October 22, 2024
Executive Summary
The power industry is on the precipice of a tectonic shift. After decades of muted growth, electricity demand surged over the last year, a trend that is expected to continue driven by data centers, industrial reshoring and electric vehicles, amongst other electrification trends. Meeting this resurgent electricity demand will require significant infrastructure investment and the adoption of new energy sources, which will not be without challenges. This white paper explores the dynamics rapidly unfolding in the energy space, as there will be widespread implications across many sectors of the global economy.
Inflection Point
Demand for electricity has been stagnant in the U.S. over the last twenty years with an average annual growth rate of less than 0.5%. This has primarily been driven by energy efficiency efforts including more efficient appliances and stringent commercial building codes. This prolonged period of stasis has come to an end. The convergence of new technologies and industrial reshoring in the U.S. is driving an acceleration in electricity demand growth, which is expected to swell by as much as four-times over the coming decades.
U.S. power demand (in thousand terrwatt-hour, TWh) is expected to surge by as much as four-times over the coming decades.
Source: NextEra Energy, McKinsey, EIA AEO 2023

“The global installed capacity for electricity is approximately 8,000 gigawatts. To meet expected demand, this installed capacity will need to expand to more than 20,000 gigawatts in the next 20 years. In addition, nearly half of what exists today will need to be retired, as it is very carbon-intensive. Said differently, we need to more than double the current capacity (which was largely built over the past 50 years) while also replacing approximately 50% of what we have.”
– Bruce Flatt, CEO, Brookfield Corporation, August 8, 2024

Source: GE Vernova
Catalyst #1: Data Centers
Data center capacity has expanded significantly over the last decade driven by the steady growth of the internet, including social media, streaming and gaming. Data center growth has also been fueled by cloud service providers (CSPs), including Amazon Web Services (AWS), Microsoft Azure, and Google Compute Platform (GCP), who have taken workload share from on-premise environments. Data centers consume massive amounts of energy to power and cool servers, which generate excessive heat. The International Energy Agency estimates that compute comprises 40% of a data center's total energy consumption, while cooling (40%) and other associated IT equipment (20%) round out the balance.

Source: Wall Street Journal, datacenterHawk
The recent inflection in electricity demand coincided with one development in particular: the emergence of generative artificial intelligence. OpenAI released ChatGPT, a chatbot powered by a large language model, in November of 2022. Training large language models is an extremely energy intensive task that involves processing enormous amounts of data on high-performance hardware. Goldman Sachs estimates that a ChatGPT query consumes nearly 10-times as much electricity as a Google search. The size of artificial intelligence models has grown exponentially and the trend is expected to continue. GPT-4 maintains approximately 1.8 trillion parameters, up from the 117 million underpinning GPT-1, released in June 2018. Artificial intelligence scaling laws will only advance further if leading edge processing chips are up to the task. In NVIDIA’s most recent earnings call, CFO Colette Kress stated that next-generation AI models will require 10 to 20 times more compute to train with substantially larger data sets. While leading edge chips are being designed with greater efficiency per unit of power, the overwhelming demand for compute will continue to drive absolute power consumption higher for the foreseeable future. Bloomberg estimates that NVIDIA's Blackwell GPU launch, slated for some time in the next twelve months, has the potential to boost U.S. power consumption by nearly 40 million megawatt hours, or about 1% of total power generated.
Demand for AI infrastructure is expected to drive meaningful increases in data center spending and, relatedly, data center capacity. Dell'Oro Group, an IT research firm, recently increased their outlook for data center capex growth from 18% to 24% per year through 2028 driven by AI infrastructure, including chips, networking, storage and cooling equipment.
Data center spending intentions are reflected in the capex forecasts for hyperscalers like Amazon, Microsoft, Alphabet and Meta, who are mobilizing quickly to expand capacity. McKinsey estimates a compounded annual growth rate for data center capacity of roughly 15% through the end of the decade, at which time the Boston Consulting Group estimates that data centers will triple their share of U.S. electricity consumption, from 2.5% to 7.5%.
Data center capacity is expected to increase at a 15% CAGR through the end of the decade. Forecasts for data center capacity have risen meaningfully in just the last two years with the emergence of generative AI.
Source: AES, McKinsey

