As technology strides forward, the world's energy demands have skyrocketed, with artificial intelligence (AI) at the forefront of this surge. This escalation poses significant challenges and opportunities—an area we have recently begun to delve into. The rise in energy requirements extends well beyond AI. Data centres are vital for powering our digital landscape, cryptocurrency mining operations require massive amounts of juice, and the widespread adoption of electric vehicles contributes to the exponential growth in electricity demand. So, how are we going to power the future? This important question opens a vast field of both risks and rewards, steering us towards exploring the dramatic rise in energy demand and the unfolding opportunities within energy supply and infrastructure. Technological Drivers of Increased Energy DemandData Centres and AI The excitement surrounding generative AI and its advanced digital capabilities comes with significant hardware demands. This need for extensive data processing to generate human-like speech, text, images, and videos has escalated the demand for data centres (large facilities filled with computing equipment) on top of the already steep rise in cloud computing needs. For context, there’s no better example than Microsoft's (NASDAQ: MSFT) rapid expansion, which is opening a new data centre globally nearly every three days. The ongoing development of AI and transition to cloud services indicates significant escalation for the industry, with forecasts suggesting that generative AI could account for a third of the total energy consumed by data centres globally as early as next year. According to S&P Global Commodity Insights, by 2035, the energy-intensive facilities in the U.S. alone are expected to use over 480 terawatt hours of electricity annually—nearly one-tenth of the country's total usage and more than double their consumption in 2022. Globally, the International Energy Agency estimates that data centres' power demand could exceed 1,000 terawatt hours by 2026, doubling their usage from 2022 and matching Germany's entire power consumption. Supporting these figures, Morgan Stanley predicts a 70% yearly increase in power needs for generative AI throughout this decade, with the demand intensifying as AI models become more complex and powerful. Electric Vehicles The global shift toward electric vehicles (EVs) is placing unprecedented pressure on energy grids. As EV adoption accelerates, the demand necessitates robust charging infrastructure. This infrastructure must be capable of supporting numerous, often simultaneous, charging sessions that require substantial electrical power. The integration of EVs into the mainstream auto market compels utilities to upgrade and expand their energy production and distribution systems to accommodate the growing load and ensure reliability and efficiency in power delivery. Cryptocurrency Mining Cryptocurrency mining is also a notably power-intensive process. Mining operations, which secure and verify transactions across blockchain networks, require substantial computational power and, consequently, vast amounts of electricity. This significant energy consumption not only impacts local power grids but also contributes to broader global energy demands. As the popularity of digital currencies grows, the strain on existing energy infrastructures intensifies, prompting calls for more sustainable mining practices and the exploration of energy sources that can accommodate high energy use without compromising environmental goals. Addressing the Limitations of Aging Energy InfrastructuresIt is evident that the current energy infrastructure is significantly challenged in accommodating the rapid rise in demand driven by new technologies. In the U.S., traditional power grids, designed for steady, predictable loads, are now struggling to manage the spikes and fluctuations caused by data centres, electric vehicles, and cryptocurrency mining activities. These grids are not only ageing but are also often based on outdated technologies that are ill-equipped to integrate large-scale renewable energy sources effectively. Additionally, slow planning and permitting processes for new projects and supply chain issues pose substantial hurdles. These factors are complicating efforts to enhance generation and transmission capacity to meet the soaring demand. Therefore, betting on a future dominated by AI plus the electrification of vehicles, currency and more of our daily lives also requires confidence in the energy infrastructure's ability to support it. So, where will the power come from then?The urgency for innovative solutions is clear: we need to develop more adaptable, resilient, and efficient energy systems. The debate on whether renewable energy alone can meet escalating power demands is ongoing. With the U.S. government offering US$1 trillion in incentives to enhance the green energy grid and tech giants like Google (NASDAQ: GOOG) and Microsoft pushing for eco-friendly operations, the stakes for transitioning to sustainable energy sources are high. However, even as renewable sources expand, they struggle to match the voracious energy appetite of new technologies. Despite ongoing discussions about reducing fossil fuel consumption, history has shown that human predictions and forecasts in this area often fall short. With the relentless energy demands of AI now in the equation, this trend is unlikely to reverse in the near future. No matter your stance in the green-energy debate, it's evident that the increasing electricity demand heralds a prosperous period for both fossil fuels and renewable energy sources. Investment Opportunities in Energy InfrastructureThe rising electricity demand could potentially unveil numerous growth opportunities for discerning investors. Each of the following presents unique prospects: Natural gas The firms that supply the much-needed fuel to power utility companies should stand to benefit as energy demands surge, including ExxonMobil (NYSE: XOM) Nuclear power companies Positioned advantageously for their ability to provide clean, continuous power, these firms are becoming increasingly attractive for data centres that prefer to be located adjacent to power sources. This setup avoids the costly process of connecting to the broader grid. Companies like Constellation Energy (NYSE: CEG) have proven fruitful investments for our Global High Conviction strategy. Fuel-cell manufacturers These companies are gaining traction as their technology is ideal for data centres requiring stable power. They can provide a reliable energy source that complements the variable nature of renewable energies. Power purchase agreement providers Providers of power purchase agreements (PPAs), particularly those involved with wind and solar energy, are strategically positioned to secure profitable, long-term contracts with major energy consumers. The TAMIM TakeawayAs we navigate the complexities of an increasingly electrified world, the heightened demand for energy underscores the significance of improving infrastructure and increasing supply to meet evolving needs. While renewable sources and traditional energy must both play pivotal roles, innovative energy solutions are essential for sustainable growth. The convergence of necessity and innovation offers unique opportunities for discerning investors to engage with the future of energy. Disclaimer: ExxonMobil (NYSE: XOM), Google (NASDAQ: GOOG) and Microsoft's (NASDAQ: MSFT) are currently held in TAMIM portfolios.
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