Robert Kwan:
Welcome to the Industries In Motion Podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast-moving markets in industries. My name is Robert Kwan, and I'm the Global Head of Power, Utilities, and Infrastructure Research at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Today, I'm pleased to be joined by Shelby Tucker, Managing Director and US Power and Utilities Analyst and Elvira Scotto, Managing Director and Midstream and Pipelines Analyst. GenAI and data center growth are huge themes in the market, and today we're going to discuss the opportunities and challenges for power generators, regulated utilities and midstream infrastructure companies as it relates to the growth in data centers, which are large consumers of electricity, mostly driven by both computing power and cooling needs. So let's dive into it. Shelby, let's start with what's driving the opportunity for infrastructure companies, and how big can this be?
Shelby Tucker:
Robert, again, first of all, thank you for hosting this podcast. As you may know, a recent announcement highlighted the potential growth in electricity demand driven by data center capacity expansions. And in the US, our findings show that data centers could represent about half of the power of demand growth through 2026. Furthermore, we expect demand to accelerate beyond 2026 as the grid tries to catch up the large backlog of projects.
Robert Kwan:
As you know, Shelby, it's not just the US either, our European team has flagged some big announcements in Spain by Microsoft and Amazon Web Services that could in and of themselves boost the entire country's electricity demand by over 2%. So what are you seeing in terms of electricity growth when it comes to the US?
Shelby Tucker:
So the US Energy Information Administration load growth forecast has increased with each new forecast higher than the previous. Demand driven by the growth in AI data centers has combined with the surge in reshoring of manufacturing to drive commercial and industrial load growth to levels not seen since the early 2000s. In recent months, utilities such as Georgia Power, Duke Energy, Arizona Public Service and others have projected significant increases in demand supported largely by data centers. This in turn is driving the need for incremental investments to meet reliability.
So for example, Georgia Power has seen unprecedented interest in its service territories, which is of course Georgia, which has led to a 17 times increase in load growth versus prior forecast. These forecasts are generally captured in Integrated Resource Plans, also known as IRPs. If you start aggregating a lot of the IRPs around the nation, funnel that into the national load forecast such as the North American Electric Reliability Corporation's long-term 10-year peak demand, which actually was revised upward by about a CAGR of 30 basis points in its 2024 forecast alone. Ultimately, we expect utilities whose service territories experienced higher interest from large load customers to continue to update IRPs and increase load forecasts more frequently leading to the potential need for incremental resources.
Robert Kwan:
So Shelby, let's just stop and think about where we're going to get that power from. Many data center customers have net-zero emissions targets, but one thing that struck me from a couple of sessions we recently held at our annual Energy, Power and Infrastructure Conference in New York was that many data center providers would go to jurisdictions that can offer a quicker path to market and where it economically made the most sense to locate the data center while dealing with the renewable power procurement separately, even if that meant a contract in a different geography. So we'll come back to the renewable power opportunity in a moment, but if we're looking for reliable base load power generation, it's hard not to think that natural gas will be playing a big role in meeting increased electricity demand. So over to you Elvira. You're in the thick of this. What are you hearing? What are you thinking?
Elvira Scotto:
Sure, Robert. We've been hearing a lot on this topic. For example, in its recent earnings presentations, Kinder Morgan cited estimates for incremental natural gas through 2030 that range from three Bcf a day to 10 Bcf a day, while some producers note even more aggressive high-end scenarios, some as high as 18 Bcf a day. That said, given the current pipeline capacity utilization and absent any changes in permitting regulations and timelines, we see the lower end forecast as more likely by 2030.
Robert Kwan:
So Elvira, you just touched on pipeline capacity and permitting challenges. What's the state of pipeline capacity right now and what's it going to take to add more capacity to the system?
Elvira Scotto:
Well, according to the Energy Information Administration, or EIA, since 2013, natural gas demand has grown about 43% while pipeline capacity has only grown about 25%, and this has led to increased pipeline utilization. So just to give you an example, Kinder Morgan, which transports about 40% of the natural gas in the US and supplies roughly 20% of the natural gas for power generation, noted that in 2023 its average pipeline utilization rate was 87%. That's up from 73% in 2016. But importantly, on peak days, these pipelines may run at 100% utilization.
Williams noted that it's Transco system, and Transco is a key artery of pipelines that connect Texas to New York, is fully contracted at max rates. So given these utilization rates, we do believe that growing natural gas demand will require natural gas pipeline capacity expansions, and that's going to be either through the addition of compression, the construction of laterals and/or the twinning or looping of existing pipelines, which should provide attractive long-term growth opportunities for the pipeline companies. That said, Robert, while we need more pipeline capacity when it comes to building these pipelines, a perfect example of the challenges is the Mountain Valley Pipeline, which was first proposed in 2014 and had an original completion date of 2018, but that just entered into service this past June. So suffice it to say, committing and constructing a brand new pipeline is very difficult.
Robert Kwan:
I think we're hearing the same message on both sides of the border. We're hearing the same high utilization rate and full contracting from Enbridge and TC Energy for their systems, so it really does seem like capacity is getting maxed out across the board. What are you hearing on the ability to expand the existing systems?
