AI could drive natural gas boom as utilities face surging power demand

According to Wells Fargo, AI data centers alone are expected to add about 323 terawatt-hours to U.S. electricity demand by 2030. The AI-driven predicted electricity demand alone is seven times greater than New York City's current annual electricity consumption of 48 terawatt-hours. Goldman Sachs predicts that data centers will account for 8% of total US electricity consumption by the end of the decade.

Rapidly increasing demand for electricity is posing a challenge for Amazon, Google, Microsoft and Meta. Tech companies are working to power their data centers with renewable energy to reduce their carbon footprint. But solar and wind power alone may not be enough to meet the electricity load, as they are dependent on the weather, according to an April memo from consulting firm Rystad Energy.

According to Rystad, as power loads surge, there will be a need for energy sources that can jump in and meet the surge in demand in situations where renewables cannot generate enough power. The natural gas industry is betting that gas will become the preferred option.

“These types of needs demonstrate that the emphasis on renewable energy as the sole source of electricity is fatally flawed when it comes to meeting real market demand,” said pipeline operator Kinder.・Richard Kinder, Morgan's executive chairman, told analysts at the company's first press conference. April quarterly results.

“The primary use for these data centers is big technology, and I believe they are starting to recognize the role that natural gas and nuclear power have to play,” Kinder said on a conference call. Kinder Morgan is the largest natural gas pipeline operator in the United States with a 40% market share.

A Goldman Sachs report released in April predicted that 60% of the growth in electricity demand from AI and data centers will come from natural gas, with the remaining 40% coming from renewable energy.

Gas demand could increase by 10 billion cubic feet per day by 2030, according to Wells Fargo. This represents a 28% increase compared to the 35 bcf/d currently consumed for electricity generation in the U.S. and a 10% increase compared to the 100 bcf/d total national gas consumption.

“That's why people are becoming more bullish on gasoline,” equity analyst Roger Reed, one of the authors of the Wells Fargo analysis, said in an interview. “That's a pretty high growth rate for a product.”

Demand forecasts vary, however, as analysts are only just beginning to piece together what data centers mean for natural gas. Goldman forecasts gas demand growth of 3.3 bcf per day, while Houston-based investment bank Tudor Pickering Holt & Co. predicts a base-case increase of 2.7 bcf per day and a high-case forecast of 2.7 bcf per day. The amount is expected to be 8.5 bcf.

Toby Rice, CEO of EQT, the largest U.S. producer of natural gas, said utilities need energy that is reliable, affordable and can be deployed quickly to meet growing power demand. He said he needed it.

“Speed ​​to market is important,” Rice said on CNBC's “Money Movers” in late April. “This will be another differentiator for EQT and natural gas to capture a very large portion of this market share.”

Rice told analysts on an April earnings call that EQT is positioned to be a “major facilitator of data center construction” in the Southeast.

The Southeast is the hottest data center market in the world, and Northern Virginia is in the midst of a boom, hosting more data centers than the next five largest U.S. markets combined. Approximately 70% of the world's internet traffic passes through the region every day.

Utility company Dominion Energy predicts data center demand in Northern Virginia will more than double from 3.3 gigawatts in 2023 to 7 gigawatts in 2030.

Further south, Christopher Womack, CEO of Southern Company, Georgia Power's parent company, said during the utility's fourth-quarter earnings call in February that Georgia Power expects retail electricity sales to begin in 2028. He said he expects 80% of demand to come from data centers, with a 9% increase by 2020.

“Accelerating economic growth, electrification and data center expansion are driving the most significant demand growth in our company's history,” Dominion CEO Robert Blue said at the company's investor conference in March. “And demand shows no signs of slowing down.”

Rice said on the earnings call that the surge in power demand in the Southeast is right in front of EQT's asset base in the Appalachian Basin. The CEO said coal-fired power plant retirements and data centers could create 6 bcf of new natural gas demand in EQT's backyard by 2030.

