My Bet on Energy Due to AI's Electricity Bottleneck
Why I'm Betting on the Energy Market Due to AI's Electricity Bottleneck: My Two Cents
As someone who works in the AI space, I've witnessed firsthand the incredible advancements and the hype surrounding artificial intelligence. Companies like NVIDIA have seen their stock prices skyrocket to all-time highs, fueled by the insatiable demand for AI technologies. But beneath this excitement lies a critical, often overlooked issue that could significantly impact the energy sector—and offer intriguing investment opportunities.
In this article, I want to share my perspective on why I'm betting on the energy market, specifically utilities and natural gas companies, due to the emerging electricity bottleneck caused by AI's exponential growth. If you're an investor or just someone interested in the intersection of technology and energy, this is a trend you won't want to miss.
The Unseen Problem: Electricity Demand Outpacing Supply
The AI Boom and Its Energy Appetite
Working in AI, I see daily how models are becoming increasingly complex, requiring massive computational power to train and operate. While the parameter sizes of these models aren't doubling every few months, the growth is still substantial. For example, GPT-3 has 175 billion parameters, and estimates suggest GPT-4 has around 280 billion parameters (*1). Training GPT-4 is estimated to have required about 1,750 megawatt-hours of electricity—the equivalent of what 160 average American homes use in a year (*2).
But it's not just about training these models; running them (inference) also demands significant power. Each query to GPT-4 consumes about 2.9 watt-hours of electricity, nearly ten times that of a standard Google search (*3). Multiply that by millions of users and billions of queries, and you can see how quickly the energy consumption adds up.
Hitting the Limits of Electrical Infrastructure
Here's the crux of the issue: our current electrical infrastructure isn't equipped to handle the escalating demands of AI. Data centers already consume 1-2% of global electricity, and this figure is projected to rise to 3-4% by 2030 (*4). The International Energy Agency forecasts that global data center electricity demand will more than double from 2022 to 2026, with AI playing a major role (*5).
In my professional circles, there's growing concern about the strain on power infrastructure. Operating large clusters of high-performance GPUs, like NVIDIA's H100, could potentially strain a state's entire electrical grid. While specific figures vary, the general consensus is that we're nearing the limits of what our grids can handle (*6).
Microsoft seems to recognize this issue. They've recently purchased a power plant, presumably to secure a stable electricity supply for their data centers (*7). This move underscores the severity of the electricity bottleneck we're approaching.
The Impending Slowdown in AI Development
Given these constraints, I believe the rapid pace of AI advancement may slow down in the short to medium term. Industry leaders like Elon Musk and Amazon CEO Andy Jassy have identified electricity supply as the latest bottleneck for AI development, replacing the previous constraint of chip availability (*8). It's not just about technological capabilities anymore; it's about physical resources. We simply aren't producing enough electricity to sustain the current trajectory of AI scaling.
This isn't a hurdle we can clear overnight. Building new power plants, upgrading grid infrastructure, and securing renewable energy sources are massive undertakings that require time and substantial investment. This potential slowdown has significant implications for markets and investors, shifting attention toward sectors that can address or benefit from these challenges.
Why the Energy Sector Stands to Benefit
Increased Demand for Electricity
The most direct beneficiary of this situation is the energy sector. As AI companies grapple with electricity shortages, utilities and energy providers will see increased demand. According to Goldman Sachs Research, data center power demand is expected to grow 160% by 2030 (*4). This isn't just a temporary spike; it's a trend that could persist as long as the demand for AI technologies continues to grow.
Natural Gas as a Key Player
Natural gas is a cornerstone of U.S. electricity generation, accounting for approximately 43% of the country's electricity production in 2023 (*9). Its abundance, relatively low cost, and ability to quickly ramp up production make it essential for meeting immediate energy demands. With constraints on electricity supply, natural gas producers and related infrastructure companies are in a prime position to capitalize.
Opportunities in Grid Infrastructure
Beyond just producing more electricity, there's a pressing need to upgrade and expand the electrical grid. The strain isn't solely about capacity but also about managing fluctuations in demand. Companies specializing in grid infrastructure and smart technologies could see substantial growth as they help modernize the system to handle higher loads.
Stocks and Sectors I'm Watching
1. Utilities with Natural Gas-Fired Power Plants
NextEra Energy (
NEE ): Not only does NextEra have significant natural gas operations, but they're also leaders in renewable energy. This dual focus positions them well for both immediate and long-term energy needs.
Duke Energy (
DUK ): Serving millions across multiple states, Duke Energy's extensive infrastructure makes them a key player in meeting increased electricity demand.
