AI is about energy. And energy is now about AI. The vast amounts of computing power used to train generative AI and natural language models means that these two things are intertwined.
So prevalent is the data center narrative in the energy industry right now, that there’s some discussion of Big Tech companies influencing the future path of global decarbonization efforts.
To see just how dominant the data center narrative has been, take a look at Dominion Energy Inc., which says it’s connected 94 data centers over the past five years that are collectively consuming about four gigawatts of electricity — or roughly the output of four nuclear reactors and enough to power about three million homes.
Almost every single question on the company’s most recent earnings call was about data centers, and how much Dominion stood to benefit from booming demand. For the same period last year, there was just one question on the topic.
Overall, a Bloomberg search of earnings transcripts for energy companies in the S&P 1500 shows a huge increase in the number of times ‘data centers’ were discussed in the most recent earnings period.
You can see the dynamic playing out in a whole host of US energy companies right now.
Here’s American Electric Power Co.:
And Ameren Corp.:
And PG&E Corp.:
And Xcel Energy Inc.:
And AES Corp.:
And Sempra:
The list goes on and on, spanning everything from PPL Corp. to Alliant Energy Corp., WEC Energy Group Inc., Entergy Corp., Duke Energy Corp., NextEra Energy Inc., Dte Energy Co. , CenterPoint Energy Inc. and Vistra Corp., whose stock price chart now pretty much tracks that of chipmaker Nvidia Corp.
And, as alluded to in some of the questions above, enthusiasm in the energy space for all-things AI poses some interesting questions for the future shape of the industry.
On the one hand, massive demand from large tech companies could help underwrite the huge investments needed in renewables to help achieve decarbonization goals. On the other hand, there’s a risk that the AI craze and its appetite for power gets satisfied the old-fashioned way; through natural gas, or even coal.
In an upcoming episode of the Odd Lots podcast, Brett Christophers, the author of The Price Is Wrong: Why Capitalism Won't Save the Planet, describes the difficulty of securing financing for renewable energy projects. Not only are returns expected to be relatively low over time, but electricity pricing is notoriously volatile, making solar and wind projects in particular a hard sell for traditional financial institutions like banks.
In their stead, governments have either helped fill the financing hole, primarily through tax credits and other subsidies. But more recently, corporate giants have also stepped in to fill the funding gap by striking long-term supply agreements for renewable electricity.
As Christophers puts it:
“… Lots of listeners will have heard of these particularly recently because they've been in the news a lot recently, is what's called corporate
power purchase agreements, where instead of the generator having to sell their electricity into the volatile spot market, a Google or an Amazon or a Microsoft will come along
and say ‘Hey, we're gonna build a new data center because of everything that's going on with AI, we want to secure as much of that electricity renewably as we can because it's good for our PR.’
Obviously that's the most important thing for them. And so they will enter a direct agreement, a power purchase contract with the renewable developer and say ‘Look, if you build this facility, we commit to buying off all your electricity, sometimes 50% of the electricity you generate. And we'll do that at a fixed price for the, for the next 12 years.’
And the renewables developer then takes that commitment, goes back to the bank and says, ‘Here's what you're looking for, now give me the money.’ And so they've become a really important way of rendering renewables projects bankable.”
So there’s some hope that the AI craze could actually spur the clean energy transition if it means more money flowing to big tech, which then funnels money into renewables investment through long-term offtake agreements. But, as Christophers notes, private capital can only do so much here. And even with the vast sum of money now flowing into AI in various ways, there are limits to its impact:
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The key thing here is the agreements from the big AI developers, the Amazons and so on, are what enable a lot of renewables projects to get off the ground that might not otherwise get off the ground because they're offering long-term fixed prices.
And actually if you, if you read what a lot of policy makers have been saying, not just in the last few months, but actually the last few years, they, in many cases, regard those power purchase agreements as kind of almost an alternative to government subsidy and government support. So the argument there is that, look, the market will perform the role that governments have historically by rendering projects bank, by rendering them bankable through those power purchase agreements.
