Robeco logo

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS – The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorised to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

Robeco Institutional Asset Management UK Limited (“RIAM UK”) markets the Funds of Robeco Institutional Asset Management B.V. (“ROBECO”) to institutional clients and professional investors only. Private investors seeking information about the Robeco Funds should consult with an Independent Financial Adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing the website.

RIAM UK is an authorised distributor for ROBECO Funds in the UK and has marketing approval for the funds listed on the website, all of which are UCITS Funds. ROBECO is authorised by the AFM and subject to limited regulation by the Financial Conduct Authority.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor, you should therefore not proceed. By proceeding, please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

Decline

08-07-2024 · Insight

In the AI race, electricity grids are showing their age

Bottlenecks are building as clean energy goals coupled with the speed and scale of AI’s electricity demands have blindsided unprepared and ill-equipped utilities. That leaves next-generation data centers racing to find electricity. But what may look like an energy dilemma is turning out to be a deluge of opportunities for smart energy investments.

    Authors

  • Sanaa Hakim MBA - Co-Portfolio Manager Robeco Smart Energy

    Sanaa Hakim MBA

    Co-Portfolio Manager Robeco Smart Energy

Summary

  1. Digitization, electrification and now AI are overwhelming electricity markets

  2. Securing power now will determine the winners and losers in the AI arms race

  3. The AI race is accelerating investments across the data center value chain

The coming power surge

Electricity demand has been remarkably stable over the last two decades. However, the electrification of the economy and intensifying processing in data centers, are driving demand unexpectedly higher (see Figure 1). In Ireland data centers already gobble up more than 22% of total electricity and that’s expected to inflate to a third in just a few short years.1

In Asia, Malaysia is planning to increase data capacity ten-fold through 2026 in a bid to become a critical digital hub, a move that will intensify electricity consumption by up to 128%.2,3 The IEA predicts that by 2026 global data centers will consume as much energy annually as the entire country of Japan. After years of incremental growth, by the end of the decade, global data center power demand is poised to expand around 15% annually.4

Figure 1 – Data centers’ share of grid power is rising globally

Figure 1 – Data centers’ share of grid power is rising globally

Source: IEA, 2023. Data center energy demands are consuming more grid resources globally.

Utilities and network operators now face higher electricity demand while also combating aging and unpredictable grids (see Figure 2). Grids in countries globally are in desperate need of an overhaul as energy generation moves from dispatchable units from centralized power plants to intermittent ones from decentralized renewable sites. The majority of distribution lines are more than twenty years old in industrialized countries.

The majority of distribution lines are more than twenty years old in industrialized countries

Figure 2 – Aging grids are old and ill-equipped for next-generation electricity demand

Figure 2 – Aging grids are old and ill-equipped for next-generation electricity demand

Source: IEA, October 2023. The graphic shows the age of different parts of the energy grid. Transmission infrastructure (Tx) carries power from generation plants. Distribution infrastructure (Dx) is the last mile to end users.

The race for energy

The growth surge significantly resets the dynamics of power consumption trends, with implications for data centers and power supply chains globally. Big Tech players are feverish to establish an early foothold in AI’s game-changing potential. But that means building more data centers filled with cutting-edge GPU chips which need up to five times more electricity than CPU chips used for traditional data center processing.5

Mark Zuckerberg summed up the problem when he said, “energy, not compute, will be the number one bottleneck to AI progress.” A major concern around the highly anticipated growth in data center computing capacity is the availability of grid connections. Key issues include limited power lines, substations, and voltage transformers as well as delays in planning and permitting. Lead times for power projects are typically over five years in some regions in Europe and the US.

Sustainable energy

Powering the transition to a low-carbon future
Discover more
View all themes


Energy, not compute, will be the number one bottleneck to AI progress.” – M. Zuckerberg

This is a race for energy. A recent study from Morgan Stanley showed operators would double the price they would pay local operators for electricity in order to gain access ahead of competitors. These scenarios are playing out globally and the press for power is reflected in Nvidia* CEO’s prophetic analysis that many nations will push to build their own “sovereign” AI systems to stay competitive and process data locally.

Many nations will push to build their own ‘sovereign’ AI systems to stay competitive and process data locally

Capacity constraints and climate goals challenge grids

Net-zero goals complicate the plot further. Governments and companies have pledged to decarbonize by 2050 which limits power generation to low-carbon energy sources. Solar is seen as clean and is quickly built relative to other energy source. A solar farm can be built in less than a year, compared to nearly six years for nuclear (see Figure 3).

