The Utilities Analyst Who Says the Data Center Demand Story Doesn't Add Up

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0:30Hello and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, imagine you are a utilities analyst. Yeah, fun. And for years you are laboring in the utility analysis minds. Yeah. And, you know, we like talking about utilities. We like talking about energy. We find pretty much anything interesting. That's right. Equal opportunity interest people we are. But you've got to say, utilities for a while, some people would say it was a little boring. A little quiet. No, that's right. I mean, for most of our careers, I think if you were a utilities analyst, a really big part of your job – and maybe I'm wrong, but I just in the popular discourse was like talking about yield relative to treasuries, right?

1:14Yes, yes. They were seeing a sort of bond-like instrument, et cetera, maybe a little bit of growth, but roughly bond. Reliable, safe haven-ish dividend plays, I guess. Totally. And since I know where we're going with this conversation, one of the themes of the last few years has been what I would say is the old industries that were either stable or cyclical becoming secular in the way they grow. I think that's right. So what is happening now is if you were, I don't want to say a lowly utilities analyst, but maybe a sort of forgotten utilities analyst outside of your sector, suddenly you are very in demand, right?

1:52Because all you hear about nowadays is the AI build out and energy constraints on that. And so obviously a lot of people want to look at it from a utilities perspective. Totally. I always think like what a great luck that some people have in their careers. You know, you can be an analyst and learn modeling skills and all kinds of stuff and then you get allocated and someone gets allocated to, I don't know, farm equipment and another person gets allocated to they wind up in utilities in 2022. And it's like, man, they're on TV all the time. My old boss at Business Insider, Henry Blodgett, it's like he was there as an internet analyst in like the late 90s.

2:31What amazing timing and luck. And so. So it's like journalism in the eight-year sign, right? That's right. It's the exact same thing. I started out covering airlines of all things, but those were interesting. Anyway, I'm glad to say we do, in fact, have the perfect guest. So we're going to be speaking to a utilities analyst, someone who happens to have a very contrarian take on the data center buildout and how much energy is actually required. We've been hearing a lot from people who are very, very bullish on the data center buildout. So this will be a useful counterpoint. I love it. Okay, so without further ado, Andy DeVries, head of investment grade credit and head of utilities and power over at Credit Sites.

3:09Thank you so much for coming on All Thoughts. Thank you. The pleasure is mine. So is it great to be a utilities analyst right now? Even better? Well, your Bloomberg News reporter, Josh Saul, wrote an article about how much it's changed to be a utilities analyst now that data centers are here. But to push back, we did have the largest bankruptcy of all time in Enron. Oh, yeah. The largest LBO of all time in TXU, which then went bankrupt. And the largest private equity return ever in Calpine,$25 billion, which exceeds Apollo's Lionel trade and Blackstone's Hilton trade. So we have had a lot of fun along the way.

3:41Have you been a utilities analyst throughout that entire timeline? How long have you been doing it? I started with the first PAC gas bankruptcy and then went through the second. And here we are with data centers. 25 years. Wow. So you really have seen it all. It is fair to say. So you're absolutely right. There have been some disasters and home runs and utilities, you know, they do get central in the news, obviously, with the fires that we saw, for example, in California several years ago. And the court trial is about allocation of risk in those situations. You mentioned Enron, et cetera. But it is also fair to say that much of the discourse in day to day has been like these are sort of bond-like instruments.

4:25Before we get into that, just like. Talk to us about what a normal day is like and when you're thinking about utility. Pre-data centers? Yeah, pre-data centers, five years ago, whatever. Pre-data centers, you're looking at a lot of rate cases. You're studying a lot of local news. You're looking at legislation. You're reading dry regulatory documents. And then you're tracking natural gas prices because that's setting the price of power. And then on the federal level, you obviously have the renewables displacing coal. And that's obviously having a big impact now. So I actually think it's a lot of fun.

4:55My impression was always the policy aspect of it seemed kind of the most important thing to keep track of. Is that right? Absolutely. And that's down to the state level, but also the federal as well. Yeah. We've done a few energy episodes, still trying to wrap my head around the sort of patchwork of rules that seem to cover our energy infrastructure. But anyway. There's something a little aspie about the way you talk to people in this space. And you're like, well, how does this get priced? And they're like, well, are you talking about market or central? It's like, OK, I don't know. You know, it's like, are you talking about a rate board or are you talking about market prices?

