Generative AI: Some Infrastructure Implications
Any given event or trend doesn’t just have the obvious immediate effects visible on the surface -- those are just the first-order effects. Second-order effects refer to the outcomes that are one step removed from the direct consequences of an action or event, and these are often not immediately apparent. Third-order effects are even further removed, being the consequences of the second-order effects. They represent the subsequent layers of impact that an initial event can have, often more complex and less predictable, illustrating the interconnectedness of systems, actions, and reactions over time. Needless to say, when we are discussing significant technological trends such as the rise of generative AI (GenAI) -- a constellation of innovations which is going to have deeply transformative effects across the entire global economy -- the second- and third-order effects will be major. Often it’s here that significant, and initially under-appreciated, long-term investment opportunities arise.
Generative AI and the Grid
GenAI promises to transform many industries through its first-order effects -- but as an example of second-order effects, it also presents a pivotal challenge and opportunity for electricity infrastructure. The anticipated increase in power consumption due to GenAI is far from trivial. There’s already a disconnect between the parlous state of much of the developed world’s electricity grids (a topic we’ve written about in the past), and the demands set to be placed on those grids by accelerating decarbonization.
Source: Morgan Stanley Research
GenAI is set to grow into another massive stressor on inadequate and antiquated grid systems. The complaints about the power consumption of the Bitcoin network that were popular in media a few years ago were largely overblown, but the growing impact of GenAI is not an exaggeration. We have seen projections indicating that GenAI alone could consume power equal to that of much of global data centers’ power usage by 2027… as much as 224 terawatt hours, up from ~ 15 today. This may be conservative, because the providers will have every economic incentive to maximize the uptime of their tech. In the U.S. alone, a recent study by Boston Consulting Group suggested that the $150 billion in planned spending over the next five years on industrial data centers could cause a tripling of electricity demand consumed by that industry usage by 2030.
Grid strategies has mapped out the growth in demand on the U.S. power generation by region over the next three years. They also note that while it may take two years to build a new factory or data center, it takes 4–10 years to build new large-scale electricity generation plants and transmission systems.
This increase in demand underscores the critical need for robust, resilient, and flexible electricity grids capable of supporting not only the current but also the future energy requirements driven by technological advancements. In short, the rise of GenAI is going to benefit companies participating in the modernization and rationalization of the grid. Indeed, it may have more of an impact in that regard than the decarbonization push, which is, after all, largely a political affair, and one that we believe will ebb and flow in intensity with the winds of political sentiment.
The momentum behind power growth needs for data centers and GenAI are not politically driven; they are driven by organizations, industries, and governments around the world competing to adopt a new technology that can improve and/or transform all aspects of their operations, from consumer-facing, to security, to logistics, to resource management and optimization, to communications, to R&D. Here, the pressure is from many decision makers who see the clear efficiency and productivity benefits and are eager to get on board before they are left behind. This is the kind of endogenous economic motivation that really drives a trend.
The integration of GenAI across various sectors is expected to revolutionize industries by enhancing efficiency, creativity, and decision-making processes. However, this transformation obviously comes with an increased reliance on electrical power. Significant investment in grid infrastructure will be essential. This includes upgrading physical infrastructure, implementing advanced grid mechanics, and fostering service innovations to ensure the grid’s reliability and sustainability in the face of rising electricity demands.
For investors, this presents a unique set of challenges and opportunities. Strategic investments opportunities may emerge in:
infrastructure companies with solutions for managing the critical power demands of data centers,
technologies that enhance grid flexibility,
new, distributed, on-site power generation technologies, including some renewables,
novel power storage solutions, and
niche tech providers focused on the efficiency and meeting power needs of data centers.
There will be many companies involved in such large infrastructure works around the globe; some companies that should see direct benefits to their U.S. business include:
Emerson Electric – electronic, electrical, and power management systems
GE – financing, power generation turbines and other
Siemens – engineering and manufacturing of electrification and automation solutions
Keysight Technologies – remote electric measuring
Quanta Services – Transmission systems services
AMETEK – advanced electronic instruments and electrical interconnects
Tesla – Solar power and storage solutions
Powell Industries – systems and equipment for power distribution, management, and process control
We tend to believe that large, public utilities will be less noteworthy beneficiaries of this trend, yet it is expected that their earnings should grow at a faster rate than in previous cycles as rising demand for power will help the pricing embedded in the power-purchase agreements that they have with industrial consumers. There will be some benefit to the large industrials who can participate in the large-scale makeover of the grid, but this is likely to be a longer, slower, less noteworthy opportunity compared to the immediate need to ramp up data center capacity as GenAI usage explodes in the next several years.
Perhaps it is time for more rational conversations about sourcing electric power. The fate of the last few years’ sanctions on Russian hydrocarbons -- ineffective and much more troublesome to the sanctioners than to the sanctioned -- have served to underscore the ongoing, and for all intents and purposes, perennial significance of global hydrocarbon energy. Concurrent with the corporate de-emphasis of other recent politically driven priorities such as ESG and DEI, it’s probably about time for a cooling off of the decarbonization mania and a reassessment and rationalization of the rate at which the global economy can reasonably go through this transformation. Better policies will be needed in order to ensure that growth in electricity demand does not lead to the faltering and overloaded grid that some industry watchers are anticipating.
Electricity is an unnoticed, underappreciated, taken for granted, supply constrained raw material badly needed for the technological innovation-filled future so many look forward to. The bottom line is… we will need a lot more juice. Frequent readers will know we are fans of nuclear energy playing a big role in the future, but we realize that in addition to nuclear, solar, hydro, wind, oil, natural gas, and yes… even coal will play a role.
Thanks for listening; we welcome your calls and questions.
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