Why electricity is the cornerstone of multiple megatrends

For the first time in a generation, global electricity demand is rising. With multiple simultaneous megatrends like artificial intelligence (A.I.) and decarbonization depending on electrical infrastructure investment, Janice Wong, Associate Portfolio Manager (Industrials and Utilities), Global Equity, and Massimo Bonansinga, Portfolio Manager (Industrials and Utilities), Global Equity, argue that the opportunity set is rich for those who will build the energy networks of the future.

Key takeaways

• Unplanned demand from multiple megatrends such as artificial intelligence (A.I.) are stressing an electricity ecosystem that was already facing complex challenges to deliver on decarbonization targets

• Increased geopolitical tension has resulted in the regionalizing of supply chains and the near tripling of the manufacturing construction in the U.S.

• Data centre capacity is anticipated to grow at a 10‒15% compound annual growth rate (CAGR) by 2030, with A.I. expected to represent 19% of total data center power demand by 2028 (Figure 8)¹.

"The real potential of electricity lies not in providing social amenities but in stimulating long-term economic development." Christopher Flavin

Electricity is the backbone of economic development. It is no wonder, then, that many of today’s most powerful megatrends converge on the theme of electricity expansion.

Decarbonization targets, digitization and A.I. computing goals, supply chain regionalization and ongoing economic development all drive higher energy consumption. Indeed, electricity is now considered a limiting factor in the advancement of these megatrends.

Compounding the impact of consumption growth are other energy initiatives such as decarbonization and the energy transition, energy and supply chain security goals, and energy reliability.

Altogether, these are the forces behind one of the most powerful and visible megatrends of our generation—electricity expansion.

The challenge and opportunity of today is to build an electrical network that will meet future power needs at the pace and scale anticipated. It will require co-ordinated investment, growth and execution across many sectors of the global economy. For those that will build these networks, the opportunity set is rich, and these themes are among those embedded in the investment solutions of BMO Global Asset Management’s Global Equity Team.

Energy consumption is on the rise

For the first time in a generation, global electricity demand is rising. For two decades, electricity consumption in the U.S. and Europe has been dominated by two key trends: deindustrialization and energy efficiency. In that time, electricity demand decelerated and flatlined. However, as shown in Figure 1, this trend is set to inflect as electrification, reindustrialization and digitization efforts drive a step change in electricity consumption.

Figure 1: 5-year CAGR for U.S. and European electricity demand

To put these trends in context, the International Energy Agency (IEA) suggested that by 2026 the combined global electricity consumption of data centres, cryptocurrencies and artificial intelligence could reach 620-1,050 terawatt hours (TWh), up from a base of 460 TWh in 2022.² This increment is equivalent to adding “at least one Sweden or at most one Germany” to the global grid. At that time, global data centre power consumption could rival that of the country of Japan.

Meanwhile, electrification, the substitution of fossil-based applications with electrical solutions, continues. Indeed, the pace of that substitution is set to accelerate as global economies embrace a cleaner electrical power mix. As shown in Figure 2, electricity currently accounts for 21% of global energy consumption. That is up from 18% in 2015 but shy of the near 30% required by 2030 to be aligned with the IEA’s pathway to net zero by 2050 scenario.²

Figure 2: Total global energy consumption by sector (2023)

These trends add to the growing power demands of ongoing urbanization in developing markets and re-industrialization in Western economies.

In aggregate, the IEA suggests that global electricity demand will shift from decades-long stagnation to a CAGR of 3.4% through 2026.² More than a third of this shift is to come from data centres and electrification alone.² Addressing this new demand paradigm will require substantial and co-ordinated global and cross-sector investment.

Decarbonization and the energy transition

The European Green Deal, Fit for 55 (a component of the European Green Deal intended to reduce the European Union’s greenhouse gas emissions by 55% by 2030), and the U.S. Inflation and Reduction Act are all hallmarks of the global shift toward decarbonization. This energy transition necessitates meaningful investment in physical infrastructure.

In the span of just three years, global investment in the energy transition has nearly doubled from $934 billion USD to almost $1.8 trillion.⁶ (Figure 3.) By 2026 (and for the first time since 1971), fossil fuels are expected to account for less than 60% of the global generation mix.² Yet despite measurable progress, infrastructure is far from aligned with net-zero-by-2050 ambitions. To achieve that goal, BloombergNEF estimates that the global energy transition spend must reach an annualized $7.6 trillion by 2050.⁶ This is a significant opportunity for those in the value chain.

Figure 3: Global investment in energy transition, by sector

Current energy transition efforts are focussed on decarbonizing the electrical grid and transitioning fossil fuel-based applications such as transportation and building heating and cooling to a decarbonized electrical grid.

One key initiative is large scale adoption of renewable power. By 2040, it is forecast that renewable power such as wind and solar will account for 45% of the electricity fuel mix, up from 20% today.⁹ This shift in the energy mix has far-reaching consequences on the broader energy complex, requiring not only additional generation capacity but considerable investment in larger, smarter, bi-directional grids, and substantially higher back-up capacity. Rising complexity drives content gains and addressable market growth for electrical solutions providers.

