How Electric Utilities Will Handle Booming AI Datacenter Demand

28:56And that's the tension that we're in right now of how do we quickly accelerate the delivery and growth of the electric grid, which is which. And I think I just want to quick aside on this. Consuming electricity is in the context we're talking about is a really great thing. I mean, this is something that leads to economic growth. It leads to job creation. All of this, I mean, this whole problem that we have right now of electric utilities having to think about this whole new era of growth, it's all because we're on shoring manufacturing in the United States. We're building these data centers and creating all sorts of amazing tools and creating efficiency across all sorts of sectors.

29:43And we're also in the same vein, we're also electrifying transportation and heating. Like all of this is good. It's all goodness. And we didn't even get to things like hydrogen production and other ways that we're going to use electricity. The real rub of this, though, is that we're in this situation right now where, again, the electricity industry was somewhat surprised by this. They weren't prepared for over a period of a couple of years. Again, going back to the case of Dominion, having to double their load forecast. like so so reflexively they're going to go to the one thing they know how to do which is build gas plants because they know that works that's that's the easy way out there are other things we can do though there are ways we can leverage the existing system more effectively we can use things called grid enhancing technologies where we through censoring through better dynamic rating of power lines we can actually get more out of the existing system we have there's ways we can use storage more effectively because really what we're trying to manage is just these system peaks.

30:48Most of the time, there's plenty of power. It's really just during the hottest summer hours or the coldest winter hours that the system gets constrained. And that's what's driving a lot of the need for utilities to want to build this new capacity. But we can manage it in other ways. And it's really incumbent upon the data center industry to lean in on this, just think through how can we be more of a party to solving this problem? Because data centers have lots of opportunities to be more flexible. They have behind the meter generation. They have behind the meter storage. They can actually be part of the solution, not just part of the problem.

31:25I just want to press you on this point because I know people will have questions about this. And I take the point about, in many respects, we're talking about increased energy usage as a result of new things that are leading to new jobs and new productive industry. And also the idea that, well, we can produce more electricity in different ways, or we can make the delivery of electricity more efficient and all those types of things. But I think one of the reservations people might have about this is the idea of competition with large tech companies that have a lot of money and that potentially have a lot of influence over the utility companies.

32:08And the idea that maybe you could get a situation where, I don't know, Amazon gets like 100 % offtake from some power plant in whatever state. And maybe other people are left with either, you know, not enough electricity or more likely much more expensive electricity. Can you talk about that? I was being somewhat facetious in the intro talking about a zero-sum game, but there is this idea of competition and there might not be enough to go around, at least at the precise times that everyone might want it. that's right and that's the big challenge that good planners have today is what loads do you say yes to and what are the long-term implications of that and this and we've seen this play out over the the rest of the globe where you've had these concentrations of data centers this is a story that we've we saw in in dublin we've seen it in singapore we've seen it in amsterdam and and these governments start to get really worried of wait a minute we have too many data centers as a sort of percentage of overall energy consumption.

33:20And what inevitably happens is a move towards putting either moratoriums on data center build out or putting very tight restrictions on what they can do and the scale at which they can do it. And so, you know, we haven't yet seen that to any material degree in the United States, but I do think that's a real risk. And it's a risk that the data center industry faces, I think, somewhat uniquely in that if you're the governor of a state and you have a choice to give power to a, say, new EV car factory that's going to produce 1 ,500, 2 ,000 jobs versus a data center that's going to produce significantly less than that, you're going to give it to the factory.

34:04The data centers are actually the ones that are going to face likely the most constraints You know, as governments, utilities, regulators start wrestling with this tradeoff of, oh, we're going to have to say no to somebody. And that's the real risk that I think the AI and data center industry faces today is that they are the easiest target because everyone loves what data centers do. but no one particularly loves just having a data center next door to their house and so that's a real challenge for the industry is that they will start to get in the crosshairs of these regulators leaders whomever who's pulling the strings as these decisions start to get made.

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35:42Brightview, Dulles Corner, and Great Falls offer vibrant senior independent living, assisted living, and memory care services through various daily programs, Chef prepared meals, safety and security, transportation, resort style amenities and high quality care. Take financial possession of your apartment by December 31st, 2025 and save. Discover more at brightviewseniorliving.com. Equal housing opportunity. So I just want to make two random thoughts that were in my head. I walked by a film set in the East Village the other day. They were filming this movie and there were all these like big, like thick electrical cables.

36:17that are powering the lights and cameras and all that stuff. And I thought to myself, oh, it'll be so great when they can just make all the movies on AI with Sora or something like that. And then we'll also get electricity savings because we won't have to have human actors with actual lights and stuff like that. So that'll be exciting. And then I'm being a little facetious about the end of human actors, but in theory, that could be exciting. And then you mentioned it was like, well, the utilities got surprised by the low, the spike in demand. But it sounds to me like we can't really blame the utilities too much, because if even the people inside Microsoft got a bit caught unsurprised by the explosion of AI interest in the fall of 2022, then I guess we can't really blame Dominion.

