A dominant topic at CERAWeek this year was how expansion of data centers – the bricks-and-mortar installations that house the computing “cloud” we use daily – drives significant increases in electricity demand.
Artificial intelligence technologies deployed through the cloud today, and those in development for tomorrow, hold great promise for transforming the global economy. But a factoid repeated frequently at the conference was that a conventional internet search uses a measure of energy, and an AI-assisted search uses 10 times that amount.
Last month I referenced the Consumer Energy Alliance’s President David Holt calling out policymakers at both the federal and state level for “adopt(ing) aggressive decarbonization policies that eliminate reliable, affordable and clean energy sources without any equivalent replacement.”
“Our economy and our lives depend on having the energy essential to cool and heat our homes, to power the businesses that propel our economy,” Holt continued. “Mandating politically preferred energy forms that can’t yet, if ever, replace abundant natural gas, oil, and nuclear will bring energy shortages, electricity blackouts and higher prices at home and at the pump.”
CEA is a consumer advocate for affordable and reliable energy in the United States.
What’s Driving Demand Growth?
As recent headlines revealed, the topic of energy affordability and reliability is much on the minds of those large technology companies who are building and using the data centers that connect us and increasingly deliver services we use daily.
First, Microsoft announced a deal to work with Constellation Energy to restart a nuclear reactor at Three Mile Island. Then, both Amazon and Google announced deals to purchase power delivered by small modular nuclear reactors, a next-generation technology that is in its test-phase and yet to be deployed at scale. The tech giants are planning for the future.
That’s a good thing, according to an October 2024 research note by Wood Mackenzie titled, “Gridlock: the demand dilemma facing the U.S. power industry,” because the power sector is struggling to adapt to a generational change.
“The gradual decoupling of U.S. electricity demand from economic growth underway since 1950 accelerated dramatically in the last two decades. While the U.S. economy expanded by a cumulative 24 percent in the 2010s, electricity demand remained unchanged. This trend is set to reverse, however, and the U.S. electric utility industry has been caught flat-footed,” wrote Chris Seiple, the author of the report.
It’s not just data centers driving demand, though that is a significant factor. He cites various analyst estimates indicating that electricity demand from this sector will grow between 10 and 20 percent per year through 2030. That’s between 13 and 35 gigawatts of additional demand in the next five years. For comparison, 1 GW is enough to power about 750,000 homes.
The renewed focus on domestic U.S. manufacturing is a second source of demand growth, particularly batteries, solar panels and semi-conductors – all energy-intensive fabrications.
“We expect energy-intensive large loads from battery, solar and semiconductor manufacturing to add up to 15,000 (megawatts) of high-load-factor demand over the next few years,” said Seiple.
Additional manufacturing growth will only add to this demand.
The third factor is the increasing electrification of the U.S. economy – a persistent trend. This growth is partially dependent on state-level decisions. California and parts of the northeastern United States are pushing policies, such as electrical vehicle incentives, that will grow power demand. And in these locations, there is also strong pressure to assure these electrons are “green.”
As Holt observed in his op-ed, it becomes very difficult to ensure affordable and reliable electricity supply when policymakers act as if supply will magically appear to meet this demand.
The Struggle Ahead
The challenge, Seiple explains, is that power utilities are used to planning for 2 to 3-percent annual growth. The investment and planning required to meet much higher demand growth is something the power generation sector is struggling to accommodate.
Maegan Rouch and colleagues at Bain and Company echoed this concern. In a research brief titled “Utilities Must Reinvent Themselves to Harness the AI-Driven Data Center Boom” published last month, they say that “utility executives face a high-wire balancing act. Data center demand is the most significant catalyst of load growth in decades, and harnessing it could fund energy transition investments and potentially reduce residential rates. At the same time, how can utilities ensure reliability, protect affordability, finance the required capital, meet sustainability commitments, and move at the necessary pace?”
The utility sector – having experienced flat demand for nearly two decades – needs to figure out how to manage in a more dynamic market. Saddled with a high regulatory burden and long timelines for permitting and construction of new power generation, it’s a significant challenge.
The challenge isn’t unprecedented, Seiple writes:
“The last time the U.S. electricity industry saw unexpected new demand growth like this was during World War II. Between 1939 and 1944, manufacturing output tripled and electricity demand rose 60 percent. It was a closely coordinated national effort that brought together industry and policymakers to address the challenge and find innovation along the way. A similar effort is needed now.”
“The Blackouts are Coming! The Blackouts are Coming!” was the title of Holt’s op-ed on RealClearEnergy. I thought that was a bit much when I read it. After reading the research by Wood Mackenzie and Bain and Company, I’m not so sure.