Power Grab Part 5: AI’s Impact on Utilities and the Future of Power Infrastructure

What if the race for AI supremacy is not just about algorithms and data, but also about the massive energy demands reshaping our power infrastructure? Join us as we explore the critical intersections of AI-driven data center loads and the immense challenges faced by distribution utilities that are compelled to build and own their infrastructure. From the complexities of wholesale power markets to the sustainability of current business models, we unravel the urgent need for new generation assets. Discover whether innovations in cooling technologies and chip efficiencies can transform the industry and what this means for the future of power consumption.

Our discussion also brings to light the fascinating dynamics of the AEP Ohio rate case, an emblematic example of the high-stakes negotiations between utilities and data centers. With key players like Walmart influencing tariff proposals, learn how these negotiations could reshape infrastructure costs and the implications for ratepayers. We'll guide you through the intricacies of 10-year contracts, minimum demand charges, and the evolution of transmission technologies. This episode promises a compelling look at the future of utilities in a rapidly advancing AI-driven world, where technology, energy, and economics collide in unexpected ways.

Transcript

Speaker 1: 0:00

Hi, in the past four sessions we've reviewed AI-driven data central load, we've had a limited look at key value propositions for AI and we've discussed growth projections, issues related to training, the large language models, the LLMs, and the possible impacts on wholesale power prices. In this section, we'll look at the impacts on distribution utilities and, most especially, where they build and own their own infrastructure. Distribution utilities and, most especially, where they build and own their own infrastructure. Wholesale bulk power markets are one thing. There, power prices may be affected by supply and demand balances, but if somebody builds a generating asset and loses, that loss is borne by shareholders With vertically integrated utilities, whether they own generation or transmission. The financial impact of their decisions is passed on to rate payers. If you want to know more about how something like that feels, talk to the folks who pay bills at Georgia Power.

Speaker 1: 0:50

Now that the Alvin Vottle nukes are online, sort of Unit 3 seems to be having some trouble there. So let's summarize the challenge with respect to utilities and these huge data center loads. First, they are huge. Many of them are in the many hundred megawatt and even gigawatt scale. Second, they want the power now. Time to power is a critical thing in the race for AI supremacy. Third, that means utilities are rapidly being asked to build supply and supporting infrastructure such as transmission and transformers. Fourth, there's a great deal of uncertainty as to where and how AI will actually make profitable business and whether the LLMs can keep growing at the rate they are currently doing. And fifth, there's also a great deal of uncertainty as to whether they'll continue to keep consuming electricity at current rates. As one example, cooling represents somewhere around 40 to 50 percent of total load, but that's using air and fans, which is a lousy way to deal with waste heat. New liquid immersion technologies that involve putting servers in dielectric fluids, as one example, can dramatically reduce cooling loads by up to 95 percent. Then there are the chip efficiencies themselves. Ibm in September announced a breakthrough in chip efficiency, and market leader NVIDIA continues to make gains here as well. So the natural question If they make gains, won't this just be another example of Jeevan's paradox, in which they'll just use these gains to attain more compute power? Perhaps, but at some point there will be finite limits.

Speaker 1: 2:24

Thus, utilities are faced with a rapidly growing industry whose value propositions are all but certain, with a request to build tens of thousands of megawatts of new generation assets and infrastructure that may not line up temporally with the load being served. Gas plants, for example, may have 30 to 40 lifespans over which they're amortized. The crux of the matter, then If business models change and the demand for those supply and infrastructure assets evaporates, you, the rate payer, get to pay for it. This dynamic has been playing out in the AEP Ohio rate case that involves only transmission and not any new generation. The utility served 600 megawatts of data load, with agreements to supply an additional 4,400 megawatts through 2030. Transmission in their system was sufficient for that quantity, but then in May of this year another 30,000 megawatts of requests showed up that would require new lines, possibly the big 765KV ones. So AEP put a moratorium on new supply and came back with a proposal to the data centers Commit to 10-year contracts with an out clause and a fee after five years and to paying us a minimum demand charge set at 90% of contract capacity. This was an increase of 50% over the current 60% tariff requirement for large loads that were not data centers. In early October, the data centers and some suppliers, such as Constellation, came back with a counter quote settlement requesting AEP to provide proof of transmission constraints and asking for application of improved transmission technologies, so-called GETs, and arguing for a lower fee of 75%. Aep and other parties, including Walmart, subsequently filed a tariff proposal with the Utilities Commission requiring large new data centers to pay a minimum of 85% of the energy they expect to use each month to cover infrastructure costs. The data centers also have to show they're financially viable and could pay an exit fee if projects are canceled or companies cannot meet contractual obligations. The terms would include a four-year ramp during construction and be in effect for a total of 12 years. And why Walmart? Well, probably because they share the same concern that was voiced in a similar utility and data center hearing on October in Indiana that data center load could have the effect of crowding out all other economic development while increasing rates.

Speaker 1: 4:47

The dramas playing out in Ohio and Indiana are a show that will soon be coming to a theater close to many of you, so it's worth seeing what happens. And how big might these rate increases be? Well, nobody knows for sure. There are still too many variables and uncertainties affecting this equation today, but a study out this week from the Jack Kemp Institute suggests an increase of as much as 70% in rates over the next decade.

Speaker 1: 5:11

Again, nobody really knows. What we do know is that the grid has never before seen as rapid an increase in demand as the one expected here in the US and globally, with the capital involved and the risk to ratepayers involved. Utility regulators are going to have to be informed in ways they never have had to be in the past, and they will likely have to institute safeguards they would have not had to in the past either. Tens of billions of dollars of ratepayer money is at stake. Well, thanks for watching and listening. If you like this and you think I may be able to help educate you and your team on this or just about anything else related to the electron, please just reach out to me on LinkedIn, take care.