37:03They were probably further away from the issue. You mentioned peak demand, and this gets to the type of power, because people talk about this sort of need, the problem with renewables as well, at least when we're talking about solar and wind, there's this intermittency problem. It's not always sunny, even if it's hot when it's hot. It's not always windy. There's nighttime, et cetera. How much does that constrain the ability of more renewables to be sort of the solution to the utilities problem? It's a real challenge because, again, as you noticed, we're trying to manage peak demand. That's what all this growth is about.

37:42So peak demand is about the certainty that you're going to have power during those highest system peaks, the hottest days, the coldest winter nights. And you can't always guarantee that renewable generation will be online during those times. And this is the role of the system planner is to look at all these different resources and figure out how can we assure that we have this sufficient reserve margin to ensure that we're not going to have things like rolling brownouts or blackouts. Now, there's a lot of tools, though, that we have to help manage that uncertainty. And we have increasingly, you know, month after month, it seems like lower cost battery options, which give us more duration that we can deploy to solve some of these issues.

38:28We have the ability of even the loads through like virtual power plants to be more responsive during these times of system peaks, right? So we have tools that we can use to manage that uncertainty. The problem is it is a very complex problem. I mean, you're talking about, you know, millions of different data points that you're trying to manage. And the way that utilities have historically managed these things has been fairly rudimentary in terms of their sophistication. And so they're having to go through this learning curve of how do we ensure that we can achieve the load growth that all these industries are expecting and meet the reliability, cost, availability expectations of our customers.

39:16And that's where the challenge comes in. And this is where the whole problem gets, frankly, really interesting, is that there There are lots of levers that we have, and we don't just have to throw more fossil fuel plants at this problem. Does that mean we're not going to build any new gas plants in this country? I'm certain we will. I don't think there's a way around this problem, at least in the short run, without having some incremental addition of fossil-based resources. But there's also a lot of other things we could be doing that would significantly reduce dependence on fossil-based resources to achieve the growth objectives that we have as a country.

39:56What are the levers specifically on the tech company or the data center side? Because, again, so much of the focus of this conversation is on what can the utilities do, what can we do in terms of enhancing the grid, managing supply more efficiently, but are there novel or interesting things that the data centers themselves can do here in terms of managing their own energy usage? Yes, there's a few things. I mean, one is data centers have substantial ability to be more flexible in terms of the power that they're taking from the grid at any given time. As I mentioned before, every data center or nearly every data center has some form of backup generation.

40:42They have some form of energy storage built into this. So the way a data center is designed, it's designed like a power plant with an energy storage plant that just happens to be sitting next to a room full of servers, right? And so when you break it down into those components, you say, okay, well, how can we better optimize this power plant to be more of a grid resource? How can we optimize the storage plant to be more of a grid resource? And then in terms of even the servers themselves, how can we optimize the way the software actually operates and is architected to be more of a grid resource?

41:15And that sort of thinking is what is being forced on the industry. Like, frankly, we've always had this capability. I mean, we did a project like 2016 with a utility where we put in flexible gas generators behind our meter because the utility was going to have a new power plant if we didn't have a way to be more flexible. So we've always known that we can do this, but the industry has never been pressurized to really think innovatively about how can we utilize all these assets that we have inside of the data center plant itself to be more part of the grid, right? So that's, I think, the most important thing is really thinking about how data centers become more flexible.

42:01There's a whole other line of thinking, which is this idea of, well, utilities aren't going to move fast enough, so data centers just need to build all their own power plants. And this is where you start hearing about nuclear and SMRs and fusion, which is interesting, except it doesn't solve the problem this decade. It doesn't solve the problem that we're facing right now because none of that stuff is actually ready for prime We don't have an SMR that we can build today, predictably on time, on budget. So we are dependent on the tools that we have today, which are things like batteries, grid-enhancing technologies, flexible load, reconductoring transmission lines to get more power over existing rights of waste.

42:48So there's a number of things we can do with technologies we have today that are going to be very meaningful this decade. And we should keep investing in things that are going to be really meaningful next decade. I'm very bullish on what we can do with new forms of nuclear technology. They're just not relevant in the time horizon, the problem we're talking about. At some point, we're going to do an Odd Lots episode specifically on the promise of small modular reactors and why we still don't have them despite the seeming benefits. But do you have like a sort of succinct answer for why this sort of seeming solution of manufacturing them faster, et cetera, like has not translated into anything in production?

