Data centers were the topic du jour during recent first quarter earnings calls, and continue to grab headlines across the energy industry. NGI captured some of the overarching questions and issues surrounding the boom in artificial intelligence (AI) – breaking down everything from estimates about a potential surge in demand from natural gas-fired generation to grid reliability concerns.
Normally, when utility stocks soar, as the S&P Electric Utility index has by more than 30% since October 2, that’s a tell-tale sign that investors are switching to more defensive names ahead of a potential economic recession. That’s not to say there isn’t an element of that happening, but it may be the case that the surge in electric utility stock prices is being driven by the potential need to build more data centers to feed the boom in AI.
- How much could capacity utilization for existing natural gas power plants increase?
In 2022, average U.S. capacity factors were about 66% for baseload facilities, 36-57% for intermediate load and less than 20% for peaking load according to the U.S. Energy Information Administration (EIA).
- How much of the incremental demand for power from data centers would be fueled by natural gas?
Renewables, nuclear and coal are expected to take part of this load. Environmental, social and governance concerns have not gone away, and the AI giants – Microsoft, Amazon, Alphabet’s Google and Meta (MAGMA) – all have net-zero greenhouse gas emission aspirations as well. Adding carbon capture and sequestration (CCS) to gas-fired generation would help address this, but adds to the cost.
Per Bloomberg, AI-powered queries require about 10-times the energy (and cost) compared to regular internet searches. Goldman Sachs estimates that data centers could use 8% of U.S. power by 2030, compared with 3% in 2022. Wall Street expects MAGMA companies to increase their combined capital expenditures (capex) by $52 billion, or 37% year/year in 2024, and to grow off those levels in the future.
Data centers are expected to require 24-7 continuous baseload power. That could translate into a demand opportunity for Lower 48 natural gas. NGI’s Thought Leaders have seen more than a dozen forecasts for what data centers could mean for Lower 48 gas demand in 2030, and those range from 1-20 Bcf/d, with a median of 6.5 Bcf/d. Why such variation?
- Demand forecasts for AI vary widely as well
AI is still very much in its formative stages, much like 25 years ago with the dot-com industry. Forecasts back then for future demand also were all over the map. In fact, a number of different energy companies admitted they were still figuring out how they would even use AI, in addition to trying to estimate its potential demand upside for natural gas consumption.
- Other sources of demand are expected to also expand
Williams, Liberty Energy Inc. and Range Resources Corp. all pointed to increased industrial load and demand from nearshoring. Electric vehicles and cryptocurrency mining operations also continue to drive growth.
- The ability to obtain permits, which is always a wild card
To that end, FERC on May 13 issued Order No. 1920, in an attempt to revamp the entire U.S. transmission grid to prepare for extreme climate threats and face the challenge of growing power demand – including for natural gas-fired generation – via a rulemaking that outlines how to plan and pay for facilities. “Our country is facing an unprecedented surge in demand for affordable electricity, while confronting extreme weather threats to the reliability of our grid and trying to stay one step ahead of the massive technological changes we are seeing in our society,” said Federal Energy Regulatory Commission Chairman Willie Phillips. “Our nation needs a new foundation to get badly needed new transmission planned, paid for and built. With this new rule, that starts today.” But as NGI’s Carolyn Davis, managing editor for news, also wrote, “Still to come are the legal battles.” How this plays out will have an obvious impact on the ability for the U.S. grid to handle the increase in demand from data centers, crypto mining, increased industrial demand and more. Perhaps the MAGMA companies and others like them would step up their lobbying to match that of the electric industry, although it has been increasing in recent years.
- Equipment bottlenecks
From a recent note by Morgan Stanley: “On the road with several company management teams, we also heard that gas turbines can have a wait time of up to 4 years, adding a potential bottleneck to the buildout of gas plants in tight markets like ERCOT.”
- Reliability issues
There are questions about the ability for the L48 grid to handle this increase in demand, but would all utilities even want to? They haven’t always in the past, according to Carson Kearl of Enverus in a recent episode of NGI’s Hub & Flow podcast hosted by Davis. Moreover, current Wall Street estimates are only calling for a slight bump in capex among U.S. electric utilities. This may be reasonable, but perhaps estimates are too low.
- The size of such facilities
Dominion Energy Inc. CEO Robert Blue, CEO of Dominon Energy Inc. said during the company’s 1Q2024 earnings call that “historically, a single data center typically had a demand of 30 MW or greater. However, we're now receiving individual requests for demand of 60-90 MW or greater, and it hasn't stopped there. We get regular requests to support larger data center campuses that include multiple buildings and require total capacity ranging from 300 MW to as many as several gigawatts.”
- How long it takes a new data center capacity to reach full capacity
“Typically, when they had capacity, they might ramp into that capacity over like a 4 to 5 year type of period, and now that same capacity that we're interconnecting could be closer to a 2 to 3 year period,” said Dominion COO Diane Leopold.
- The source of the estimate
Investment banks are likely going to be more aggressive in order to support buy recommendations. In fact, it’s an investment bank that published the 20 Bcf/d estimate at the high end of the range. Meanwhile, Enverus’ base level expectations are at the lower end.
- Potential double counting
Are U.S. gas exports via LNG and pipelines to Mexico being included in this total if said exports are earmarked for data centers internationally?
- Improvements in renewable technology.
NOV Inc. (NOV) management noted “we're pursuing very disruptive technology in the land wind space,” and the more battery storage technology improves, the more renewables could be used to address baseload power needs, all else being equal.
- Goals from the United Nations Climate Change Conference 2015, aka the Paris Agreement, have not gone away.
That may cause some to shy away from increased gas-fired generation.
Clearly, there are many moving parts to this, so please follow along with NGI’s Thought Leaders in the months ahead.
