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Investment Commentary: The Quest for Power

By Andrew R. Duncan, CFA®

US electrical utilities are currently experiencing a significant increase in electrical power demand with further increases expected, and the risk of power shortages should lead to significant capital investment across a variety of industries in the coming years. Foster Victor’s portfolios include exposure to many of these interconnected spaces, and we continue to look for opportunities for strategic changes.

Power demand for Artificial Intelligence (“AI”) driven data centers is expected to rise 160%, accounting for 7.5% of total US electric power demand and 3-4% of total global power demand by 2030.  If the projected increased demand were allocated to a hypothetical country, it would be in the top ten of power consumption of countries today.  In addition to data center demand, electric vehicle charging, new home power needs, and new factories for electric cars, batteries, and semiconductors are all driving an unprecedented quest for power generation. The demand increase has complicated utility efforts to reduce or eliminate coal plant production in favor of greener alternatives. As it stands today, data center power demand growth is predicted to drive a greater than 100% increase in aggregate carbon dioxide emissions by 2030.

The power requirements for AI-driven data centers are enormous.  Dominion Energy recently said they regularly receive requests from data center developers requiring several gigawatts (“GW”) of power.  One gigawatt (one billion watts, or 1,000 megawatts) is roughly equivalent to the output of a nuclear reactor generating enough power to supply 750,000 homes.  Amazon recently bought a data center next to a nuclear power plant in Pennsylvania to connect directly to it and receive power prior to delivery to the grid.  Standard Power, a Data Center infrastructure company, is planning to supply power to data centers in Ohio and Pennsylvania with modular nuclear reactors like those used on nuclear submarines.  Additionally, the US Department of Energy (“DOE”) recently announced loan guarantees to restore and restart the Palisades nuclear power plant, an 800 megawatt nuclear generation station that was previously retired in 2022.

(*Wh=watt-hour, energy unit equivalent to one watt of power extended for one hour)

The Challenges

The US electrical grid has fundamental challenges that include not just the age of the grid (select locations are over a century old), but a lack of coordinated planning for new transmission and power generation due to differing levels of state versus federal authority across states.  The US grid is a patchwork of regional networks with insufficient transmission lines in place to efficiently distribute new power coming online.

The DOE recently noted, “From 2000-2010, the US averaged 500-1,000 new transmission interconnects per year.  Over the last decade, new requests have risen to 2,500-3,000 per year – a 300-500% increase.  This backlog can significantly delay clean energy deployment and lead to higher cost for developers and electricity consumers.”  Currently there are 10,000 projects representing 2,000 GW of potential generation and storage capacity waiting in line to connect to the grid.  That figure is nearly twice the current 1,250 GW of total installed capacity in the US, and these types of commercial operation interconnection requests are now taking up to 5 years to complete.

Because data centers require very concentrated levels of load (power demand), grid operators will need to assess grid upgrades needed to connect these loads.  According to the Texas grid operator ERCOT, “A new era of transmission planning is necessary to manage the large amount of prospective load… Recommended transmission projects to meet the large load could far exceed prior annual average infrastructure projects.”

The Beneficiaries

Utilities should benefit.  Growing volume, grid modernization and hardening, and continuing transition away from coal-based generation will require utility company participation.  Merchant power generators, particularly renewables-based providers, should see increases in power purchase agreements going forward.  Small scale nuclear technology developers and geothermal applications should see an uptick in use in addition to continued growth in wind generation.  Manufacturers of power generation equipment and solar power are likely beneficiaries as well.

Increased data center capacity needs are also causing a shortage of parts and components thereby creating a delay in buildouts.  Cooling systems, power transformers and backup generators are all backlogged from 6 months to two years.  Combined, these supply constraints create a situation where it currently takes approximately 2 years to get a data center up and running.  Battery storage and backup power, cooling solutions, and electrical components should see revenue growth as part of data center construction.

It is clear that a multitude of industries and companies would benefit from the expected buildout of electrical generation capacity in the US.  Historically, it is often true that when large scale capacity growth occurs, companies in the infrastructure components see even greater revenue growth than the ultimate end market (in this case Utilities). Foster Victor portfolios hold several positions exposed to this theme and we are looking for additional names to add as fundamentals and valuations provide opportunity.

Shannon Dermody

Shannon DermodyTEST

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