43:35Well, quite simply, we just forgot how to do it. We used to be able to build nuclear in this country. We did it in the 70s. We did it in the 80s. But every person that was involved in any one of those projects is either not alive or certainly not still a project manager at a company that would be building nuclear plants. I think we underestimate human capacity to forget things. Just because we've done something in the past doesn't mean that we necessarily can do it again. We have to relearn these things. And as a country, we do not have a supply chain. We don't have a labor force. We don't have people that manage construction projects that know how to do any of these things.

44:15And so when you look at what South Korea is doing, you look at what China is doing, they are building nuclear plants with regularity. They're doing it at a very attractive cost. They're doing it on a predictable time horizon. but they have actually built all of those resources that we just simply don't have in this country that we need. And we need to rebuild that capability. It just doesn't exist today. You know, one of the things that in the, when you're talking about utilities, they're like weird companies because they're not like normal businesses. They're sort of natural monopolies. They price set, my understanding is based on how much they invest.

44:53And so they have to then petition some local regulators say, look, we had to invest this much, and that's why I want to raise the prices this much, et cetera. Are there regulatory hurdles or things about the regulatory system right now that are going to make that doubling of demand more challenging than they need to be? Absolutely. And so if you go back to the era that we've been in of relative no load growth, if you're a utility regulator and the utility comes and ask you for a billion dollars for new investment. And you're used to saying no. You're used to saying, well, wait a minute. Why do you need this?

45:31What is this for? How is this going to help manage reliability, cost predictability, et cetera? Now you're in this whole new world. And going back to this concept of we easily forget things, no one who's a regulator today or the head of a utility today has ever lived through an environment where we've had this massive expansion of the demand for electricity. So everyone now, including the regulators, are having to relearn, OK, how do we enable utility investment in a growth environment? It's not something they've ever done before. And so they're having to figure out, OK, how do we create the sort of the bandwidth for utilities to make these investments?

46:16Because one of the fundamental challenges that utilities have is that they struggle to invest if there's no customer sitting there, you know, asking for the request, right? So they can't sort of invest. I mean, if I'm NVIDIA and I'm thinking about the world five years from now and think, wow, how many chips do I want to sell in 2030? I can go out and build a new factory. I can go out and invest capital and I can go do all this. I mean, I don't need to have an order from a Microsoft or an Amazon or a Meta to go do that. I can build speculatively. Utilities can't really do that. They're basically waiting for the customer to come ask for it.

46:59But when you have all this demand show up at the same time, well, what happens? The lead times start to extend. And so instead of saying, yeah, I'll give you that power in a year or two years, it's now like, well, I'll give it to you in five to seven years. And so that's an unsustainable way to run the electric utility grid. So we do need regulators to adapt and evolve to this new era of growth. This is actually exactly something that I wanted to ask you, which is we're sort of used to at this point when we talk about industrial policy, the importance of an end buyer for whatever capacity that we're building out.

47:35And utilities, you know, to some degree have struggled with that in recent decades, at least this idea that they have huge investment requirements. And while there is clearly demand for electricity and maybe new types of electricity, it's not always certain. And you're sort of managing these day to day cycles and things like that. But if we know that AI is booming and we know this is a future area of growth and we see these headlines like AI servers are going to require like 100 terawatt hours per year and things like that, does that potentially give utilities more certainty or more confidence in the future investment outlook?

48:18I mean, I would say in some respects it does. I mean, there's certainly, and I've been spending a lot of time with utilities, well, for most of my career, but even in the last several months having this conversation about how are they thinking about this future growth. And, you know, they're struggling a little bit because like all they know is what the customers, you know, show up at their door and say that they want, right? They say, well, okay, talk to XYZ data center and this is what they say they want, but they don't necessarily have view to the long-term, like what really is the demand behind that?

48:56Like I'm getting a request because one data center bought one parcel of land and they need 500 megawatts of power. And then they're trying to extrapolate from that, well, what is that underlying demand for data? How much more growth should I expect after that? And that's where the utilities, I think, are really struggling is that they can't see much beyond the requests that they have. And so they're trying to then extrapolate, okay, what are these trends? you know and really the only the only way to get a good sense of the the real demand for data and the trends is you have to actually go back to the probably to the invidias and the intels of the world and go what's the forecast for chip sales like what's the forecast for how many chips you're going to make not i mean not even sales but really how much they produce because frankly i think every chip they can produce it will get plugged in someone will buy it and it will get plugged in So that's probably the best estimate that you can come up with for what utility load growth should look like, at least as it relates to data centers.

49:59But you have thousands of utilities in the United States. So you don't have, there's not even like a single source you can go to to say, okay, what's the forecast next year for electricity load? Nobody has that. I mean, people have, there's numbers out there, but they're not really based on anything other than speculation. So this is the challenge that utilities have, is that they don't have a good view into what load growth really is going to look like over the next five, seven, 10 years. Brian, Janice, fascinating conversation. There's probably like 10 more follow-ups that we could do specifically with you, and maybe one day we'll do them.

