For those of you who would prefer to listen:
America is hitting an energy bottleneck as the AI revolution accelerates power demand to unprecedented levels. Data centers supporting the computing power are popping up all over the country which has created a need for clean and sustainable sources of energy. The ability to fuel them is getting stretched. Something’s gotta give. America is struggling to power the Digital Age.
Something happened last week that sent the Energy Industry buzzing. Microsoft announced a partnership with Constellation Energy to revive 3 Mile Island. Microsoft will purchase the carbon-free energy produced from the Pennsylvania plant to power its data centers to support artificial intelligence. Demand for clean, reliable and cost-effective energy has never been greater. These data centers need to run at full capacity 24/7. Nuclear is able to stay on at all times of the day and night, unlike wind and solar.
If 3 Mile Island rings a bell, it’s because it was the site of the worst nuclear disaster in American history. A separate unit of the plant was shut down in 1979 after experiencing a partial meltdown, in one of the biggest commercial nuclear accidents in U.S. history. This unit that Microsoft and Constellation are revitalizing was not involved. Unit 1 was still operational until 2019 when it was shut down for economic reasons. The economics have changed.
America has been moving swiftly towards electrification. However, the infrastructure is simply not ready for the increased demand. The electric grid in the U.S. was created nearly 150 years ago. It essentially began in New York City with Thomas Edison’s Pearl Street Station in 1880 and expanded with contributions from innovators named Westinghouse and Tesla. The grid evolved over time with innovations such as long-distance transmission lines, hydroelectric dams, and smart grid technologies. That’s essentially where they are today.
The U.S. electric grid is a vast network connecting Thousands of electricity generators to Millions of consumers. The system links public and private enterprises operating within a web of government institutions: Federal, State, and Local. It consists of 6 Million miles of transmission and distribution lines owned by over 3,000 enterprises. Power plants are basically large facilities sending power out to points of consumption. Major improvements and developments were made in the 1960s and 70s, but it’s still quite antiquated by today’s standards. They’re also proving very vulnerable to cyberattacks in this Digital Age.
Wall Street is getting involved to help fund the AI infrastructure. Blackrock, Microsoft and Nvidia announced a deal to build The Global AI Infrastructure Investment Partnership. It’s expected to be one of the biggest investment vehicles ever raised on Wall Street.
People are calling this Energy renaissance the “Electrification of Everything”. AI is reshaping what’s happening on the grid. Data center infrastructure growth has changed the landscape. It’s energy intensive. The system wasn’t ready. There’s been an unanticipated load and demand growth. It’s an outdated infrastructure that supports an equally old and cumbersome business model. The system is run by vertically integrated utilities. When a utility is vertically integrated, one company owns the power generation source and the wires that transmit the power from the plant into your home. They used to be mostly coal fired plants too. This type of system favors large, centralized generation sources and the large institutions that own them. It’s ripe for disruption for greater flow and efficiency.
Modernizing our “electric highway” by adding new capacity will enable new companies and new energy sources access to the grid. Competition will raise the bar. This will provide consumers more choices which should in turn increase quality of service and lower power prices. Did you know that one of the largest expenses for utilities today is trimming trees? Maintenance and power outages from wildfires and storms is very costly. Better forecasting and more efficient management will enhance production. AI is proving to increase both demand and solutions for America’s energy needs.
Perhaps the most important attribute to energy needs is reliability. It needs to work. That was the case with coal, but it was dirty and less efficient. Natural Gas and Nuclear are playing a huge role today, accounting for 60% of America’s power. Renewable energy like solar and wind have made serious strides, but they cannot be considered reliable yet. We need power when the sun doesn’t shine, and the wind does not blow. Nuclear is the cleanest source of electricity that can scale.
America is seriously reconsidering nuclear for its reliable energy needs. The Palisades nuclear plant in Michigan was destined for closure until the Federal government stepped in with over $1 Billion to save it. PG&E’s Diablo Canyon nuclear facility in California was set to close this year before Governor Newsom signed a bill to extend its operation to 2030. Former Microsoft CEO Bill Gates invested $1 Billion in a nuclear power plant that broke ground in Wyoming this Summer. The plant will power both homes and AI. Nuclear is increasingly viewed as a viable option again. Of course, it’s inevitable that some still equate nuclear reactors with Chernobyl, Fukushima and Homer Simpson. It’s paid to trust Science over Simpson.
The Street now expects a 4% increase in power consumption by the end of 2026. To put in perspective, Japan accounts for 4% of global power consumption today. There will need to be enough power to provide for another Japan. Utilities are like growth companies and their stocks in 2024 reflect it. Demand for uranium is expected to increase by 30% by the end of the decade and double by 2040. It’s very investable.
Other sources are gaining traction. Wind turbines generated more electricity in the U.S. than coal-fired power plants in March and April, according to the Energy Information Administration. That marks a new milestone in the country’s energy transition. Innovation has led to a lowering of costs to build renewable energy infrastructure. Tax credits under the Inflation Reduction Act and states mandating utilities need to support growth in clean energy contributed too. That said, fossil fuels still account for the majority of electricity generation in the U.S. in 2024.