“AI is widely acknowledged as having the potential to be one of the greatest drivers of transformation in a generation… I believe the consequences of AI are as profound as what occurred in 1880 when Thomas Edison patented the electric light bulb… the need to provide power for these data centers is a major contributor to an expected 40% increase in electricity demand in the United States over the next decade compared to minimal growth in the last decade.”
– Stephen Schwarzman, CEO, Blackstone, July 18, 2024
As companies plow money into data centers in a race to achieve AI leadership, there is a debate in the market as to how attractive the return-on-investment (ROI) will be relative to the substantial capex. Certain companies have demonstrated strong returns from the AI investments, such as improved targeting in digital advertising and enhanced software developer productivity. However, if more widespread adoption fails to materialize in the near-term, the industry could experience a period of digestion and capex budgets could retreat. Long-term, AI holds the potential to drive significant productivity growth across every industry and significant infrastructure investment will be needed to support it.
Catalyst #2: Reindustrialization
A resurgence in electricity demand is also being driven from a renaissance in American industrial activity catalyzed by government stimulus programs. The Inflation Reduction Act (IRA), Infrastructure Investment and Jobs Act (IIJA), and the CHIPS and Science Act (CHIPS) have spurred investment across clean energy, infrastructure and semiconductor manufacturing, respectively. Eaton Corporation estimates that there have been $1.2 trillion in cumulative North America mega projects since January 2021 of which over half are related to federal government incentives. Eaton has quantified that only 16% of these projects have started construction, implying a multi-year runway for growth.

Source: Eaton Corporation
Catalyst #3: Electric Vehicles
The long-term proliferation of electric vehicles will also increase load on the power grid. While EV penetration has slowed, from a growth rate of 33% in 2023 to an estimated 20% in 2024 (International Energy Agency, IEA), the growth rate is expected to remain robust in future years. In order for EVs to transition from early-adopters to mass market appeal, affordability must improve and public charging stations must become ubiquitous. Indeed, Kelley Blue Book estimates that the average price of a new EV has declined by ~15% over the last two years, while the prices of used EVs have declined even further. Federal tax credits ($7,500 for new EVs and up to $4,000 for qualifying used EVs) have enhanced affordability even further. Meanwhile, public charging stations, particularly level three (direct current fast charging, DCFC) chargers, have more than doubled since 2020, according to the Department of Energy.


Public charging infrastructure has more than doubled since 2020.
Source: Department of Energy
A fast charging station in San Diego, California, boasts 20 DC level 3 fast chargers powered by solar canopies, with onsite retail and shopping.
Source: Electrify America
The IEA estimates that under current policy settings, nearly half of all cars sold globally will be electric by 2035, up from about one in five cars sold in 2024. China and Europe serve as precedent for future electric vehicle penetration in the U.S. The IEA estimates EV penetration is ~45% in China and 25% in Europe, which suggests ample runway for U.S. penetrated to grow above its current 11% level. Furthermore, electrification is spreading beyond passenger vehicles to all forms of road transportation including heavy trucks, buses and vans.

BloombergNEF estimates that global sales of battery electric (BEV), plug-in hybrid electric (PHEV) and hybrid vehicles will overtake those of internal combustion engines (ICE) before the end of this decade.
Source: BloombergNEF
Catalyst #4: Electrification of Buildings
Residential and commercial buildings are increasingly replacing fossil fuel systems with electronic appliances. For example, furnaces, boilers and water heaters, which burn oil, gas or propane, can be replaced by electric heat pumps. The Department of Energy estimates that less than 15% of about 6 million commercial buildings in the U.S. use heat pumps for heating and cooling. In the residential sector, Bosch has counted approximately 18 million homes in the U.S., out of more than 140 million, that have installed heat pumps. McKinsey estimates the market for heat pumps to achieve a compounded annual growth rate greater than 15% CAGR through the end of the decade, meaningfully higher than the broader HVAC (heating, ventilation, and air conditioning) industry.
An example of a home with fully electric appliances.
Source: City of San Jose