Elvira Scotto:
Well, while not easy, we do think that expansions of existing systems will be the most likely outcome and that favors the incumbent operators. Even then expansions take time. If we just look at Williams' proposed Southeast Supply Enhancement project, which is a 1.6 Bcf a day expansion of its existing Transco system. Williams began its public outreach on this project in late 2023, it pre-filed with regulators in early 2024 and it hopes to get permits and begin construction in the spring of 2026 with the targeted in-service date by the end of 2027. Even more recently, Kinder Morgan announced a successful open season for its South System Expansion 4 project, that'll increase the capacity of its existing Southern Natural Gas Pipelines South Line by around 1.2 Bcf a day, and should also help meet the demand growth in the southeast markets. This project will comprise of brownfield looping and horsepower compression additions, even so Kinder Morgan expects the projects to come online in late 2028.
Robert Kwan:
Okay, so gas should definitely be a big part of the solution, but Shelby, how should we think about renewables, particularly with many data center customers having net-zero ambitions?
Shelby Tucker:
Yeah, it's a very interesting dynamic. We definitely think that renewables and storage will primarily drive new generation additions, but we view the need for gas generation as unavoidable. We project that solar additions can account for about half of the new capacity, with wind and storage solutions making up a big part of the remaining mix. In addition, we know that 85% of the active generation requests sitting in interconnection queues are renewables and storage projects.
Robert Kwan:
So can we dig into that and talk about the interconnection queues? Between electric transmission requirements and the backlog of large-scale electricity transformers, how do we solve these hurdles to get more renewables built in a more timely fashion?
Shelby Tucker:
Yeah, this is really one of the toughest challenges facing the industry and has potential to be the greatest bottleneck in the rapid deployment of large-scale data centers, particularly new data centers, the Federal Energy Regulatory Commission adopted to order, 2023, a year ago, which was meant to streamline the permitting and approval process. It's a step in the right direction, it does little to accelerate the timeline for new transmission projects. The independent system operators like the PJM or MISO can modify their approach to take advantage of the flexibility of GenAI data centers that do not require a co-location. And then a more real-time IRP process can identify the need for new transmissions faster for regulated utilities.
Robert Kwan:
Elvira, you've covered a number of renewable companies, particularly on the solar side. What do you see as some alternative solutions to help fill this demand?
Elvira Scotto:
Yeah, that's right, Robert. I used to cover some of the rooftop solar companies, I think we could see the potential for more virtual power plants, which is essentially the aggregation of power from several homes with rooftop solar plus storage capacity and then sell that power back into the grid. The question there would be the ability to scale this power and the ability for the grid to handle more power. I think some of the other options could include behind-the-meter solutions such as using fuel cells to provide power similar to the recent deals Bloom Energy announced with data centers. Turning it to you, Robert, what are you seeing up in Canada?
Robert Kwan:
Yeah, up here north of the border, on the surface, Canada has a favorable setup with several provinces boasting electricity generation that is almost entirely renewable and in certain regions you have lower ambient temperatures, which can help as well. We'll see how everything develops, but one of the issues I could see is the politics of customer rates as well as many provinces up here having net-zero carbon emissions targets. So there's a limited ability to add data centers without requiring new and expensive generation. It might be a tougher sell to residential customers, i.e., the voters, if rates are rising due to new data center development. So we'll see how that plays out.
With that all being said, I keep my eye on Alberta. On the surface, not necessarily the optimal place for a data center as electricity has historically been more expensive and with more volatile power prices than some of the other provinces, as well as the carbon intensity of that power is higher than many other provinces. That all being said, the Alberta government is formulating a strategy to court data centers to the providence, and when the Alberta government gets behind something, I take notice.
So as we wrap it up here, what are a couple of the key takeaways on this data center theme? Shelby, from you on the utilities and power side and Elvira on the natural gas infrastructure side of things.
Shelby Tucker:
So the event of data centers has created an exciting but challenging time for the electric utility and independent power producer subsectors, exciting because demand growth is back in the US. If properly managed, it should help manage customer bill increases given the large capital programs coming. But challenging because after two decades of anemic demand growth, the regulatory bodies are not used to expediting capital plans to create more resources. Thanks to the flexibility of GenAI data centers, we do have about a two, three-year window of building around spare power capacity in the US, but if the data center demand growth is sustained, an acceleration of speed to market will become essential.
Elvira Scotto:
It's clear to us that natural gas will be a part of the solution empowering this data center growth. This will require additional natural gas pipeline capacity as pipelines are running essentially full as well as additional natural gas storage facilities, especially as gas demand becomes peakier, so we'll need more backup to renewable power generation. However, constructing these new facilities will take time given the regulatory and construction timelines. That said, we believe all of this combined should provide years of growth opportunities for midstream companies along the natural gas value chain.
Robert Kwan:
Shelby and Elvira, thank you very much for your time in joining the RBC Industries in Motion podcast. I enjoyed our discussion on what has been a hot topic for the sector globally, given the significant potential for growth over the coming years.
So what else lies ahead in today's ever-evolving markets and industries? We'll be keeping track right here on Industries in Motion. Thank you for joining us for this episode recorded on July 24th 2024. Please make sure you subscribe to Industries in Motion wherever you listen to your podcasts, and if you'd like to continue the conversation or if you're interested more information, please contact your RBC representative directly or visit our website at www.rbccm.com. Thank you very much.
Speaker 4:
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