Good morning! In 1990, Snap! a German dance act released what would become a global dance anthem with “The Power”. The song reached number one all over the world. One of the lines in the chorus, “It’s getting, it’s getting, it’s getting kind of hectic” could just have well been about describing the grab of unique power supplies from Big Tech this year, with many of these firms announcing, “I’ve got the power”.
Power demand in the developed world, largely stagnated for the last 20 years as households switched to LED lighting, reducing or at least levelling off demand, while manufacturing demand also declined due to the offshoring of production to emerging economies. We are now faced with these two secular forces either pausing or reverting, causing net power demand in the developed world to increase.
Today we need to consider A.I. and the huge power demand from data centers. The chart from McKinsey and Company below, shows the forecasted power demand for data centers within the U.S. over the next 6 years. The staggering figure is at the bottom where it suggests that over 10% of the total power demand in the country will come from data centers. Unfortunately, like many developed nations, the power grid and power generation are built upon ageing infrastructure. This increase in demand is exceptional versus the capacity of the current power generation capabilities.
Markets tend to solve these kinds of problems, and we have seen Big Tech source or contract dedicated sources of power for their data centers. Here are a few data points from this year on big tech’s demand for power and their willingness to think “outside-the-box” (or at least “off-the-grid”):
- Earlier this year Amazon reached an agreement to purchase a data center on the site of a nuclear power plant from Talen Energy
- Microsoft agreed to be the sole purchaser of power from the nuclear reactors at Three-Mile Island for 20 years (beginning in 2028)
- Microsoft agreed to a $10 billion forward power purchase agreement with Brookfield for the offtake of large-scale renewable energy facilities
- XAI (a Tesla subsidiary) has built 18 small-scale gas-powered turbines in Tennessee to power their large-scale AI computing power
- Google announced they would buy the power generated from two small modular reactors (SMRs) from Kairos Power
An interesting point from these deals is that in most instances these consumers of power are willing to pay hefty premiums (50-100%) above market rates to secure reliable power.
Data centers require very reliable and steady power levels to operate effectively. This has pushed these companies towards securing capacity from sources of power in natural gas and nuclear. Renewables will play an important part in their sources, but only once efficient power storage solutions exist for times where the sun isn’t shining, and the wind isn’t blowing. In the near term this seems like a bullish indicator on natural gas and natural gas turbines while also long term bullish on nuclear generation and uranium. Canada should be a net winner from this race towards power generation.
There is political risk attached to nuclear power and we have seen global stagnation in terms of the construction of new reactors. The Fukushima incident in 2011, caused a huge decline in power generation from nuclear plants. As the chart from the IAEA shows below, the number of active reactors around the world has actually declined over the last 20 years.
Big Tech is behind nuclear and natural gas power generation. These firms have very large capex budgets today and could we expect to see this trend break out into the public domain and see policymakers also embrace these sources of power?