Powering the Future: Clean Energy
“They are cheaper, they are clean and quite frankly, easier to site, so the future is going to be renewable energy."
– Andrès Fluski, CEO, AES (source: CNBC)
Clean energy is poised to play a key role in meeting the surge in electricity demand. Many data center customers, including the large technology companies, are insisting that a significant portion of their power needs be derived from clean energy in an attempt to meet their emission reduction targets. Alphabet and Amazon aim to achieve net-zero emission by 2030 and 2040, respectively. Microsoft has committed to being carbon negative by 2030 and, even more ambitious, to eliminate an equivalent amount of carbon dioxide the company has emitted since its founding by 2050.
Additionally, renewables have a distinct advantage in time-to-market. In the race for AI leadership, technology companies are prioritizing speed of deployment in electrifying their data centers. Solar combined with battery storage can be constructed in under one year, compared to gas-powered generation (1-4 years) and nuclear (10+ years).
Finally, the falling cost of renewables has been key to their recent momentum and will only improve with economies of scale. Legacy fossil fuels continue to serve as the primary source of power, comprising 59% of total generation in 2023. However, as renewables become cost competitive, they are rapidly gaining share. Renewables currently comprise over 90% of net capacity additions.

Levelized cost of energy (LCOE) benchmarks reflect the dramatic decline in renewables over the last decade-plus.
Source: BloombergNEF
Renewables comprise over 90% of net capacity additions, taking share from legacy fossil fuels.
Source: U.S. Energy Information Administration

“Low-cost renewables are also bringing power bills down, which attract new investment from data centers, semiconductor chip manufacturers and other sectors that are looking to invest in the U.S... with industrial growth across sectors, power demand is only going to go up from here. And our country is going to need low-cost, fast-to-deploy electricity more than ever, and renewables are the quickest to market and the lowest-cost option in almost every state."
– John Ketchum, CEO, NextEra Energy, July 24, 2024
Battery storage will be key in solving the challenge posed by the variability in sunshine and wind conditions. Battery storage costs have declined nearly 99% over the last three decades. (Rocky Mountain Institute) The IEA forecasts solar power combined with batteries is on track to be cheaper than gas-fired power in America in the next few years. The battery storage industry is expected to see significant growth. Bain estimates the market for grid-scale storage could reach $200-700 billion by 2030, up from $15 billion in 2023.
Nuclear energy is also likely to play a role long-term. Nuclear has received more attention recently following deals inked by each of the three major cloud service providers. Microsoft signed a power purchase agreement with Constellation, which will invest $1.6 billion to revive a previously decommissioned reactor at Three Mild Island in Pennsylvania which is expected to come online in 2028. Alphabet and Amazon have both signed agreements to support the build-out of small modular nuclear reactors (SMRs), though the deployment of SMRs is likely several years away.
“We're very bullish on the technology [nuclear]. We think that it's one of the key parts of our portfolio going forward as we move towards completely clean energy."
– Matt Garman, CEO, Amazon Web Services (source: Barron's)
Obstacles
Meeting the surge in electricity demand will not be without challenges. The electric grid was vulnerable even prior to the latest surge in electricity demand. Infrastructure is aging and will need to be replaced as equipment nears the end of its lifespan. The Department of Energy estimates that 70% of transmission lines are at least 25 years old while the average age of large power transformers is 40 years. Meanwhile, the grid has been strained by extreme weather, including higher peak demand in summer months due to warmer temperatures.
Growing electricity demand has introduced new complications. Before new power projects can begin construction, lengthy feasibility studies are performed by regulators to assess the impact of the new connection to the grid. Interconnection queue times have surged due to high demand for new projects and the limited manpower and resources of regulators. Issues have also arisen from lack of transmission capacity, which causes grid congestion. Transmission lines, which carry electricity over long distances and often across state lines, are not being built fast enough to keep pace with load growth. Permitting and siting of these projects is complicated as collaboration is required among utilities, regulators and landowners, who often have competing interests. Lastly, lead times for certain electrical components are extended as the supply chain confronts high demand. Wood Mackenzie, an energy consultancy, estimates that lead times for transformers lengthened from 50 weeks in 2021 to 120 weeks in 2024.
Conclusion
Myriad tailwinds are in place to drive electricity demand over the following years. Building the necessary infrastructure to accommodate electricity growth will require a high level of coordination across stakeholders with important implications for utilities, equipment suppliers, renewable energy developers and service providers. Investors in these industries should monitor these dynamics closely.