Rising energy prices put AI and data centers in the crosshairs

AI-driven data centers are significantly increasing U.S. electricity demand, projected to rise from 4% to as much as 12% by 2028, fueling consumer concerns about utility bill increases. While renewable energy sources, particularly solar, have helped meet recent demand and are being adopted by tech companies, their future growth faces uncertainty from potential policy changes. Concurrently, natural gas supply is constrained by exports and long development timelines for new plants and turbines, creating a challenging energy supply environment for data center expansion and potentially exacerbating public backlash against AI due to rising energy costs.

Analysis

The rapid expansion of AI-driven data centers is significantly accelerating U.S. electricity demand, with consumption projected to nearly triple from 4% today to 6.7%-12% by 2028, according to Lawrence Berkeley National Laboratory. This surge, alongside a 2.6% annual growth in commercial electricity use, is fueling substantial consumer concern, with 80% of respondents in a Sunrun-commissioned survey worried about rising utility bills.

While renewable energy sources, particularly solar, have largely met recent demand, attracting large utility-scale investments from major tech firms, their future growth faces headwinds. The U.S. Energy Information Administration (EIA) expects renewables to dominate new capacity only through next year, with potential Republican repeal of key Inflation Reduction Act provisions threatening longer-term expansion. Concurrently, natural gas, another data center energy source, is constrained by rising exports and a 4-year development timeline for new plants, compounded by a 7-year backlog for turbine deliveries.

This energy supply-demand imbalance, coupled with slow natural gas buildouts and potential renewable growth impediments, creates a challenging environment for data center operators. The situation risks exacerbating consumer backlash against AI, driven by concerns over energy prices and job displacement, as indicated by a Pew survey showing more concern than excitement for the technology. This confluence suggests a moderately negative outlook with significant market implications.

Key Decisions for Investors

• Monitor policy developments regarding the Inflation Reduction Act, as potential changes could significantly alter renewable energy investment landscapes and data center operational costs.
• Evaluate energy supply chain resilience and diversification strategies for companies heavily reliant on data centers, considering the constraints in both natural gas and potentially renewables.
• Assess the potential for increased regulatory scrutiny or public backlash against AI-centric businesses due to rising energy costs and consumer sentiment, which could impact valuations and operational licenses.
• Consider investment opportunities in energy efficiency technologies or grid infrastructure upgrades that address the growing demand from data centers, as these solutions will become increasingly critical.