The demand for data center growth has steadily increased over the past two decades as more processes become digitized. However, this demand has recently become more challenging to manage due to the rise of large language models (AI), first-mover incentives, and an "electrify everything" approach to climate change. These factors are putting additional strain on an already fragile power grid.
In this report, William Blair analysts explore the U.S. power grid, focusing on the impact of AI demand. It is projected that AI could increase electricity demand by 150 TWh to 500 TWh per year by 2030, which translates to a 4%-12% growth in annual electricity demand. Understanding AI's role in data center growth and energy demand is crucial because large language models require significantly more energy than traditional search engines. Cryptocurrency and blockchain data centers also present a significant energy demand challenge.
While some argue that renewable energy sources, like solar and wind, push marginal costs to near zero with their "free" input fuels, our data suggest otherwise. Due to the structure of our grid and society's reliance on dispatchable power on demand, renewable energy penetration above 5% quickly becomes the most expensive generation asset. Although battery storage can help, our analysts conclude that natural gas will be the greatest near-term benefactor. In the long term, advanced nuclear solutions must be part of the conversation and could become central to grid architecture.
The key takeaway is to gain exposure to AI power trends by owning natural gas generation assets, energy storage, and nuclear assets. The demand for data centers driven by AI and cryptocurrency presents a significant challenge for existing energy markets, with renewable energy penetration above 5% escalating electricity costs far beyond expectations. Contrary to the belief that solar is in a cyclical downturn due to higher interest rates, we find the situation to be more structural, with new technologies like gallium nitride and silicon carbide potentially offsetting margin compression.
For more information about our energy & sustainability research, please contact us or your William Blair representative.
Listen to the Plugged In With Jed Dorsheimer podcast episode: Electricity Unplugged: From Deregulation to a Renewable Powered Future