In addition, due to inherently high renewable intermittency, renewable and back-up power must be added at a multiple of traditional power sources to account for lower load factors. Bernstein Research suggests that in the absence of massive power storage systems, 2‒3x renewable capacity must be added for every unit of fossil capacity displaced (Figure 4). McKinsey & Company estimates that U.S. gas-powered electricity peak day generation must grow by 40% to 160% between 2021 and 2040 to provide sufficient back-up power to meet reliability and consumption needs.¹⁰

Figure 4: To replace a single megawatt (MW) of fossil fuel generation, 2‒3x more electricity capacity is needed

Nuclear small modular reactors, hydrogen, and biofuels are also promising low-carbon alternatives with significant development and investment potential.

Today, transportation along with building heating and cooling account for over 40% of global energy consumption, so addressing the carbon footprint of these markets is critical to the energy transition.¹¹ This is driving the accelerated adoption of electric vehicles (EVs) and heat pumps. In Europe alone, the IEA estimates that 9 million new EVs and 11 million new electric heat pumps will be added by 2026.² At the infrastructure level, complementary investment in charging infrastructure, grid modernization and capacity expansion is necessary to facilitate the EV transition.

Energy and supply chain security

Supply chain and energy security have attracted new scrutiny following several years of elevated trade disruptions, including geopolitical conflict, trade wars, and a global pandemic. At a minimum, disruptions have been costly and inconvenient, but lack of access to critical materials such as semiconductors and pharmaceuticals have also emerged as national security concerns. Countries have responded by redirecting global energy trade and companies have responded by regionalizing supply chains. Both responses have triggered investment in enabling infrastructure, including energy.

Russia once accounted for 45% of European gas supply, but that trade has been severely curtailed since the country’s invasion of Ukraine.¹³ In place of Russia, countries such as the U.S. and Qatar accelerated liquefied natural gas (LNG) export development, and the U.S. has since established itself as the largest LNG exporter in the world. Ongoing LNG investments, as shown in Figure 5, will address immediate displacement needs in Europe but also longer-term growth and decarbonization needs in Asia. With half the greenhouse gas (GHG) emissions footprint of coal, LNG is a critical transition fuel on the global pathway to net zero.

Figure 5: Global LNG supply and demand forecasts

Global manufacturing responded to recent trade frictions by reversing decades of globalization in favour of regionalization and ‘nearshoring.’ These pivots will boost electricity demand in certain regions. The U.S., in particular, is experiencing a period of reindustrialization as evident in the near tripling of the manufacturing construction spend in recent years (Figure 6). These investments have financial and legislative support from federal initiatives such as the U.S. Inflation Reduction Act and the CHIPS and Science Act.

Figure 6: U.S. manufacturing construction spending, evidence of reshoring trends

Reliability initiatives

Projected changes in demand, supply, energy mix, and network complexity are meaningful but constitute planned stresses on the energy complex. Networks of the future must also contemplate a wider range of unplanned events, including: changing weather patterns and the frequency of extreme weather events; the growing weather-dependence of both supply and demand; the risk of physical and cyber attacks on power grids; and technical issues from ageing infrastructure. Investments are needed to adapt existing infrastructure to changing environmental conditions.

Extreme weather events are becoming more frequent and costly. For instance, inflation adjusted data from the U.S. National Centres for Environmental Information suggests that billion-dollar disasters that typically occurred once or twice a year in North Carolina, now occur six or seven times a year. Indeed, the deadly, Category 4 Hurricane Helene was the third hurricane strike in 13 months on Florida’s Big Bend, a region that previously went “decades without a hurricane strike.”¹⁴

Reliability investments such as energy diversification, underground power lines, regional power interconnections, energy management systems, and grid modernization/digitization are increasingly important elements of network planning. They add content and complexity to underlying capacity investment needs.

Sector insights and investment opportunities

Consumer Discretionary

Electrification is leading today’s deep restructuring of the automobile industry, with global EV sales beating expectation in past years, despite the recent slowdown in Europe and the U.S. due to policy disruptions. In the near term, we may see most legacy auto manufacturers suffering from thin margins in the early stage of electrifying their product portfolio. However, in the long term, EV is set to make up the lion’s share of the global fleet given rapid advances toward cost parity, and inherent advantages as the future platform for human-machine interaction.

Electrification will also impact consumers through residential building needs. The EIA estimates that an all-electric home consumes 127% more electricity than a traditional home, pulling through higher electrical content per home.¹⁵ In addition, competition for electricity should incentivize building energy efficiency initiatives. Enablers of building energy efficiency should benefit, including providers of heating, ventilation, and air conditioning (HVAC) equipment, heat pumps, building insulation, building controls, energy management systems and energy storage systems.

Energy

Natural gas is considered a bridge to decarbonization, especially in countries that are still very reliant on coal as an energy source for electricity generation. Natural gas has half the carbon footprint of coal and will benefit from rising electrical intensity.