2. Natural Gas Producers
ExxonMobil (
XOM ): As one of the world's largest publicly traded energy providers, ExxonMobil has substantial natural gas operations and the resources to scale up production.
Chevron Corporation (
CVX ): Chevron's investments in natural gas projects and Liquefied Natural Gas (LNG) facilities make it a key player in meeting both domestic and international needs.
EQT Corporation (
EQT ): Focusing on the Appalachian Basin, EQT stands to benefit directly from increased domestic demand.
3. Natural Gas Producers
Kinder Morgan (
KMI ): Operating extensive pipeline networks, Kinder Morgan is crucial for natural gas distribution.
The Williams Companies (
WMB ): Specializing in natural gas processing and transportation, Williams is set to capitalize on increased flow, with plans to add around 4.2 billion cubic feet per day from 2024 to 2027 (*10).
4. LNG Exporters
Cheniere Energy (
LNG ): As the leading U.S. LNG exporter, Cheniere recently loaded their 3,000th cargo in 2023 (*11).
Tellurian Inc. ( AMEX:TELL ): Poised for growth with plans to build the first two plants at their Driftwood LNG export facility (*12).
5. Grid Infrastructure and Technology Firms
American Electric Power (
AEP ): Owning the nation's largest electricity transmission system, AEP plans to invest $40 billion from 2023 through 2027, focusing on transmission and distribution (*13).
Eaton Corporation (
ETN ): Their energy-efficient technologies are vital for grid modernization and enhancing reliability (*14).
6. Renewable Energy Companies
While natural gas is key for immediate needs, renewable energy companies are crucial for sustainable long-term solutions.
First Solar (
FSLR ): Specializing in utility-scale solar projects.
Brookfield Renewable Partners (
BEP ): With a diversified renewable portfolio, they're set to benefit from the shift toward clean energy.
Disclaimer: This article reflects my personal opinions and is for informational purposes only. It is not financial advice. Investing in the stock market involves risks, including the loss of principal. Please conduct your own research or consult a financial advisor before making investment decisions.
Sources
1. OpenAI's GPT-4 Technical Report
[url=cdn.openai.com/papers/gpt-4.pdf ]cdn.openai.com/papers/gpt-4.pdf
2. AI Energy Consumption
[url=energycentral.com/c/ec/ai-energy-consumption-hidden-costs-digital-revolution ]energycentral.com/c/ec/ai-energy-consumption-hidden-costs-digital-revolution
3. The Hidden Cost of AI
https://www.datacenterknowledge.com/energy/here-s-how-much-energy-it-takes-train-ai-models
4. Goldman Sachs Research on Data Center Power Demand
[url=goldmansachs.com/insights/pages/gs-research/ai-could-power-07-gdp-boost.html ]goldmansachs.com/insights/pages/gs-research/ai-could-power-07-gdp-boost.html
5. International Energy Agency on Data Centers
[url=iea.org/reports/data-centres-and-data-transmission-networks ]iea.org/reports/data-centres-and-data-transmission-networks
6. The Conversation on AI Energy Use
[url=theconversation.com/ai-supercharges-data-center-energy-use-straining-the-grid-and-sparking-innovation-209096 ]theconversation.com/ai-supercharges-data-center-energy-use-straining-the-grid-and-sparking-innovation-209096
7. Microsoft's Power Plant Purchase
[url=theverge.com/2023/10/5/23905320/microsoft-ai-energy-nuclear-power-plant-purchase ]theverge.com/2023/10/5/23905320/microsoft-ai-energy-nuclear-power-plant-purchase
8. Electricity Supply as AI's Bottleneck
[url=ft.com/content/eb2e4c04-08c2-4f2a-b3e6-1b0c8c9a1e2c ]ft.com/content/eb2e4c04-08c2-4f2a-b3e6-1b0c8c9a1e2c
9. U.S. Energy Information Administration
[url=eia.gov/tools/faqs/faq.php?id=427&t=3 ]eia.gov/tools/faqs/faq.php?id=427&t=3
10. Williams Companies Expansion Plans
[url=williams.com/operations/growth-projects/ ]williams.com/operations/growth-projects/
11. Cheniere Energy Milestones
[url=cheniere.com/ ]cheniere.com/
12. Tellurian's Driftwood LNG Project
[url=tellurianinc.com/projects/ ]tellurianinc.com/projects/
13. American Electric Power Investment Plans
aep.com/investors/reportsAndFilings/AnnualAndQuarterlyReports/
14. Eaton Corporation Overview
[url=eaton.com/us/en-us/company/news-insights/our-company.html ]eaton.com/us/en-us/company/news-insights/our-company.html
As someone who works in the AI space, I've witnessed firsthand the incredible advancements and the hype surrounding artificial intelligence. Companies like NVIDIA have seen their stock prices skyrocket to all-time highs, fueled by the insatiable demand for AI technologies. But beneath this excitement lies a critical, often overlooked issue that could significantly impact the energy sector—and offer intriguing investment opportunities.
