Bullish expectations for US electricity are attracting new power traders
A new class of traders is getting involved in US power markets, seeking opportunities to benefit from the boom in generative artificial intelligence, according to Sarah Kiernan, head of Americas Commodities Sales in Goldman Sachs Global Banking & Markets.
Power generation is in focus because data centers, which provide the computing muscle to train and support AI technologies such as large language models, require a growing amount of electricity. Goldman Sachs Research analysts estimate that data center power demand will grow 165% by 2030 (as of July 9, 2024). That adds to the increasing demand for power from electric vehicles and the onshoring of manufacturing and supply chains.
The fresh attention to power derivatives shows how the stock market rally that began in tech stocks is broadening to other assets that are expected to benefit from AI innovation. Kiernan says Goldman Sachs is having more conversations about the power market with hedge funds and asset managers, which haven’t traditionally been major players in the sector.
“This really became a major topic of conversation around February,” says Kiernan, who is also chief operating officer of global commodities within FICC and Equities. As interest in AI increased, “people were saying to themselves: ‘OK, what’s the next impact? What other markets should we be thinking about?’”
How much power do data centers consume?
At present, data centers worldwide consume 1-2% of overall power, but this percentage will likely rise to 3-4% by the end of the decade, according to Goldman Sachs Research.
The cost of power on the east coast of the US, one of the largest and most liquid power markets, started to rise around February and March, Kiernan says. The spark spread — the difference between the wholesale market price of electricity and the cost to produce it — has increased by roughly 50% this year and has nearly doubled over the past two years. Spark spreads have also expanded similarly in the key Texas market, as increasing interest from long-term investor buyers has been layered on top of a continuing supply migration from thermal assets (energy generated by burning oil, coal, or natural gas, for example) to more intermittent renewable resources.
Where are US data centers concentrated?
US data centers are particularly concentrated in the Virginia area. Goldman Sachs Research documented a rise in commercial power consumption there of 37% from 2016 to 2023, as power demand remained roughly flat in most other states.
“The ramp-up in Virginia started around late 2016, initially supported by crypto currency mining, and accelerated after a brief pandemic pause, as the use of data centers broadened,” Daan Struyven, head of oil research, says of Virginia’s power demand in the team’s report.
There’s also been rapid expansion of data centers in Phoenix, Atlanta, Dallas, Oregon (with hubs in Portland and Hillsboro), and Columbus in recent years, according to Cushman & Wakefield. Amid power constraints in some locations, there are signs that operators are widening their focus to the likes of Charlotte, Salt Lake City, Kansas City, and Indianapolis.
Kiernan has also seen a recent increase in power demand around Virginia and across the country. And while forecasts for the rise in total electricity demand in the US vary, when it comes to AI and data-center driven demand, “the hockey stick projection is expected,” she says. “The question is just what the slope of that hockey stick is.” Kiernan adds that discussions with utility and independent power producer clients have highlighted the sheer volume of requests they’ve received for bilateral contracts with data centers.
Investors are increasingly focused on power trading
The power market hasn’t traditionally been a mainstay for hedge funds and asset managers, because it’s less liquid than commodities like oil and copper, and prices tend to be harder to observe, Kiernan says. She points out that power derivatives, while available through on-exchange futures contracts, more often tend to be bilaterally traded, meaning that parties interact directly with each other in over-the-counter transactions.
But there are signs that interest levels are changing. “We’ve been having many more conversations with our investor clients, people who are maybe long the AI story in other ways,” she says.
At the same time, corporate clients, including independent power producers, also have questions. Kiernan says they’re discussing whether they should build new electricity generation, or work with firms like Goldman Sachs to lock in prices, given the potential for increased volatility driven by the uncertainty in both longer-term demand and sources of supply. Power consumers are also exploring the best ways to access the markets and lock in supply over the foreseeable future, including signing off-take agreements (an arrangement to buy product from a project at a certain price) with developers to incentivize new power builds where possible, or working with Goldman Sachs and others to directly access the wholesale markets and protect themselves from further increase in term prices.
What does AI mean for the gas market?
While natural gas is a key commodity for US electricity plants (estimated to have accounted for about 45% of the country’s power generation in July-August 2023), and a market that major investors may be more familiar with, AI and data centers alone are unlikely to drive enough demand to have a critical impact in that market. Kiernan says that if all the expected additional data center demand for electricity for the next seven years were met with gas, it would require about 2 billion cubic feet (bcf) of extra daily gas production. That’s very little compared with the recent ramp up in production that has already taken place since the shale revolution: The US has increased its daily gas production from 70 bcf to more than 100 bcf over the past decade.
“And then, of course, that ignores the important and definitely significant role of renewables,” Kiernan adds. “So we’ve been telling people generally, in our view, this probably isn’t a gas demand story,” she says. “There may be regional dislocations in gas prices, but from a macro perspective it is probably a power story. So they should be thinking about the right markets to be involved in, and the right size and their own considerations around risk tolerance and liquidity.”
Key reasons to be bullish on the power sector
Aside from the growing demand for power, Kiernan says the changing supply stack is also a key reason she’s optimistic about the market. As the US transitions to more renewable energy, coal and older gas-driven power plants are closing, and even nuclear plants were added to the decommissioning schedule in recent years. Those providers of large, stable, baseload “chunky” power supply are being replaced with intermittent renewable energy with lower capacity.
“We continue to be bullish on power and power volatility,” Kiernan says. “Each incremental piece of news has tended to build on and reinforce that view.”
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