5:29It's so hard. Especially in a 40-minute podcast to try to generalize that. But I love the people. Don't get me wrong. Those are my favorite people. Anyway, Andy, what is the mood like at the moment among utilities, people, analysts, investors? Wasn't there a conference recently? Everyone's gung-ho on this. So the biggest conference of the year is EEI in November. And it was packed. I was standing and rolling for some of these presentations. Wow. Your competitors at CNBC were broadcasting from the floor. Is that the first time that happened? Probably a sign of a top. So, yeah, people are very happy.

6:04And to quantify it, utilities have generally grown around 4%, 5%, 6 % a year. And then that's moved to 5 % to 7 % a year. And now certain names, which we'll talk about later, are up to 8 % a year. And that's driven by data center growth. Talk to us a little bit more about that. So what is the, I mean, I'm like looking at a chart of the XLU ETF. I don't think it's like done insane. But talk to us a little bit about like maybe quantify the exuberance for us. So it's like, OK, we are no longer just in the business of measuring bond proxies and looking at policies, et cetera. There is a secular growth driver.

6:42Talk to us about the bull case and then also how we would see the bull case, sort of like how it's manifesting into tradable instruments. Sure. And you pulled up the graph of the XLU. Obviously, it's still a very interest rate sensitive sector. Yeah, that's right. Because people are putting dividends. You can find higher yields in other fixed income instruments. Yeah, right. So maybe it didn't do so well last year. But the industry argues that as this EPS growth rate goes up to the high single digits, mid to high single digits, that it shouldn't be as interest rate sensitive. So that's the big debate going on with investors right now.

7:14And the stock, I mean, the XLU has done well. It's gone up. Yeah, if you zoom out, it looks pretty good. It's done well. That's my impression of a Bitcoin investor, by the way. Zoom out. Just zoom out. Well, right. And you've gotten that coupon, right? Sure. So you might, in normal times, just be happy with a coupon. You're getting coupon plus. I mean, it worked out. The Fed went zero interest rates for so long, so utilities are the place to be. That's just math. And then as soon as the Fed starts jacking up rates, ChatTPT comes on the scene. and all of a sudden there's data centers. So now all of a sudden you're taking the leg up on growth when you don't need to be so interest rate sensitive.

7:46Interesting. So one of the reasons we wanted to talk to you is because you have that contrarian take on the data center build out and we wrote it up in the All Thoughts newsletter, which everyone should subscribe to. It got a lot of attention. Your analysis, interestingly, is just based on some pretty simple math. So why don't you, just to start out with, Why don't you walk us through the calculations that you're actually making to try to analyze how much capacity the utilities are taking on to actually power data centers? Sure. So as you said, it's pretty simple math here. So data centers now are consuming around 45 gigawatts of power.

8:27And you can switch between capacity and throughput. I'm going to stick with capacity. Okay. So 45 gigawatts of power. And then there's lots and lots of third-party estimates for where they're going to be in 2030. and they center around this 90, 95 gigawatts. So you need to add 50. For 2035, there's a lot fewer estimates. You come around 160. Now these estimates, they're all over the place. They come from sell-side banks. They come from consultants. They come from everyone. BNEF has one. They're, I think, one of the best out there. Thank you. Thank you. We use them a lot. So that's on the demand side of where you're going to come out on these.

9:06And then you look at the supply and everyone talks about the demand, right? Oh, yeah. But then you look at the supply and all these tech bros are too cool to actually look at the supply and do utility analysis, right? Who wants to be a utility analyst? You were making fun of us before. We were making fun. But if you look at this - We're pitying you. But when we realize our pity was misplaced, but we were not making fun. Anyway, keep going. It's great. So you look at the supply and these utilities are tracking all these data centers connecting to the grid because they've got to do a lot of work, spend a lot of money in transmission, distribution, new substations, transformers.