In this article, I want to share my perspective on why I'm betting on the energy market, specifically utilities and natural gas companies, due to the emerging electricity bottleneck caused by AI's exponential growth. If you're an investor or just someone interested in the intersection of technology and energy, this is a trend you won't want to miss.
The Unseen Problem: Electricity Demand Outpacing Supply
The AI Boom and Its Energy Appetite
Working in AI, I see daily how models are becoming increasingly complex, requiring massive computational power to train and operate. While the parameter sizes of these models aren't doubling every few months, the growth is still substantial. For example, GPT-3 has 175 billion parameters, and estimates suggest GPT-4 has around 280 billion parameters (*1). Training GPT-4 is estimated to have required about 1,750 megawatt-hours of electricity—the equivalent of what 160 average American homes use in a year (*2).
But it's not just about training these models; running them (inference) also demands significant power. Each query to GPT-4 consumes about 2.9 watt-hours of electricity, nearly ten times that of a standard Google search (*3). Multiply that by millions of users and billions of queries, and you can see how quickly the energy consumption adds up.
Hitting the Limits of Electrical Infrastructure
Here's the crux of the issue: our current electrical infrastructure isn't equipped to handle the escalating demands of AI. Data centers already consume 1-2% of global electricity, and this figure is projected to rise to 3-4% by 2030 (*4). The International Energy Agency forecasts that global data center electricity demand will more than double from 2022 to 2026, with AI playing a major role (*5).
In my professional circles, there's growing concern about the strain on power infrastructure. Operating large clusters of high-performance GPUs, like NVIDIA's H100, could potentially strain a state's entire electrical grid. While specific figures vary, the general consensus is that we're nearing the limits of what our grids can handle (*6).
Microsoft seems to recognize this issue. They've recently purchased a power plant, presumably to secure a stable electricity supply for their data centers (*7). This move underscores the severity of the electricity bottleneck we're approaching.
The Impending Slowdown in AI Development
Given these constraints, I believe the rapid pace of AI advancement may slow down in the short to medium term. Industry leaders like Elon Musk and Amazon CEO Andy Jassy have identified electricity supply as the latest bottleneck for AI development, replacing the previous constraint of chip availability (*8). It's not just about technological capabilities anymore; it's about physical resources. We simply aren't producing enough electricity to sustain the current trajectory of AI scaling.
This isn't a hurdle we can clear overnight. Building new power plants, upgrading grid infrastructure, and securing renewable energy sources are massive undertakings that require time and substantial investment. This potential slowdown has significant implications for markets and investors, shifting attention toward sectors that can address or benefit from these challenges.
Why the Energy Sector Stands to Benefit
Increased Demand for Electricity
The most direct beneficiary of this situation is the energy sector. As AI companies grapple with electricity shortages, utilities and energy providers will see increased demand. According to Goldman Sachs Research, data center power demand is expected to grow 160% by 2030 (*4). This isn't just a temporary spike; it's a trend that could persist as long as the demand for AI technologies continues to grow.
Natural Gas as a Key Player
Natural gas is a cornerstone of U.S. electricity generation, accounting for approximately 43% of the country's electricity production in 2023 (*9). Its abundance, relatively low cost, and ability to quickly ramp up production make it essential for meeting immediate energy demands. With constraints on electricity supply, natural gas producers and related infrastructure companies are in a prime position to capitalize.
Opportunities in Grid Infrastructure
Beyond just producing more electricity, there's a pressing need to upgrade and expand the electrical grid. The strain isn't solely about capacity but also about managing fluctuations in demand. Companies specializing in grid infrastructure and smart technologies could see substantial growth as they help modernize the system to handle higher loads.
