excess supply globally.

Yet, as energy supply has boomed, energy demand has flatlined. Efficiency gains have offset population economic growth — in total, the U.S. consumes the same quantity of primary energy today as it did in 2000. From an economic and geopolitical perspective, this is fantastic. Energy is abundant and cheap, and we have only gotten better at using it effectively.

The story of energy industry has been a tragedy of riches. For much of the past decade, my professional career focused on investments in the energy space and so I had a front row seat to these peculiar dynamics. I’ve seen the gold rush into new shale plays, the disappointment of flooded markets, the re-shaping of infrastructure, the challenges and potential of renewables.

The experience was fascinating and at times frustrating. This fundamental dichotomy — vast new energy production against flat demand — has plagued so many investments and the industry as a whole. It’s been a challenging space to make a buck, and an easy space to lose one. Overall S&P 500 earnings for the energy sector has been flat since 2008, the only sector with such dismal performance.

Within power markets, new natural gas and renewable generation relative to flat demand created a brutal war of attrition, slowly forcing older power plants out of the market by depressing prices. While grid stability issues have become more pronounced in many regions, they have been largely driven by extreme weather disrupting infrastructure, not a lack of primary energy.

It’s with this background and scar tissue that I enter today’s discussion.

For the first time that I can remember, there is a growing bullishness on energy demand — power demand in particular. While the electric vehicles have been cited for a while as a secular demand driver, the new story is computing demand — data centers, AI, cryptocurrency mining. Over the past several months, we’ve heard a growing chorus from both technology and energy executives discussing this theme. Investors are getting frisky too, bidding up power producers that used to be considered dinosaurs.

Is this energy story just the latest tag-a-long AI trade or does it live up to the hype?

In today’s post I hope to draw from my experience and shed light on the following topics:

• Power basics & demand forecasts

• Resource adequacy in key U.S. power grids

• Co-location and conversions

• Implications for utilities, independent power producers, natural gas and coal producers, and renewables