Despite all the advancements and innovation, the World still runs on Crude. That has been abundantly clear since Covid and the war in Ukraine. Supply disruptions nearly crippled the Global Economy once demand picked back up. The U.S. is currently producing at a record pace of over 13 Million barrels of crude per day. That is substantially more than any country, including Saudi Arabia. The output growth has helped tame gas prices and, perhaps more importantly, undermined the influence of OPEC and Russia following its invasion of Ukraine in 2022. This has clashed with the Biden administration’s clean energy agenda, though for the time being, inflation concerns and energy independence leaped to the top of the priority list.
OPEC+ (Organization of Petroleum Exporting Countries) has curbed supplies in recent months in order to help defend Oil prices. There have been nearly 6 Million barrels per day removed from circulation. The organization, led by Saudi Arabia, extended its cuts of 3.6 Million barrels per day until the end of 2025, but additional reductions of 2.2 Million barrels per day would start to unwind over the next 12 months, starting in October. They were initially due to expire at the end of June. The decision to extend the production cuts is a clear acknowledgment that demand growth is still uncertain. The Global Economy keeps slowing.
OPEC+ is effectively betting that Oil demand is going to be stronger in 2025. OPEC+ holds much of the world’s spare production capacity, but also that supply growth from outside the group has been enough to meet the increase in global demand. The United States has become the swing producer, much to OPEC+ chagrin.
West Texas Intermediate (WTI) crude fell to the low $60’s to start September. That was the low on the year. That brought great reprieve for American drivers over Labor Day, experiencing an average $3.40 per gallon at the pump. That was the lowest gas price since June of 2021. Oil jumped back towards $70 to close out the month but remains way off the $100 mark that OPEC+ is targeting with its new roadmap. Saudi Arabia is still highly reliant on Oil revenue. It funds over half the kingdom’s annual budget. It is believed the Saudi’s need $96 Oil to balance its budget. 2 things happened this week that sent prices lower again. Libya resumed Oil production while Saudi Arabia seems to have thrown in the towel on trying to get $100 Oil, now favoring market-share gains over price support. That has WTI back below $70 again.
Despite 2 major ongoing wars, Geopolitics have failed to generate any significant reaction in Oil prices. It goes to show how well supplied the market is. Besides, some nations, like China and India, are importing crude from shadow fleets, mostly Iranian and Russian. The production cuts and subsequent roadmap from Saudi Arabia bought some political goodwill in Washington by helping the U.S. craft a more comprehensive energy policy which it lacks. The time is far past due to come up with a long-term, comprehensive energy policy for America.
Leaders throughout the Middle East have strong incentives to make sure the current conflict doesn’t expand beyond the engaged regions. So far, according to our sources, they have acted accordingly. The Gulf states have been trying to re-establish their diplomatic relationships with both Israel and Iran. Everyone seems aware that these desired economic and sociological transitions are impossible with a militarized Iran. Saudi Arabia is the most visible. The country has spent $3.2 Trillion to move away from Oil and become a logistical hub. The kingdom wants to be a hub for tourists, for FinTech, and other innovative industries. Saudi Arabia is embracing the Digital Age.
100% of Iranian exported Oil goes through the Strait of Hormuz. That is the main passageway from the Persian Gulf. It has no other option. The strait is just 30 miles wide at its narrowest point. It is definitely not in Iran’s interest to shut down the strait, considering how much it and its neighbors depend on it. Doing so would take 20 Million barrels per day out of circulation. That’s nearly one-third of the daily Oil trade. Shutting the Strait of Hormuz down would send the price of Oil skyward, creating a certain shock. For Iran, it would be an act of desperation. The probability of a shutdown isn’t zero, but it is very low.
Things have changed over the years. Five decades ago, the majority of Gulf Oil was exported to the United States and Europe. Today, two-thirds of that Oil goes to Asia. China is the biggest buyer. Geopolitically the situation is so much different. America’s energy independence has changed the global landscape and enhanced our national security. We are no longer dependent on foreign Oil.
Boom-bust cycles are normal for the Oil industry. Producers know that while times are good, demand can quickly plateau followed by declines. That has been the case this year, while the U.S. has been exporting more Oil than nearly every member of OPEC. Industry leaders had been preparing for it, turning to mergers and consolidation to squeeze more efficiencies from their production and raise their competitiveness as the cheapest barrels on the market. But long-term demand still looks strong, led by younger demographics in emerging markets.
Eyeing growth in India, Africa and the Middle East, as well as a slower adoption of EVs and greener fuels, OPEC sees global Oil demand rising into 2050. The organization sees Oil maintaining a 30% share of the energy mix with other sources. This year there has been further recognition that the world can only phase in new energy sources at scale when they are genuinely ready. The group expects Oil demand to reach 120 Million barrels per day in 2050 compared to 102.2 Million today. Despite the market share gains for alternative energy, crude will still be key for decades.
