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U.S. electricity demand is growing faster than anticipated, driven by data centers, manufacturing, and electrification.
The Inflation Reduction Act is boosting U.S. manufacturing, adding to the electricity demand, but delays in projects and rising electricity costs may hinder further growth.
The fast rate of projected demand growth in electricity is not just presenting a challenge for utilities, it’s presenting a challenge for decarbonization as well.
Earlier this month, the Department of Energy announced a grant pot of almost $2 billion to be distributed among 32 projects in 42 states. The purpose of the projects is to improve grid resilience. The challenge: $2 billion is a drop in the bucket as unexpected electricity demand calls for not just resilience improvements but a massive grid expansion.
For about a decade, demand for electricity in the United States has been virtually flat. It reached a peak in the 2010s and plateaued. In that context, it was perhaps a foregone conclusion that demand will remain where it was. Yet it didn’t, because we have entered the era of data centers, which coincides with the push for the total electrification of everything. No grid in the world can handle both of these without some major adjustments.
Indeed, a recent report from Wood Mackenzie says that the challenge for U.S. power utilities could become extra serious as future demand projections peg growth at between 4% and 15% between this year and 2029.
The report cited “burgeoning data-centre development, a resurgence in energy-intensive US manufacturing, and greater transport and heating electrification driving electricity demand growth not seen since the 1990s,” as factors driving the demand growth. The firm’s analysts then pointed out that while certain rates of demand growth would be welcomed by the power utility industry, any faster growth presents a problem because the necessary upgrades to the grid take years to bring from plan to field.
“In the power sector, however, new infrastructure planning takes 5 to 10 years, and the industry is only now starting to plan for growth,” Wood Mackenzie’s Vice Chairman of power and renewables, Chris Seiple, said. Meanwhile, demand is growing right now, with as much as 24 GW in new data center capacity announced in the first half of the year alone, according to the Wood Mac report. Since January 2023, new data center announcements have reached 51 GW.
This alone would require a substantial additional supply of electricity and the grid infrastructure to bring it from the supplier to the data center consumer. But tech giants are not stopping there. The industry has really big plans for its artificial intelligence programs and will need more capacity. Now add to this the electrification drive strongly supported by the federal and state governments and the population growth in some parts of the country such as Texas, causing jumps in power demand.
There is also the effect of the Inflation Reduction Act, commonly referred to as Biden’s climate bill, on U.S. manufacturing and, consequently, electricity demand. According to Wood Mac, the IRA subsidies are spearheading a renaissance in U.S. manufacturing, especially in batteries, solar wafers, and semiconductors. A rebound in manufacturing is good news for any economy—but not all good news for power utilities as, in this case, it would lead to an additional demand of up to 15 GW over the next few years, per Wood Mackenzie.
As usual, there are sceptics that all of this additional demand would pan out. Fitch Ratings is one of these. In a July report, the ratings agency said that power utilities may be overestimating the additional electricity demand that data centers would create and risk overbuilding as a result because of “inconsistent methodologies for forecasting load.”
In that same report, Fitch Ratings also noted the effect that this need to expand the grid would have on electricity prices—additional demand is not going to make electricity cheaper. This in itself could serve as a restraining factor in the buildout of demand-intensive new capacity, as evidenced by the delay or shelving of many IRA-funded projects because of unfavorable market conditions.
The fast rate of projected demand growth in electricity is also presenting a challenge for grid decarbonization efforts as well. Wind and solar capacity is simply not expanding fast enough to accommodate all the additional demand, according to Wood Mac. According to factual power generation data, it never could—because it is not on-demand capacity, unlike coal, gas, and nuclear.
In September, Reuters reported, citing data from LSEG, that coal and gas generation in the United States had represented 58% of the total in the first eight months of the year. While this was down from 60.4% in the first eight months of 2021, in absolute terms, the power output of coal and gas plants was higher than three years ago. Because demand was higher and these plants could ramp up output in response. In the context of growing power demand and a market imperative to satisfy it, baseload generators would be the only sure winners.
The post U.S. Electricity Demand Jump Catches Power Utilities Unaware appeared first on Energy News Beat.
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