Stocks and Sectors I'm Watching
1. Utilities with Natural Gas-Fired Power Plants
NextEra Energy (
NEE ): Not only does NextEra have significant natural gas operations, but they're also leaders in renewable energy. This dual focus positions them well for both immediate and long-term energy needs.Duke Energy (
DUK ): Serving millions across multiple states, Duke Energy's extensive infrastructure makes them a key player in meeting increased electricity demand.2. Natural Gas Producers
ExxonMobil (
XOM ): As one of the world's largest publicly traded energy providers, ExxonMobil has substantial natural gas operations and the resources to scale up production.Chevron Corporation (
CVX ): Chevron's investments in natural gas projects and Liquefied Natural Gas (LNG) facilities make it a key player in meeting both domestic and international needs.EQT Corporation (
EQT ): Focusing on the Appalachian Basin, EQT stands to benefit directly from increased domestic demand.3. Natural Gas Producers
Kinder Morgan (
KMI ): Operating extensive pipeline networks, Kinder Morgan is crucial for natural gas distribution.The Williams Companies (
WMB ): Specializing in natural gas processing and transportation, Williams is set to capitalize on increased flow, with plans to add around 4.2 billion cubic feet per day from 2024 to 2027 (*10).4. LNG Exporters
Cheniere Energy (
LNG ): As the leading U.S. LNG exporter, Cheniere recently loaded their 3,000th cargo in 2023 (*11).Tellurian Inc. ( AMEX:TELL ): Poised for growth with plans to build the first two plants at their Driftwood LNG export facility (*12).
5. Grid Infrastructure and Technology Firms
American Electric Power (
AEP ): Owning the nation's largest electricity transmission system, AEP plans to invest $40 billion from 2023 through 2027, focusing on transmission and distribution (*13).Eaton Corporation (
ETN ): Their energy-efficient technologies are vital for grid modernization and enhancing reliability (*14).6. Renewable Energy Companies
While natural gas is key for immediate needs, renewable energy companies are crucial for sustainable long-term solutions.
First Solar (
FSLR ): Specializing in utility-scale solar projects.Brookfield Renewable Partners (
BEP ): With a diversified renewable portfolio, they're set to benefit from the shift toward clean energy.Disclaimer: This article reflects my personal opinions and is for informational purposes only. It is not financial advice. Investing in the stock market involves risks, including the loss of principal. Please conduct your own research or consult a financial advisor before making investment decisions.
Sources
1. OpenAI's GPT-4 Technical Report
[url=cdn.openai.com/papers/gpt-4.pdf ]cdn.openai.com/papers/gpt-4.pdf
2. AI Energy Consumption
[url=energycentral.com/c/ec/ai-energy-consumption-hidden-costs-digital-revolution ]energycentral.com/c/ec/ai-energy-consumption-hidden-costs-digital-revolution
3. The Hidden Cost of AI
https://www.datacenterknowledge.com/energy/here-s-how-much-energy-it-takes-train-ai-models
4. Goldman Sachs Research on Data Center Power Demand
[url=goldmansachs.com/insights/pages/gs-research/ai-could-power-07-gdp-boost.html ]goldmansachs.com/insights/pages/gs-research/ai-could-power-07-gdp-boost.html
5. International Energy Agency on Data Centers
[url=iea.org/reports/data-centres-and-data-transmission-networks ]iea.org/reports/data-centres-and-data-transmission-networks
6. The Conversation on AI Energy Use
[url=theconversation.com/ai-supercharges-data-center-energy-use-straining-the-grid-and-sparking-innovation-209096 ]theconversation.com/ai-supercharges-data-center-energy-use-straining-the-grid-and-sparking-innovation-209096
7. Microsoft's Power Plant Purchase
[url=theverge.com/2023/10/5/23905320/microsoft-ai-energy-nuclear-power-plant-purchase ]theverge.com/2023/10/5/23905320/microsoft-ai-energy-nuclear-power-plant-purchase
8. Electricity Supply as AI's Bottleneck
[url=ft.com/content/eb2e4c04-08c2-4f2a-b3e6-1b0c8c9a1e2c ]ft.com/content/eb2e4c04-08c2-4f2a-b3e6-1b0c8c9a1e2c
9. U.S. Energy Information Administration
[url=eia.gov/tools/faqs/faq.php?id=427&t=3 ]eia.gov/tools/faqs/faq.php?id=427&t=3
10. Williams Companies Expansion Plans
[url=williams.com/operations/growth-projects/ ]williams.com/operations/growth-projects/
11. Cheniere Energy Milestones
[url=cheniere.com/ ]cheniere.com/
12. Tellurian's Driftwood LNG Project
[url=tellurianinc.com/projects/ ]tellurianinc.com/projects/
13. American Electric Power Investment Plans
aep.com/investors/reportsAndFilings/AnnualAndQuarterlyReports/
14. Eaton Corporation Overview
[url=eaton.com/us/en-us/company/news-insights/our-company.html ]eaton.com/us/en-us/company/news-insights/our-company.html
Disclaimer
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