AI companies seek solutions to avoid raising electricity prices

The AI revolution faces two challenges that have visibly intensified this month. Commercially, there has been a flurry of anecdotes from companies querying the value for money they get from AI tools. For example, Uber’s chief operating officer Andrew Macdonald noted that when he asked the company’s engineers about the impact of AI use on productivity, “that link is not there yet.” 

Meanwhile, the political backlash against data centre development has been gaining momentum. There are 14 US states where legislatures have been debating bans on new data centres, with support from across the political spectrum. Bans are being considered in Democratic states such as Vermont and New York, in Republican states such as Oklahoma and South Dakota, and swing states such as Pennsylvania and Georgia.  

Although energy is essential for AI, it affects the affordability of the technology only at the margin. The electricity used by data centres accounts for a small fraction of the total cost of AI services, a point that was sharply illustrated by the recent S-1 filing for SpaceX, Elon Musk’s space, communications and AI company. 

SpaceX revealed that Anthropic is paying US$1.25 billion per month to use capacity at its Colossus data centre complex in Tennessee. That capacity uses 300 megawatts of power. Even given that Colossus uses relatively expensive electricity from single-cycle gas turbines, the cost of the power is likely to be at most only about 5% of the price being paid by Anthropic. 

When it comes to AI’s political challenges, however, the energy it uses could potentially make a difference. Fears that new data centres will drive up electricity bills have been a key factor in local resistance to development.  

Growth in electricity demand, including demand from new data centres, has so far not had much impact on US power prices. However, it is starting to become a significant factor in some areas, including on the PJM grid that stretches from New Jersey to Tennessee.  

It is also becoming an increasingly prominent political issue. Last week, the governors of two states, New Jersey and Pennsylvania, published plans intended to ensure that new data centres do not drive up electricity bills for ordinary ratepayers. 

The big tech companies and data centre operators have already pledged to bear the full cost of the additional investment in generation and grid capacity needed to support their facilities. The Trump administration in March brought together the leading companies to sign the Ratepayer Protection Pledge, which includes commitments on adding new generation, covering the cost of grid upgrades, and supporting system resilience. 

But those commitments are easier to make than to implement. Utility regulation is generally set up to ensure that system costs are spread across all customers, not borne by specific users. And where increased demand puts upward pressure on costs through the supply chain, such as the price of transformers, there is no way to allocate that increase to specific data centres. 

The price of natural gas is another example of that problem. If demand for gas-fired power from hyperscalers and other AI companies drives up the prices of gas, that will increases costs for everyone. 

There are also widespread concerns about the environmental impact of increased power generation, both in terms of greenhouse gas emissions and local pollution. Environmental goals in general, and climate targets in particular, have been pushed down the agenda for governments and the private sector alike. But they can be expected to re-emerge in some form, the next time the political pendulum swings. 

In that context, innovation in energy technology is critical. Last week, there was an announcement of an unusual collaboration between the four largest hyperscalers – Microsoft, Amazon, Google and Meta – to support innovation in new energy and materials technologies for data centres. The four companies are working with the non-profit investment group Elemental Impact and other philanthropic groups to support up to 10 technology startups with US$500,000–US$5 million per project by the end of 2027. 

The numbers involved are not large in terms of energy investment, and certainly not in comparison to the projected US$850 billion capital spend by the eight leading US technology companies this year. But they do send a signal that the hyperscalers want to contribute to taking on the challenges of upward pressure on prices and rising emssions created by their growing demand for energy.  

Dawn Lippert, CEO and founder of Elemental Impact, said the historic data centre buildout was an opportunity to commercialise new technologies to “deliver more positive impact for communities, including affordable, reliable energy”. 

The big problem for this kind of initiative is that the AI industry is moving very fast, and any new energy technologies are unlikely to be available at sufficient scale to make a material difference within the next ten years, at least. Even those new technologies that long periods of development behind them, including small modular reactors and fusion power, are unlikely to play much of a role in the US generation mix even? in 2040.  

If the AI industry is to solve the immediate challenges of commercial viability and social acceptance that it faces, it will have to do so using the technologies that are available today. 

The Wood Mackenzie view 

Ben Hertz-Shargel, Wood Mackenzie’s global head of grid transformation and large loads, and Chris Seiple, our vice-chairman for energy transition and power & renewables, recently published a Horizons paper assessing prospects for data centre companies seeking the fastest possible routes to getting capacity powered up and on line.  

The paper underlines the point that a grid connection is almost always the ideal power source for data centres. Supply from the grid is usually a lower-cost and more reliable solution than onsite power. Relying on collocated generation poses formidable technical challenges. But if getting connected to the grid takes too long, then “bring your own power” may be the second-best solution. 

Political pressure over household electricity bills is adding to the pressure to develop collocated power supplies. As electricity bills continue to rise, and energy affordability becomes an increasingly urgent political issue, the likelihood of more government intervention in power markets increases. That could mean further restrictions and requirements for data centres and other large loads seeking supply agreements. 