9:35It's a lot of work. but it boosts their earnings growth. So they're happy to talk about this. And so you look at where they're at and where they see things coming, and they've got around 140 gigawatts of near-term supply. Now, kudos to the utilities, they break out what's firm, committed, signed, contracted versus pipeline behind it. Because there's a lot of double, triple, quadruple counting. So if you're going to build a data center in the Southeast, you're going to tell Duke, you're going to tell Southern, you're going to tell Dominion, you're going to build one. So that's the pipeline potential.

10:04But looking just at the firm, committed, whatever they want to call it, around 140 gigawatts. Now, you've got to PUE adjust that. So when you connect a data center - What's PUE? Yeah. When you connect a data center to the grid, you've got lights, you've got cooling. Those third-party estimates I gave you are just for raw compute. Why did you split those out, though? Because I mean, all data centers are going to need to be cooled down, right? What's the point of splitting it out? I'm not splitting it out. I'm just adjusting it downward because the third-party estimates are just compute. So if you're connecting to the grid, you're going to ask for the lights, the cooling, and everything.

10:36So I want to go apples to apples versus the third party. And what does PUE stand for? Power usage effectiveness or power usage efficiency. So they're at 140. So that PUE is down to 110 on apples to apples. So just to go back, you only need 50 on the demand side between now and 2030. And the utilities are working at connecting 110. So the utilities are working on already connecting almost as much as you need by 2035. So again, just to make sure on the same page, third-party estimates, 45 gigawatts for data centers now going to 95. That's 50. Utilities are working on 110. They don't give timing for that.

11:15Some of it's going to be past 2030. What I'm trying to say is there is a lot of supply of data centers coming, and it's very unclear if there's going to be demand for this. So that's the issue there. And then it might be worth pausing that and just saying how we're tracking these things. So what we do for the demand side is we use the original AI agent. You know what that is? A Gmail alert. Oh, yeah. They're the best. So anything that's not on our trade pubs, not on Bloomberg News, we get picked up by a Gmail alert. And so then we get all that in a spreadsheet. So that's on the demand side. And then on the supply side, we use Diego.

11:51And that's not a large language model. That's my junior sitting several blocks west of us right now. So he tracks all this on utility calls. Just yesterday, NextEra moved another two gigawatts from the potential into the committed. And these utilities are chomping at the bit to sign more and more of these deals. And I think it's just going to be oversupply. We're going to overbuild these things. Just to be clear, the firm commitments, those are signed agreements to actually build this capacity. Yes. OK. And so I was talking with the CFO of Encore, and they made these comments on their call as well.

12:23They're owned by Sempra. And I said, you know, no one really believes these demand estimates. Texas is a walled-off market, as you guys know, 87 gigawatt peak market. That is the one thing I know about energy. Texas is its own walled-off market. There you go. So 87 gigawatt peak market. and the demand estimates are they're going to add 30 gigawatts by 2030. And I said to the CFO of Oncora, I said, there's just no way. And he said, it might not be 30, but it's going to be closer to 30 than it is zero. And I said, the forward power curves don't reflect that at all. And he said, then they're mispriced.

12:54So just for the benefit of your users, you cannot trade forward power in Texas on interactive brokers. I know that half of your audience. That's too bad. Everyone's like looking up there. That's what I did. Great. And this gives us a bunch of technical questions to get into.

13:24UKG, their HR, pay and workforce management tools help business leaders empower their people. Because when work works, everything works. Learn more at ukg.com slash work. Let's just keep talking about Texas. Explain to us kind of what the forward power curves are and how you can back out the implicit assumptions that traders are making based on those forward power curves about how much demand there's going to be. Sure. So, I mean, obviously, if you're going to go from 87, you're going to add 15 or 30, whatever it is, you'd expect that curve to go higher. What's the curve measuring? Okay, you say there's a forward power curve.

14:05So the forward power curve is around the clock, peak or off peak. There's three separate curves. And the difference between peak and off peak is actually narrowed because data centers run 24-7. So it depends on your North Texas or South Texas, and those are in the high 50s. But what would we be seeing in the curves for like – is there trading happening at the 20, 30, 10-er? 30 might not be so liquid, but 27 and 28 certainly are. But there is an other energy market. So if you look at Nat gas, for instance, although gas traders are really weird about the futures curve in gas, which I don't really understand.