And I think all I would say about that is, is two things. So the first is that it, it will play a role and it is playing a role and it will continue to play a role, but it's a limited role. So it will help with bankability to a certain extent, but it will only ever do that in a limited way because there are unfortunately only a kind of limited number of credible off-takers out there who can perform that role of providing bankability.
So if Amazon comes along and says ‘We'll buy your power for 12 years,’ the bank behind the renewable developer will be like ‘Fine, we are pretty confident Amazon's going to still be in business in 12 years and it's gonna honor that agreement.’
But most other types of entities that might try to do that, they're not considered credible enough ... So there's only a limited market out there.
The second thing flows from that, which is that because there's only a limited number of players out there, they have a lot of power in this market. So the Amazons and the Googles and Co. because there aren't that many of them when they negotiate, when they negotiate with renewables developers, the price at which they will buy that electricity for the next 12 years, they have all the leverage. There's thousands of developers scurrying around to get this sought-after contract from an Amazon. And Amazon says ‘Okay, we'll exploit that and we'll push down the agreed power price limiting renewables developers ‘profits.’
When that happens, energy companies essentially end up back where they started — struggling to make solar and wind a palatable investment.
This is a point that’s come up on Odd Lots before, most recently, in our conversation with Brian Janous, co-founder and chief strategy officer at Cloverleaf Infrastructure. Before joining Cloverleaf, Janous spent 12 years at Microsoft as the company’s first energy-focused hire.
As he put it:
“Well, this is where it gets a little concerning is that you have these tech companies that have these really ambitious commitments to being carbon neutral, carbon negative, having a hundred percent zero carbon energy a hundred percent of the time, and you have to give them credit for the work they've done...
The challenge though that we have is the environment that they did that in was that no growth environment we were talking about. They were all growing, but they were starting from a relatively small denominator 10 or 15 years ago. And so there was a lot of overhang in the utility system at that time because the utilities had overbuilt ahead of that sort of flatlining. So there was excess capacity on the system.
They were growing inside of a system that wasn't itself growing on a net basis.
So everything they did, every new wind project you brought on, every new solar project you bought on, those were all incrementally reducing the amount of carbon in the system. It was all net positive.
Now we get into this new world where their growth rates are exceeding what the utilities had ever imagined in terms of the absolute impact on the system. The utilities’ response is ‘The only thing we can do in the time horizon that we have is basically build more gas plants or keep online gas plants or coal plants that we were planning on shuttering.’
And so now that the commitments that they have to zero carbon energy to be carbon negative, etc., are coming into contrast with the response that the utilities are laying out in their what's called integrated resource plans or IRPs.
And we've seen this recently just last week in Georgia. We've seen it in Duke and North Carolina, Dominion and Virginia. Every single one of those utilities is saying ‘With all the demand that we're seeing coming into our system, we have to put more fossil fuel resources on the grid. It's the only way that we can manage it in a time horizon we have.’ Now, there's a lot of debate about whether that is true, but it is what's happening...
The real rub of this though is that we're in this situation right now where again, the electricity industry was somewhat surprised by this. They weren't prepared for over a period of a couple years, again, going back to the case of Dominion, having to double their load forecast. So reflexively they're going to go to the one thing they know how to do, which is build gas plants.
Because they know that works. That's the easy way out. There are other things we can do though. There are ways we can leverage the existing system more effectively. We can use things called grid-enhancing technologies where through censoring, through better dynamic rating of power lines, we can actually get more out of the existing system we have.”
So even if data centers are dominating the energy narrative right now, there are major questions as to how that booming interest actually plays out.
The Odd Lots episode with Brett Christophers will be out later this month.
Related links:
What Surging AI Demand Means for Electricity Markets — Odd Lots
Data Centers Will Drive Demand for Natural Gas, TC Energy Says — Bloomberg
Data Centers Now Need a Reactor’s Worth of Power, Dominion Says — Bloomberg
AI Needs So Much Power That Old Coal Plants Are Sticking Around — Bloomberg