The rapid build-out of artificial intelligence data centers, cloud computing facilities and advanced manufacturing projects is exposing a critical weakness in the U.S. power system: There is not enough power supply to meet demand, and the critical transmission infrastructure required to move power around is not robust enough for future energy requirements.
A 2024 white paper from Brookfield Asset Management noted that investments in global energy transmission will have to increase to more than $600 billion annually by 2030 to meet the growing demand for electricity.
Larry Fink, BlackRock’s, chair and CEO, wrote in his annual letter: “Electricity demand is rising again after years of relative stability. Homes are more electrified. Industry is expanding. Data centers require large amounts of reliable power. At the same time, adding new generation and transmission capacity takes years.”
He added, “Natural gas remains essential for reliability, and the U.S. has abundant supply. But gas alone is unlikely to meet projected growth in electricity demand in every region. A broader expansion of capacity will be necessary. Nuclear power will also be critical over the longer term—but new capacity takes time to develop, reinforcing the need to scale additional sources now.”
Don Dimitrievich, global head of infrastructure credit at Nuveen, adds that asset owners and limited partners have become receptive to investing in infrastructure private credit, especially as private capital is stepping in to foot the bill for much of the digital infrastructure build-out, including energy transmission.
“If you want to be a prudent investor, you want to have some element of risk mitigation, and infrastructure is a way to address all the macro considerations or fears, because it’s less correlated macro risk,” Dimitrievich says. “You tend to have long-dated offtake contracts; you’ve got cash flow visibility that also has some embedded inflation protection.”
Essential Growth
The London-based Global Infrastructure Investor Association estimated, in a July report, that the U.S. infrastructure funding gap will rise to $3.7 trillion by 2033. In addition, Cambridge Associates estimates that investment in the electrical grid in the U.S. and Europe has not kept pace with investment in renewable energy in recent years.
Supply-chain issues make these projects even harder to manage. “Order backlogs for transformers, cables and switchgear are growing, and lead times for large power transformers now span three to five years in North America and Europe,” Cambridge stated in a June report.
The firm noted that energy-related investment opportunities exist across asset classes, including public equity, growth equity and venture capital.
Institutional investors in electricity transmission and grid infrastructure include Australia’s REST superannuation fund; Canada’s La Caisse, PSP Investments, Ontario Teachers and CPP Investments; the Netherlands’ APG; and Norway’s Government Pension Fund Global. In the U.S., investors include the California Public Employees’ Retirement System, the Oregon Public Employees Retirement Fund and the New York State Common Retirement Fund.
Michael Cerasoli, a portfolio manager at Eagle Global Advisors, says the potential for politics or local opposition to delay these kinds of projects can deter investors.
“The opportunity set is obvious: Invest a lot of money and get a highly regulated, market-protected rate of return over a long period of time,” Cerasoli says. . “Unfortunately, the risks are also obvious: Get bogged down in a project that requires expediency in a world where many want to slow, or flat-out stop, a project from getting built. In other words: Build something that may take five-plus years to get built in a world where political power seems to switch hands every two years.”
Power Scarcity
The U.S. power grid is controlled by regional transmission organizations and independent system operators—nonprofit, federally regulated entities that manage high-voltage interstate transmission lines and run wholesale power markets.
Local, investor-owned or municipal utility companies connect lower-voltage local power distribution directly to homes and businesses. But some of these regional ISOs, such as PJM Interconnection in the Northeast and Midwest, are facing major issues, such as skyrocketing electricity prices, a severe grid capacity shortage risk and connection delays for new power projects.
Christopher Miglino, CEO of artificial intelligence infrastructure platform Axe Compute, notes that power has become the first question for data-center development. Historically, site selection involved significant consideration of multiple factors, including fiber, latency, land and tax treatment.
These concerns are reflected in supply and demand forecasts for the U.S. power sector. A report from Bank of America analyst Anrew Obin found that energy capacity demand is expected to reach 230 gigawatts between 2026 and 2030, with only 93 gigawatts planned to come online during that time.
“The U.S. grid was largely designed around relatively flat load growth, and it is now adapting in real time to a very different demand environment. For investors, that means capital is flowing into a part of the energy system that was under-invested for decades,” Miglino says. “Transmission, substations and the equipment supply chain supporting them are moving from relatively low-growth utility categories into areas with increasingly visible demand behind them.”
The biggest risk is underwriting announced capacity projects, rather than real capacity, Miglino adds.
“There can be a significant gap between a project that has secured land and announced ambitious megawatt targets and one that has a viable power plan, delivery schedule and customer base,” he says. “Investors should be asking two basic questions about [data center and other] projects in a service territory: Where is the power coming from, and who is paying for it?”
While efforts have been made to increase the productivity of existing infrastructure, more investment will be needed worldwide for transmission infrastructure.
“Grid-enhancing technologies, reconductoring, storage and demand flexibility can help unlock capacity more quickly, but they do not eliminate the need for substantial investment in new and reinforced transmission infrastructure,” says Ivan Houlihan, head of the Western U.S. at IDA Ireland, the Irish government agency responsible for bringing foreign direct investment to the country.
Permitting Hurdles Remain a Challenge
Executing transmission projects is difficult. New transmission lines often cross multiple jurisdictions and require approvals from federal, state and local regulators. Developers must also navigate environmental reviews, opposition from local communities and changing political priorities, creating timelines that can stretch to a decade or more.
For example, the $11 billion SunZia wind and transmission project in New Mexico, from Pattern Energy, hosts 916 wind turbines and includes transmission lines stretching about 550 miles from central New Mexico to south-central Arizona. The project is “the largest clean energy infrastructure project” in U.S. history, according to the company’s web site.
“We were financing [SunZia] as it came close to achieving [authorization to begin physical work or spend project funds], but it took 17 years to get the full permitting and regulatory approval for that transmission line build-in,” Dimitrievich says. “The challenges of building new transmission capacity in the U.S., unfortunately have a long history, and it’s not clear to me that there are immediate solutions that are actionable at this point. If anything, we’ve seen further cancellations of transmission projects at various points for various reasons over the last several years.”
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Tags: Artificial Intelligence, data centers, electricity, energy, Infrastructure