EQT recently acquired the owners of the Mountain Valley Pipeline, which connects southern Virginia to the rich natural gas reserves it operates and develops in the Appalachian Basin. EQT is the only manufacturer with access to the growing data center market through its pipeline, said Jeremy Knopp, the company's chief financial officer.

“I think we're in a very unique position in that sense,” Knopp said during the conference call. Rice said the Southeast will become an even more attractive gas market than the Gulf Coast within 10 years. EQT plans to expand the Mountain Valley pipeline's production capacity from 2 bcf/d to 2.5 bcf/d. The pipeline is scheduled to be operational in June.

The level of electricity demand could lead to a break from the slump in natural gas prices.

Strong production, reduced demand due to a warm winter, and historic U.S. inventory levels caused prices to fall by more than 30% in the first quarter of 2024. By 2030, prices could average $3.50 per 1,000 cubic feet, 46% higher than in the past. According to Wells Fargo, the average price in 2024 is $2.39.

In its 2023 resource plan, Dominion laid out scenarios for adding 0.9 to 9.3 gigawatts of new natural gas capacity over the next 25 years. The utility said gas turbines will be important to fill the gap if production from renewable sources such as solar power declines. The turbine will be dual-purpose, allowing clean hydrogen to be extracted at some point.

“We're building a lot of renewable energy and all of our customers are asking for it, but we need to make sure we can operate the system reliably,” Blue told analysts on Dominion's earnings call Thursday. “There is,” he said.

Reed, the Wells Fargo analyst, told CNBC that renewable energy plays an important role in meeting demand, but faces challenges to making gas attractive until at least 2030. .

He said much of the renewable energy will be located in areas not directly adjacent to data centers. Analysts said building power lines to transport resources to areas of high demand will take time.

Another current constraint to renewable energy is that currently available battery technology is not efficient enough to power data centers 24 hours a day, said investment firm Tudor Pickering Holt & Co. said Zach Van Everen, director of research.

Wells Fargo says nuclear power has the potential to replace gas and has the advantage of providing carbon-free energy, but new advanced technologies that shorten typically long project schedules will not have a meaningful impact. It is likely that it will take 10 years.

Robert Kinder, CEO of pipeline operator Kinder Morgan, said there will be no significant new nuclear power plants coming online in the foreseeable future, and that renewable energy from far away sources will not be brought into the grid. He said it would take years to build the power lines to connect. This means natural gas will have to play an important role for years to come, Kinder said on the company's earnings call in April.

“I think acceptance of this hypothesis will become even clearer as electricity demand increases over the coming months and years. It will be profitable,” Kinder said. He said.

Any attempt to expand natural gas to meet America's energy needs will likely run into opposition from environmental groups who want an early phase out of fossil fuels.

Goldman Sachs estimates that carbon emissions from data centers will more than double by 2030 to about 220 million tons, or 0.6 of global energy emissions, assuming natural gas supplies the majority of electricity. It is predicted that this could increase to %.

Virginia requires all carbon-emitting plants to be phased out by 2045. Dominion warned in its resource plan that the phaseout could create system reliability and energy independence issues and that the company relies on purchasing power across state lines to meet demand.

Duke Energy CEO Lynn Good said natural gas “could be a difficult topic” but that utility companies have been in the market since 2005 as dirty coal-fired power plants were replaced. Fossil fuels are responsible for 45% of emissions reductions, he said. Good said North Carolina's electricity demand is growing at a pace not seen since the 1980s and 1990s.

“Natural gas has a role to play as we look for ways to expand our systems to approach this growth over the coming years,” Good said at the Columbia Global Energy Summit in New York City in April. I think there is a role to play.” The CEO said natural gas is needed as a “bridging fuel” until more advanced technology becomes available.

“All of the above strategies are the only way we see how we can maintain the reliability and affordability that our customers rely on,” Good said.