The data centre companies that have the capability to operate reliably without firm grid service will be able to scale their AI business faster than others, Hert-Shargel and Seiple say. That could give those companies a crucial competitive advantage in the AI race. 

Iran peace deal predicted, but not confirmed 

For the past ten days, there have been persistent news reports that the US and Iran are close to agreeing a short-term peace deal, perhaps lasting 60 days, that would allow shipping to flow freely through the Strait of Hormuz again. At that time of writing, no such agreement had been announced. 

Reports suggested that both the US and Iranian leaders had reservations about key provisions in the proposed deal agreed by their negotiating teams. President Donald Trump posted on social media in the small hours of Monday morning that Iran wanted to make a deal, and people should “just sit back and relax”. He added: “It will all work out well in the end - It always does!" Sporadic attacks from both sides continued over the weekend. 

Meanwhile, transits through the strait remain at very low levels. Wood Mackenzie analysts have just published their assessment of the possible implications for energy and the world economy in three different scenarios for the re-opening of the strait: a quick peace agreement, a slower-paced settlement reached over the summer, and extended disruption lasting until the end of the year. 

We project that extended disruption would send oil prices significantly higher, and tip the world economy into recession. 

Oil prices fell last week as the prospect of an end to the disruption in the Gulf has appeared to move closer. Brent crude was trading at about US$94 a barrel on Monday morning. But a rapid decline in inventories has highlighted the risk of market tightness if the Strait of Hormuz is not reopened. 

There was a 9.1 million barrel drawdown from the US Strategic Petroleum Reserve in the week to 22 May. That was the second-largest on record, behind the previous week’s draw of 9.9 million barrels.  

At the current pace of decline, the level in the SPR would in about two weeks drop below its previous recent low point of 347 million barrels, reached in the summer of 2023. If that happens, it would be its lowest since it was first being filled in the early 1980s.  

Neil Chapman, a senior vice president at ExxonMobil, warned at a conference last week that “we’re approaching unheard of inventory levels… I mean really, really low levels.” 

He added: “You can debate whether that’s going to hit, those really low levels, in two weeks or three weeks. Once you get to that point, then you’ll see price shoot up.” 

In brief 

The US government held a highly successful lease sale of acreage on federal land in New Mexico’s Delaware Basin, raising just over US$4 billion in high bids. It was the highest total ever for a US lease sale. The biggest buyer was Devon Energy, which is spending about US$2.6 billion to add about 400 net locations to its undeveloped inventory. That spend works out at an average of US$162,000 per acre for about 16,000 acres. The other big buyer was Matador Resources, which won 5,154 acres at a cost of US$1.1 billion. 

Chris Atherton of Efficient Markets, which facilitated the sale for the government’s Bureau of Land Management, described the Delaware Basin as the hottest play in American oil and gas, and the dead center of the most competitive acreage market on earth. Several factors explained the high level of interest, he added: “Best rock, best well returns, improving infrastructure, and a new demand catalyst from power-hungry data centers.” 

The Board of BP unanimously decided that Albert Manifold should no longer serve as chair and a director of the company, with immediate effect. The move followed concerns raised to the board related to governance standards, oversight and conduct. His removal comes less than eight months after he started as chair last year, and less than two months since the new CEO Meg O’Neill began in her role. 

Other views 

How quickly can Gulf oil exports recover? – Simon Flowers and others 

6 questions answered on the return to global shale exploration – Robert Clarke and Josh Dixon 

Middle East conflict disrupts major metals and mining markets, threatening global supply and prices 

China sets to control 39% of global lithium extraction by 2030 

China’s crude levers – Michal Meidan 

Climate Intuition: Food security under pressure: Iran conflict disruptions and a brewing El Niño – Sarah Kapnick 

Quote of the week 

"Britain's emissions are around 1% of global emissions. So we can't solve climate change. And to impose costs on our own business and consumers in order to accelerate to net zero, when the rest of the world is not doing so, is, I don't understand the logic behind it… Or shutting down our own North Sea oil and gas industry in circumstances where again, I don't know of another country in the world that's doing that if there's still a requirement to import energy from oil and gas." 

Tony Blair, the former prime minister, spoke on the Times Radio podcast about the UK’s energy policy, and advised the present government to abandon its Net Zero emissions strategy. 

Chart of the week 

This comes from our new note on the possible implications of the conflict in the Middle East: ‘Strait talking: Iran war scenarios and the future of energy’. It shows projections for global GDP growth in our three scenarios: Quick Peace, Summer Settlement, and Extended Disruption. If a deal can be reached quickly to reopen the Strait of Hormuz, the war could end up being no more than a speed bump for the world economy. If the strait remains closed until the end of the year, the consequence would be a global recession. Check out the full report for much more detail on our views on possible outcomes.