14:40But if you look at that, you point out that over the longer term, it's downward sloping, which suggests that there isn't going to be as much demand or maybe there's going to be more supply out in the future. I love it. We're morphing into natural gas because that is the main driver of power prices, especially in Texas. And the forward curve for gas is much more liquid than it is for power. And the forward curve for gas is inverted. It goes from 370 to 360 by the end of the decade. So as my energy analyst, Charles Johnson, points out, the bigger driver there isn't data center demand. We're at 6 BCF a day there.

15:13A lot of people are up at 10, 12. We can get into that. But LNG exports, we're exporting 18 BCF a day now. We're going to add another 12. You'd think that curve would be at least upward sloping by 25 cents, 30 cents. By the way, you can trade that in your interactive broker's account. So that goes into, is there going to be a glut of LNG? It starts getting outside of my expertise. But that's what we heard from a lot of clients last week when we went on the road all over New York City. This is very interesting. I actually want to ask another question about the pure power curve. But since we are on LNG and then we can get back to the power curve, just setting aside data centers, et cetera, intuitively you would think that what is a growth business in the United States?

15:54LNG exports. And in fact, one of the sort of policy debates around the whole question of building out LNG terminals is it's going to make gas more expensive for American consumers because now we're going to be competing with European buyers. Whereas when we didn't have LNG export terminals, we were just swimming in it because it had nowhere to go. Nowhere to go. So it's very interesting to hear that even with everyone acknowledging A, booming domestic demand, and B, the expansion of international demand, that downward sloping gas curve. Yes. Maybe, I don't know, maybe they're reflecting world peace in Europe and Russia, LNG is unacceptable to the rest of the world.

16:33That could be a driver. Then they would have to rebuild that pipeline. Yeah. But back to our original conversation on demand, the reason I was talking to the Encore CFO and asking him about this is he said he's holding$2.5 billion of cash collateral postings from some of that demand. And he's like, you're not some Joe Schmo startup. I'm going to build a data center and connect to your grid if you're posting$2.5 billion. And he says, and this is what he said on their earnings call as well, that's real demand. That is coming. It's material. I'm sorry. Just now to go back to the power curve, which I get is much less liquid out there, but there are trades that happen.

17:10These are price – like how do you infer volume from price? Because these are price curves. We don't get the volume, but it's a yearly curve. And then right before the year starts, it splits into 12-month curves, and then it goes into weekly before. But what I'm saying is how do you infer what expected volume in 2028 is going from a price curve? Sure. It's flat. It goes up$1 from here to 2030. whereas if you're going to add 20 % to your grid demand, then you'd expect it to go up several dollars. And on the natural gas side, I'd want to see 40 cents, 50 cents. I see what you're saying. Something like that.

17:41And then just to go back to the fork, your upper 50s in Texas, low 60s for peak, and the data center companies are paying 95. So Vistra just did a deal off Comanche dollars a megawatt hour for around the clock. So Vistra contracted out its Comanche peak plant in Texas, $95 a megawatt hour. So big tech is paying a very pretty penny. You can argue some of that's for the CO2-free aspect of it, and some of it's just a lock in the supply. So just to go back to the math and your overall argument, I mean, you're basically saying that utilities are already committed to building out, I guess, twice as much capacity as is forecast to be needed by 2030.

18:20Yes. The wild card to me seems to be the demand forecast, right? And we're already seeing those change pretty wildly. I know you mentioned Bloomberg NEF, but they've raised their forecast because of the data center build out. So they've raised their forecast of how much energy is actually needed. How much confidence do you have in those demand numbers and how could they change over time? Moderate confidence, but look where we're at now. OpenAI built all the ChatGPT using two gigawatts. All the big tech hyperscalers, they haven't given their 2025 volumes yet. But if you take their 2024 volumes and then double it, and this is output, so I'm going to transfer it back to capacity, and you assume a 60 % capacity factor, all the hyperscalers combined are around 15 gigawatts.