The United States is awash in Natural Gas. It’s 50% cleaner than crude and coal. Liquefied Natural Gas (LNG) capacity is anticipated to nearly double over the next two years. That would have it close to 20 Billion cubic feet per day (Bcfd). The U.S. consumes approximately 88.6 Billion cubic feet per day, while its production has been averaging around 124 Billion. This surge in export capacity could draw down those excess supplies and lead to stronger prices. The price of Natural Gas is $2 today. It was $9 two years ago. LNG exports could represent as much as 20% of the total dry gas produced in the country within a few years. That would make our friends in Europe and beyond safer with stable supplies from one of its chief allies.
The White House is throwing its support behind building large-scale nuclear reactors. The last commercial-scale nuclear reactor built in the U.S. was Southern Co.’s Vogtle project. It came in more than $16 Billion over budget and 7 years behind schedule. The Biden administration said nuclear energy is needed to meet climate and clean power goals, but a dozen reactors have closed since 2013, losing out against cheaper power from natural gas and renewable energy sources. The 3 Mile Island announcement by Microsoft sure changed the thinking on that trend. Nuclear is back to the future.
Fusion: That’s the future. Fusion energy is a potential energy source that uses the heat from nuclear fusion reactions to generate electricity. In a fusion reaction, two lighter atomic nuclei combine to form a heavier nucleus, releasing energy in the process. How it works: Fusion is a complex process that involves forcing two nuclei together that would normally repel each other. This can be done by increasing temperatures to 150 Million degrees Celsius, which is 10 times hotter than the Sun’s core. Fusion is the nuclear reaction that powers the Sun and other stars. Fusion offers a potential long-term energy source that uses abundant fuel supplies and does not produce greenhouse gases or long-lived radioactive waste.
The U.S. government started supporting the research and development of fusion energy in the 1950’s at the Atomic Energy Commission. That was the predecessor today’s Department of Energy. Support not only continues today; It’s expanding. MIT is studying ways to develop materials capable of separating super-hot plasma from the energy-generating coolant while also mitigating the damage that occurs along grain boundaries, or defects in a metal’s atomic structure. I’m not exactly clear on what this means. But scientists and MIT and beyond sure are. And they’re very optimistic about what’s possible ahead. There’s no time travel yet. But much has been developed since the flux capacitor and the DeLorean reached 88 MPH in 1985. Doc Brown sure would be proud.
Here is the stated vision of the Future Grid, from the United States Department of Energy:
A seamless, cost-effective electricity system, from generation to end-use, capable of meeting all clean energy demands and capacity requirements, with:
- Significant scale-up of clean energy (renewables, natural gas, nuclear, clean fossil)
- Universal access to consumer participation and choice (including distributed generation, demand-side management, electrification of transportation, and energy efficiency)
- Holistically designed solutions (including regional diversity, AC-DC transmission and distribution solutions, microgrids, energy storage, and centralized-decentralized control)
- Two-way flows of energy and information
- Reliability, security (cyber and physical), and resiliency
Ideas are being explored around what’s called a “Transactive Energy System”. It’s operated with smart devices. To get an idea of what that might entail, consider this: In such a connected, digital system, the power grid, homes, buildings, appliances and charging stations would be in constant contact. Those smart devices would receive forecasts of energy prices throughout the day and develop an efficient strategy to optimize consumer preferences while reducing cost and overall electricity demand. It would really target inefficiencies and waste. Coordination would come at the local level balancing overall demand with the larger wholesale market. All parties would negotiate energy production and consumption levels, cost, timing and delivery in a dynamic pricing scheme. Work is being done here real time as the future of energy is mapped out.
PG&E launched a pilot program called “Vehicle to Everything” (V2X) which allows customers with electric vehicles to use their car battery to also power their home. This can be done during power outages, as a means of backup power, or during peak hours when it is more expensive to pull electricity from the grid. Storage is clearly the key for renewables. Companies like LG, Generac, Tesla and Enphase have batteries in circulation that provide power to homes and places of work during outages. These are considered computable problems. Software is the solution. We’re seeing the advancement of autonomous systems and operations within the grid and it’s doing wonders.
All of this incredible innovation has failed to address something incredibly important: Reliability, stability and security. Artificial Intelligence and a comprehensive energy policy requires complete alignment between technology and policy. Leaders in Silicon Valley and beyond need to have meaningful collaboration with leaders in Washington and beyond. Private/Public partnerships are essential. We need collaboration between all stakeholders and proper regulation. And we need it now. The lack of leadership in Washington results in no sense of urgency. But the innovation is happening whether we’re ready or not. Falling in the wrong hands can be devastating. Bad actors act bad. Good actors need to be intentional and thoughtful, with a purpose. Our future depends on it. One has to question whether humanity makes the right decision. Stay tuned on that. We’re tracking it very closely.
Oil was the prize in the 20th century. Growing nations coveted it. Wars were fought over it. Oil powered the globe after World War II. The United States emerged supreme. The 21st century could very well be won with nuclear powered AI. Nations are scrambling for strategic positioning in this Digital Age. America remains on top. China and others have goals of taking the lead. Massive investments are being made. More will come. The future of Energy is very investable. We’re already there.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
