Is the US Power Grid Ready to Fuel the AI Data Center Explosion?

Welcome to Energy Source, bringing you insights from New York and Washington.

Despite escalating tensions in the Middle East, a report from the International Energy Agency suggests that global oil supplies will significantly exceed demand this year.

Weaker consumption in the United States and China is likely to reduce the demand for oil, but production is projected to rise to 104.9 million barrels per day, surpassing expected demand by 1.1 million b/d. This trend is expected to persist for the next five years.

The IEA asserts that its forecasts should remain accurate unless a “major disruption” occurs.

Then there’s Donald Trump, who stirred the oil markets by hinting that the upcoming week will be “very big” for the conflict, stating that the US “may” or “may not” support Israel in its actions against Iran.

Trump’s comments caused the Brent crude price to drop by 3 percent, although some of the losses were later recovered.

Currently, Iranian oil shipments remain stable. However, the future remains uncertain, even to Trump himself.

“No one knows what I’m going to do,” he remarked.

This issue covers the challenges utilities face in supporting the expanding AI data centre sector, and my colleague Jamie Smyth interviewed Bernard Looney, the former CEO of BP.

Thanks for reading, Martha

Can the US sustain its data centre boom?

Interconnection queues are overflowing as tech companies battle to connect their energy-intensive data centres to electricity grids nationwide.

If data centres are established faster than new power plants are completed, consumers might experience rising energy costs and potential outages, according to a report by Wood Mackenzie.

“In deregulated markets, we face a risk that we commit to building data centres without adequate generation capacity,” warned report co-author Ben Hertz-Shargel.

“This could lead us to an imbalance state, resulting in not just blackouts but significant cost hikes.”

A major hurdle is forecasting future electricity demand for data centres. While energy investors typically take a 30-year perspective, tech companies focus on shorter timelines influenced by uncertainties in AI profitability.

Wood Mackenzie is currently monitoring 134GW of proposed data centres in the US, but interconnection requests far exceed this, as developers occupy multiple spots in different queues, hoping eventually one will yield results. Developers are now looking beyond established hubs like Virginia and Texas, considering states like Pennsylvania, Ohio, Indiana, and Iowa, where they expect faster connection times.

Some developers are seeking to circumvent the interconnection challenge by creating their own off-grid power sources, both as an interim solution before connecting to the grid and as a long-term backup.

Project Stargate, a $500 billion AI infrastructure initiative backed by OpenAI and SoftBank, has filed for permission to build a natural gas facility in Abilene, Texas, aimed at supplying its data centre with 360.5MW of power.

Recently, Meta entered into an agreement with XGS Energy to create 150MW of advanced geothermal energy to support its AI initiatives.

Emerging technologies like small modular nuclear reactors—capable of generating about one-third of the output of a conventional plant—are highly anticipated, with backing from major players like Amazon, Google, Microsoft, and OpenAI.

However, these projects are complex. The electricity demand from data centres can fluctuate rapidly, and grids are typically better equipped to handle such variations. Securing land and obtaining environmental permits are also significant hurdles.

“The tough part is transitioning from a fast-paced tech world to the slower realm of infrastructure,” stated Joseph Majkut, director of the Center for Strategic and International Studies’ energy security and climate change program.

“While I believe this model could work over time, the realities of constructing large industrial projects are becoming increasingly clear to the tech industry.”

The structure of energy markets across the United States will significantly influence whether supply can meet demand, keeping energy costs manageable.

Utilities positioned to manage substantial demand growth tend to be vertically integrated—like Southern Company—which control generation, transmission, and distribution. They only commit to new loads when they can assure reliable power supply.

In deregulated markets, such as Texas’s Ercot, where electricity generation is open to competition, utilities focus solely on the necessary transmission upgrades to accommodate new loads. This can lead to the addition of data centres outpacing the supply of new energy.

In regulated markets, investments can be strategically directed to meet large loads, unlike in deregulated ones where wholesale power pricing signals new investments.

Even within markets like Ercot, future prices remain below levels needed to encourage new generation entry, leading to recent cancellations of planned gas-fired power projects.

High energy prices could stimulate fresh investment, but would also mean increased costs for consumers.

“While this is how efficient markets operate for all commodities, the localized nature of the electricity market, where politicians face blame for high rates, is likely to lead to more political backlash against substantial demand growth,” noted Wood Mackenzie’s report. (Martha Muir)

Bernard Looney on the global AI power crunch

The challenge of expanding energy infrastructure to power AI data centres is akin to what the US government faced during the space race of the 1960s and 1970s, according to Bernard Looney, the former CEO of BP.

Looney, who stepped down from BP in 2023 due to not fully disclosing his past relationships with colleagues, now chairs the US-based data centre group Prometheus Hyperscale. He emphasized that overcoming the global power shortage requires a concerted effort from both government and industry, focusing on skills, policy, and technology.

“By 2026, data centres will consume as much power as the entire Japanese economy…the growth rate is phenomenal and will require innovative approaches,” he asserted in an interview at the Enact summit, which brought together leaders from the energy sector, policymakers, and tech innovators in Washington.

Prometheus plans to invest $10 billion in a data centre in Evanston, Wyoming, with an initial power capacity of 1.2GW. It is among several developers aiming to leverage the AI surge, yet all struggle with securing enough reliable, consistent electricity for their operations.

Looney mentioned that Prometheus would initially establish its data centre as an “island” separate from the current electricity grid while sourcing power from natural gas, wind, and nuclear energy through partnerships.

supported by Sam Altman, Oklo is a developer of small modular reactors.

“We plan to construct an island and eventually connect it to the power grid,” he stated, noting that Prometheus aims to “send energy to the grid” instead of drawing from it. “We have natural gas and two pipelines, as well as a large area suitable for wind energy and a partnership with Oklo for small modular reactors.”

Looney also serves on the board of XRG, the international investment branch of Abu Dhabi’s national oil firm. His role involves spotting potential energy investment opportunities for the organization, which recently made an $18.7 billion offer for Australia’s second-largest gas producer, Santos.

“Santos possesses impressive gas assets, including significant oil resources in Alaska, but mainly has excellent gas holdings in Asia and Australia,” he remarked.

Looney indicated that a partnership with XRG would benefit Santos, providing it with the funding necessary for expansion.

“While it still remains Santos, it will be backed by the strengths of XRG. For XRG, it’s clearly a lucrative business opportunity and a chance to grow in one of our three main focus areas.”

According to Looney, XRG is concentrating on investments in natural gas, petrochemicals, and low-carbon initiatives, emphasizing that natural gas continues to be a priority for future mergers and acquisitions.

“We’ve made considerable strides in the chemical sector at XRG . . . we maintain a strong emphasis on gas, and Santos fits well within that focus now. Will we pursue more opportunities at XRG? I am confident we will if suitable deals arise.” (Jamie Smyth)

Job Announcements

• Ohmium International has appointed Markus Tacke as its new CEO.

• Adnoc Drilling revealed that Abdulla Ateya Al Messabi is the new chief executive.

• Flavio Garofalo has taken the position of interim CFO at Pilbara Minerals.

Key Insights

The Energy Source newsletter is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Kristina Shevory, Tom Wilson, and Malcolm Moore, with contributions from the Financial Times’ international team of journalists. Contact us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up with previous editions of the newsletter here.