19:07And that's got to be over half the data center demand. So to talk about 95 gigawatts, I mean, it's a staggering number. And then you get more advances in, you know, NVIDIA chip efficiency. Obviously, Jeven's Paradox kicks in. You've had numerous guests talk about that. It's just a lot of power, a lot of power. Can you just remind us one gigawatt is enough to power what? I like these comparisons. A million homes, but it depends if you're in Florida or the Northeast. But generally speaking, that's where you're at. Not only do I find electricity markets and market structure and electricity very difficult to wrap my head around.

19:42Even after all of these conversations, I have built no heuristics or intuitions for what these a gigawatt, kilowatt, megawatt, Like you say these things and I know gigawatts bigger than a kilowatt. Like what this actually means. And then the fact that even there we're talking about the difference between a gigawatt and a gigawatt hour. And like I've yet to develop the sort of intuitions that I have. Haven't you seen Back to the Future? Yeah. 1.1 gigawatts? Oh, there you go. We got to print out, you know, a little table. Yeah, I need a little cheat sheet. Like the way we used to do for credit ratings in a financial crisis.

20:15We need that up there. And actually credit ratings are going to be interesting from a utilities perspective as well. Can I just ask, obviously one of the sensitivities in general with all things data center and utilities is this view, and I think it's kind of overstated, is the average rate payer going to end up paying for a lot of data centers or will raise our electricity bill? And I understand like these are complex questions and the math isn't so clear. And also from what I understand, the emergence of a data center can actually lower a consumer's electricity bill because there's just that simple math, which is if there's more buyers splitting the cost of the build out, then actually your price tag can go down.

20:53But in the scenario you're laying out in which there's a bunch of upfront capital investments and everyone's very excited to build it out and that creates wires and you have to buy by transformers and gear and all this stuff. If the demand does not materialize as expected, that does sound like conditions in which we could see consumer rates go up. Absolutely. So that's what we're spending all our time on. And it's state by state. And even within the same state, you've got numerous jurisdictions. So is it legislatively mandated or is it done by a rate case? Or in the case of Northern Indiana, have the companies themselves, data center companies themselves, gotten ahead of it and said, we're going to put in a solution where rate payers are absolutely protected and get money back.

21:36So you look at Nysource, which is a Midwestern utility. They own Northern Indiana Public Service, NIPSCO. And they've got a deal where they've got an inside rate base. They've got a separate Genco. And that Genco is doing a deal with Amazon. And they're going to kick back a billion dollars over 15 years to rate payers. So rather than have a debate, oh, who's funding what? But it's like done and you get$67 million a year. And that's the blueprint. That's the gold standard. Yeah. Now, keep in mind, six months before that Genco was launched, NICER sold 20 % of NIPSCO to Blackstone. So you could argue Blackstone said, hey, let's go ahead and do this.

22:16And then the utility right north of Indiana or northeast of Indiana is Ohio. And the CEO of First Energy is an ex-Blackstone guy. So maybe they look at doing a Genco or something like that. That's pure speculation. I have no idea. PACGas, Pacific Gas and Electric, they've done a deal where they've got rates in place that protect presidential rate payers. Ameren has. But a lot of utilities don't. They don't have these protections. And the point is someone, if it turns out that there's an overbilled and there is not as much demand for it, someone's paying for it. And either it's going to be the customers or perhaps utility shareholders.

22:46I mean, you just – the political risk of having mom and pop bail out Mark Zuckerberg, Jeff Bezos is just – you can't have that happen. But again, six months ago, this was coming up on the tail end of conference calls. And now these utility CEOs are having in their prepared remarks. So I'm pretty confident they're going to figure it out. You mentioned Blackstone just then. I do want to talk about who is currently making a lot of money from the data center build out. But just to stress test the thesis a little bit more, because it is a contrarian take. And so I think we should ask a bunch of questions about it.

23:18But does it take into account time lags for projects? So I think, you know, capacity build out in the energy sector is notoriously bureaucratic. That is one thing that Joe and I do actually know about the sector. Is it possible that a lot of these committed projects actually take much longer to get working on the ground than currently forecast? I think the delays will be on building the new generation, not the data center. So a data center takes two, three years. Even if that slips to four or five years, the power plants take six, seven years. And as you know, you can't get a GE Renova gas turbine for years and years, which is obviously a bullish backdrop here.