| Katusa's Investment Insights | | Chinese Emissions. German Cost. And the Reliability of Baghdad. By Marin Katusa | | Publisher’s Note: - Last week’s Investment Insights featured a major risk to the power grid at the hands of AI and Tech – The Electric Pandemic.
- On Tuesday, July 9th we will publish a special presentation on this big theme – that you don’t want to miss.
| | | Dear Reader,
In early 2024, Amazon made an astonishing breakthrough on a near-impossible problem.
Its solution signaled a critical change in the future of both technology companies and energy companies.
Amazon wanted to acquire a data center campus in Pennsylvania and scale it up to nearly 1GW of capacity—a nuclear power plant worth of electricity.
The crux issue Amazon faces, is faced by every other tech and AI giant. And it’s not getting enough chips like you may think.
The crux issue is actually electricity.
Electricity must be: - Carbon-free,
- Low-cost and reliable.
Low-cost and reliable power are still relatively easy. Carbon-free is not.
As power demand ramps up, utilities have responded by turning up the dial on dirty energy.
Their response to rising power demand has been to keep high-emissions plants open far past their intended closing dates: - In Virginia, the epicenter of data centers, utilities have requested extensions on the lifespan of gas and coal plants.
- Wisconsin is delaying coal plant retirements—just for a new Microsoft data center.
- When Kansas City utility Evergy announced that Panasonic would be building a factory and Meta a data center, they also announced they’d be keeping a coal plant open to power the facilities.
Altogether, nearly two dozen coal plants across the U.S. that were slated for retirement are being kept open.
And utilities are building new gas plants. Across just the Southeast United States, they’ve proposed more than 33 GW of new gas projects.
Gas plants are one of the only ways for utilities to meet the magnitude of power required by data centers.
But knowing even that won’t be enough energy to power their operations, tech companies have begun taking matters into their own hands.
Tech Companies are Cleaning and Powering Up
For example, Microsoft is building its own $100M gas plant in Ireland to supplement power usage of a data center there. - You read that correctly: AI companies are so desperate for energy they’re building their own $100M power plants.
All so you can get Copilot in Microsoft Word.
And Amazon is working to deploy natural gas fuel cells at its Oregon data centers to mitigate problems with grid capacity.
Altogether, TD Cowen estimates that more than 75% of the new data center's electricity demand will be supported by natural gas, while Goldman Sachs predicts at least 60% of new data centers will be powered by natural gas.
Just one problem. Tech companies need clean, carbon-free energy.
“It’s going to be a challenge... to see carbon reduction at the same time we’ve got this unprecedented growth.” – Duke Energy North Carolina operations president Kendal Bowman
All the big tech giants, including Meta, Google, and Microsoft, have committed to 100% carbon-free operations by 2030.
So their billion-dollar energy grid buildouts are only good for the next five years.
Not only that but countries and states are cracking down on data center emissions.
A Net Zero Warning Shot to Corporations
In Loudoun County, more than 4,000 diesel generators have been permitted for data centers.
But that runs completely counter to the Virginia Clean Economy Act.
So… - Virginia has proposed a bill that would require data centers to eliminate diesel fuel use and procure all carbon-free energy to qualify for tax exemption credits.
Earlier this year, a bill was introduced in Congress that would require the federal government to develop a system for reporting the impact of AI on the environment.
And the EU’s AI Act, which goes into effect in 2025, will require the reporting of energy consumption, resource use, and emissions from AI systems through their life cycle.
So data centers and their utilities will soon be limited to building out renewables: solar and wind.
Power Plant Not Included
Wind and solar yields energy only on sunny or windy days.
But data centers require always-on, instantly available energy.
“The world is going to be short power. To power these data companies, you cannot have intermittent power like wind and solar… because you cannot turn off and on these data centers.”
– BlackRock CEO Larry Fink
That intermittence increases grid operators’ concerns that they will not be able to balance demand—and could increase shortages.
One major landlord of A.I. has a plan calling for a 13-fold increase in renewable energy sources…
And it will still need six nuclear reactors and a handful of natural gas plants.
The massive data center Amazon bought in Pennsylvania would take 42 square miles of solar—twice the size of the largest solar installation in the world.
In Mississippi, a power company is investing $2 billion to $3 billion in building out solar farms to supply just two data centers.
To confront the energy trilemma, tech companies are increasingly signing power purchase agreements (PPAs) with renewable energy suppliers.
PPAs let companies buy guaranteed power—usually a combination of wind, solar, and storage—at a set price for a set duration. It’s been a great idea, while it’s lasted.
Because the price of PPAs won’t stop going up.
In fact, they’re now the highest they’ve been since tracking started in 2018—and they’re showing no signs of slowing down according to LevelTen Energy, the largest aggregator of PPA transactional data worldwide. | | And when you add in battery storage, the levelized cost of electricity for renewable PPAs can exceed $200/MWh.
There’s only one option left for tech companies.
If They Can’t Buy it, They’ll Build it Themselves
So they’re transforming into AI Energy companies.
Aside from the inability to get sufficient power, it’s a cost issue: about 90% of ongoing data center costs comes from power.
Getting energy doesn’t just make AI possible—it makes it profitable. - A green-powered data center infrastructure is the greatest AI moat on earth.
Amazon has a strong lead over every other tech company. Its portfolio has more than 500 wind and solar projects, with enough power for more than seven million homes.
Meanwhile, Meta is betting big on batteries, and Google is going for geothermal.
But Amazon’s solution for its Pennsylvania data center reveals where the entire tech industry is headed.
Amazon needed a nuclear power plant worth of energy. So it didn’t go to the state utility or renewables or diesel generators.
It simply bought all the energy from a nearby nuclear power plant.
We’ve Needed an Energy Breakthrough for AI
And nuclear is the beginning of that breakthrough. The crucial part is what these new AI Energy companies are just now discovering.
It’s a new form of reliable, cost-effective, carbon-free energy.
And it’s finally here. - On Tuesday, July 9th, our team will release a special presentation on the “A.I. Kill Switch” that you don’t want to miss.
We’ve been talking about this and hinting of more to come behind the paywall of Katusa’s Resource Opportunities.
There are 3 major catalysts at play in the Electric Pandemic that we’ll get you prepared for.
And you’ll see why you need to get up to speed right away.
This is one of the biggest changes of the decade, and it’s just getting started.
Regards,
Marin Katusa | | | |
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