Meanwhile, clean power alternatives such as hydrogen, nuclear small modular reactors, and biofuels continue to be explored and developed.

Industrials

As the physical enablers of energy megatrends, industrial companies are key beneficiaries of the secular forces underway. Industrial companies include electrical component suppliers, electrical cable manufacturers and contractors, power generation equipment manufacturers, energy management providers, EV charging equipment manufacturers and energy infrastructure developers.

The sector’s constructive outlook is predicated, firstly, on rising consumption driving capacity investment and secondarily, on the demand multiplier that comes from reliability, intermittency, and distributed network considerations. Electrical companies are well-positioned for secular demand growth. However, capacity is a constraint. Labour, component availability, and permitting are common bottlenecks. Still, the environment is conducive to visible growth in an elongated cycle with strong pricing power.

Materials

The materials sector plays a crucial role in the electrification process by providing the necessary minerals for renewable technology and grid connection. Two-to-eight times more minerals are needed in renewable technologies like wind turbines, solar panels, and nuclear power than traditional energy generation. EV batteries are highly dependent on materials such as lithium, nickel, graphite, and copper. The demand for certain materials, such as lithium, could exceed the current market supply multiple times by the end of this decade while copper demand could grow significantly (15‒20%) by 2030. Copper supply, on the other hand, faces challenges in meeting surging demand as the grade is structurally declining and many mines are located in more challenging geopolitical areas.

Figure 7: Copper intensity of different energy sources

Technology

The technology industry is currently undergoing a massive investment cycle relating to A.I., which has been the underlying driver of demand for data centres. Data centre capacity is anticipated to grow at a 10-15% CAGR by 2030, with more shifting towards A.I., which has a 4-5x power intensity relative to traditional data centres.⁹ Research from Goldman Sachs suggests that data centres will use 8% of U.S. power by 2030, compared to 3% in 2022, with A.I. expected to represent 19% of total data center power demand by 2028 (Figure 8).¹ One of the potential gating factors that could constrain growth of A.I.-enabled regional data centres is access to power.

Figure 8: Goldman Sachs data centre power demand forecast

We view this investment cycle in A.I. to be broad-based and multi-year. The hyperscalers—service providers with an ability to scale their architecture in response to increased demand—continue to spend to develop their own internal A.I.-based applications and to build infrastructure that they can rent out to others. This A.I. investment cycle has been dominated by spending on data centres, with Amazon alone projected to spend $150 billion dollars in the next 15 years. Microsoft, Alphabet (Google), and Meta are all following suit and increasing their capital expenditure budgets to support this A.I. infrastructure build-out. These companies need to invest in this cycle or they risk falling behind in the new age of A.I. computing.

Additionally, customers are expanding beyond traditional data centres. New demand is coming from countries around the world that are investing in Sovereign A.I. by building up domestic computing capacity to create A.I. applications using data from their country and key industries. Driving all of this is the productivity gains from A.I. applications, with almost every industry noting significant productivity improvements with their A.I.-based pilot and commercial applications.

The demand for computing power is growing significantly, which in turn means its energy consumption is also increasing. Given the limitations of energy as a resource, companies are focusing on shifting their computational focus from performance to energy efficiency. Each new generation of chips typically obtains higher performance and better electricity efficiency. However, in aggregate, the widening use of A.I. will increase the total consumption of power. For instance, Nvidia’s new B200 graphics processing units (GPUs) reduce energy consumption by up to 25x over an H100 GPU.¹⁸ When considering the use cases for A.I., a single ChatGPT query requires 2.9 watt-hours of electricity currently, compared with 0.3 watt-hours for a traditional Google search, according to the IEA. Given the significant demand and opportunity to apply AI to every industry, the power consumption required for data centres will increase meaningfully from the 1‒2% of overall global power consumption today.¹

Utilities & Energy Infrastructure

Utilities & Energy Infrastructure companies are energy enablers and should benefit from rising capacity and investment needs. These include electric utilities, grid operators, natural gas infrastructure providers, energy storage providers, and renewable power developers. The dual objective of decarbonization and electrification also creates opportunities in carbon capture, utilization and storage. In addition, some asset-light service providers for smart grid and energy management should benefit from facilitating the transition.

National Grid alone is undertaking a £60 billion, 5-year investment plan, doubling its trend rate investment.²⁰ These investments are intended to expand electricity networks in the U.K. and northeast U.S. to facilitate digitization, electrification and decarbonization trends.

The sheer scale of investment required may create new commercial opportunities, such as direct collaboration with hyperscalers.

The opportunity for capital deployment is growing. Optimal positioning will depend on the ability to capitalize through regional positioning, carbon intensity, and remuneration structures.

Conclusion

The surging growth of A.I. and data centres is merely the latest megatrend to accelerate the demand for electricity, further stressing energy infrastructure that was already being tested by energy transition and decarbonization. Modernizing and hardening an electrical network to satisfy current needs and enable future growth will entail co-ordinated investment and execution across sectors and geographies. With electricity consumption now rising after two decades of stagnation, electricity expansion and the need for resilience represents a potentially significant investment opportunity.