Figure 3 – Construction time needed for energy sources (in months, expected megawatts of power)

Figure 3 – Construction time needed for energy sources (in months, expected megawatts of power)

Source: Lazard, 2021. EIA, 2022.

Smart Energy I GBP

performance ytd (30/04)
-11.48%
Performance 3y (30/04)
1.57%
since inception (30/04)
7.79%
total size of fund (30/04)
1900mln
morningstar (30/04)
View the fund
Past performance is no guarantee of future results. The value of the investments may fluctuate. Annualized (for periods longer than one year). Performances are net of fees and based on transaction prices.

Moreover, even if enough renewable sites could be built, intermittency of power production and fragmentation of power distribution across remote sites make renewables unsuitable for providing steady baseline power needed by not only data centers but the entire grid.

As a result, utilities are combining renewables with natural gas generation to balance long-term transition goals with short-term demands (see Figure 4). The large number of renewable project applications reaching late-stage connection-studies with grid operators testifies to the strong interest of developers. While not all of these projects are guaranteed connections, the high levels of new capacity from those that do connect will further strain transmission capacity.

Figure 4 – Renewable interest is exploding, pressuring grid stability

Figure 4 – Renewable interest is exploding, pressuring grid stability

How does this impact Smart Energy investments?

We view the coming AI race as a multi-year trend with broad-based investment opportunities across industrials, technology, renewables and utilities.

Electrical grid equipment providers are among the first positively impacted segments, with global annual electrical grid capex expected to grow at 8% CAGR from 2022 to 2032. Within this group, one of the most promising industries are high-voltage cable manufacturers. These so-called ‘interconnectors’ carry electricity over long distances (including between countries) with minimal losses. They are also better suited to manage energy from different sources which helps maintain synchronicity across different networks.

Energy-efficiency of end-use equipment is also a key solution. Cooling is already emerging as the biggest opportunity for making data centers more energy efficient. GPU chips used for AI are heat-intensive and tightly packed by the tens of thousands into hyperscalers. Newer liquid-based solutions such as direct-to-chip cooling (DTC) offer huge energy savings compared to traditional air cooling.6

And while less than 25% of data centers currently use low-carbon energy, pressure from regulators makes renewable power generation mission critical and are driving investments across the energy value chain. And the biggest data center customers – Amazon, Meta, Microsoft and Google* – are already leading by example. All have set ambitious climate goals in the near and long term so it’s unsurprising that they also are the largest corporate purchasers of renewables from utilities and network operators.

* The Robeco Smart Energy strategy is not invested in any of the stocks listed, nor should these references be considered as recommendations to buy, sell, or hold these or any securities.

Footnotes

1Financial Times. February 2024. ‘Data centres curbed as pressure grows on electricity grids.’
2Ten-fold data center increase through 2026, Bloomberg, June 2024. ‘AI is already wreaking havoc on global power systems.’
3Electricity consumption growth calculated from a base year of 2022 through 2026, Malaysian Investment Development Authority, April 2024. ‘Data centres, AI initiatives to boost electricity demand.’
4Annual growth in CAGR, Goldman Sachs, April 2024. ‘Generational growth in AI data centers and the coming US power surge.’
5Robeco, November 2023. ‘The energy challenge of powering AI chips.’
6Air based cooling consumes on average 40% of a data centers’ total electricity.

Robeco

Robeco aims to enable its clients to achieve their financial and sustainability goals by providing superior investment returns and solutions.

Important information This disclaimer applies to any documents and the verbal or written comments of any person in presentations or webinars on this website and taken together is referred to herein as the “Information”. The services to which the Information relate are NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws and must not be relied or acted upon by any other persons. This Information does not constitute an offer to sell, or a solicitation of an offer to buy, any financial product, and may not be relied upon in connection with the purchase or sale of any financial product. You are cautioned against using this Information as the basis for making a decision to purchase any financial product. To the extent that you rely on the Information in connection with any investment decision, you do so at your own risk. The Information does not purport to be complete on any topic addressed. The Information may contain data or analysis prepared by third parties and no representation or warranty about the accuracy of such data or analysis is provided.
In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management UK Limited (“RIAM UK”) is authorised and regulated by the Financial Conduct Authority. RIAM UK, 30 Fenchurch Street, Part Level 8, London EC3M 3BD (FCA Reference No:1007814). The company is registered in England and Wales under Ref No. 15362605.

In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.