50:37But in the meantime, thank you so much for coming on OddLods. This was a great conversation that we definitely needed to get done. So really appreciate you joining. Thank you, Joe and Tracy. Really appreciate it.

51:02Tracy, I thought that was great. I think actually the first thing that sort of stands out for my mind, sort of like working backwards through the conversation is just sort of exactly what you talked about, which is that there is this weird situation where you have this very unpredictable demand. No one knows what the steady state demand is going to be for this stuff. And yet the utilities are sort of legally constricted in the degree to which they can say overbuild now or sort of operate or plan for that demand. No, absolutely. And also, well, going back to the beginning of the conversation with Brian, the idea of a mismatch between just how fast technology is going at the moment in terms of developing AI versus utilities and their, you know, 10-year investment programs that they need to get regulatory approval for and all of that stuff.

51:54No, there was so much to pick out from that conversation. I also thought it was interesting. So I think there is a sense among a lot of commentators that there is going to be competition for power, at least at certain times. But I thought Brian's point about how, in some respects, data centers might be the easy target for politicians to kind of ignore. I thought that was really interesting. And again, his example of, well, if you're a governor or something and there's a Tesla factory that wants energy versus a data center that probably has, I don't know, like a handful of employees, maybe that's an exaggeration, then you're going to go with the Tesla factory, right?

52:34Totally. So, right. You're not going to shut down the factory that employs people. You're not going to politically tell people to go without air conditioning on a hot day. The data center is going to be the first target. I thought that was interesting. You know, again, I do think it's like striking. And I think this is not even just in the energy context, but I still am sort of fascinated by this idea that like OpenAI was this company, I think it was founded in 2016 and people saw GPT-1 and GPT-2. And then GPT-3, which came out before ChetGPT. But it was really like that day. I mean, it was like that day that ChetGPT was announced.

53:11Even though the technology was in development, there were also these theories and stuff. It was like that day of the commercialization and the productization of this technology where everyone woke up at all these different companies like, we're in a totally different new world and we have to revisit all of these investment decisions, whether it's on chips or energy that we had made maybe just a year ago. Yeah, it's also it's almost like bullwhip effect isn't the right term, but I'm just thinking the utilities in some respects are at the very end of that sort of demand cycle. Right. So even the tech companies woke up to it very, very suddenly, the boom in AI and how fast this was all going to come about and all of that.

53:50And the utilities are sort of the last ones to know. Yeah. In that respect. And we're expecting them to react very quickly to it. It's kind of funny. The other thing, too, is like it'll be fascinating to see if some of these net zero commitments just have to give or something is going to happen there. It sounds like it sounds like the rubber is going to meet the road, but it does not sound like in the short term anyway, that there is a way to accommodate this much increased demand with renewable energy. It doesn't seem like it anyway. And so like something is going to it seems like something's going to have to give.

54:24I think we're back to the very start of this conversation, which is the idea of we have these two very different paths where in an ideal world, if everything goes perfectly, you have all this new commercial interest in technology that requires a lot of energy usage. And so some of those dollars get diverted into building out additional capacity in terms of energy and maybe even additional green capacity. But the other path is kind of depressing where you have a bunch of big tech companies that feel existential pressure to do whatever it takes to win the AI race. And maybe whatever it takes includes getting energy through coal or something like that.

55:03You know what I think is interesting? And it sort of it hadn't really clicked to me. But Brian talked about how, you know, after the early 80s, the U.S. basically stopped building nuclear. And we're like, oh, you know, it's like a big mistake. Why do we stop building nuclear? But you could sort of understand it in the context of very little demand growth. Right. Right. So why make these like really big investments in anything when obviously at the time there wasn't as much concern or awareness about climate change and the effects of fossil fuels? And there just wasn't much demand growth. So why make these big things?

55:35And so you think about like South Korea and China having never really slowed down on the nuclear construction. But they're also because they're developing countries or poor countries becoming richer. They never presumably had that sort of demand plateau just by dint of having started from somewhere lower. You know what we need? What? We need chat GPT to design a small modular reactor. And then we need a robot. And then we need a robot. Yes. To build it. Yeah. All right. Well, it sounds like we're probably far away from that. Yes. But maybe one day. OK, shall we leave it there? Let's leave it there.

56:08This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Erman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. For more Odd Lots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter. And you can chat about all of these things, including AI, energy, and climate, in our chat room, Discord, discord.gg slash oddlots 24-7 with fellow listeners. And if you enjoy Oddlots, if you like it when we dive into the energy usage of AI, then please leave us a positive review on your favorite podcast platform.

56:49And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is connect your Bloomberg account with Apple Podcasts. Thanks for listening.

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