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Electricity inflation hits highest level in two years as AI boom rumbles on
Is your power bill going to kill the AI trade?
Consumer electricity prices were up 6.2% in August compared to last year, the highest reading in over two years. The increase underscores how growing demand from power-thirsty data centers is raising costs for consumers while risking political pushback against the giant investment boom sweeping across the US economy.
The Energy Information Administration forecasts that electricity consumption will hit record highs in 2025 and 2026, with much of that demand reflecting the impact of data centers.
It's not just surging data center demand that’s pushing electricity prices higher. 40% of US electricity comes from gas-fired power plants, and the cost of natural gas has jumped recently as supply remains flat while exports rise.
Some analysts have begun to spotlight the surge in electricity prices — and the shortage of supply it reflects — as a growing risk for the AI investment boom.
“The main question we’re now getting from investors is when do power constraints cause hyperscalers to cut back on capex?” Barclays analysts wrote in a note published September 3.
That’s an important question for everyone in the markets, given that the AI data center trade has been a central driver of the market’s rally off its April lows to new record highs.
That goes for both the hyperscalers writing hundreds of billions of dollars’ worth of checks to build data centers as well as the companies the tech giants are paying to get the hangar-like warehouses built and jammed with their hardware, networking equipment, and servers.
In a September 4 note, Goldman Sachs analysts wrote:
“Hundreds of billions of dollars in AI capex investment have continued to support AI infrastructure stocks. In particular, the public US AI hyperscalers (Amazon, Alphabet, Meta, Microsoft, Oracle) have made $312 billion in capex investments during the past four quarters. Capex growth among these stocks also accelerated sequentially in 2Q (from 69% year/year in 1Q to 78% in 2Q). The earnings and returns of firms involved in the build-out of this infrastructure — i.e., semiconductors, electrical equipment companies, technology hardware firms, power suppliers — have benefited from these sizable capex investments.”
Some think the persistent rise in energy prices — they’re now up 42.4% since the end of 2019, compared to an overall CPI increase of 26% — could put a speed bump, if not a roadblock, in front of that gravy train.
In a recently published note summarizing a panel discussion of experts on the topic, analysts at Barclays cited a discussion with one participant who thought the “localized nature of power and data centers is a major challenge” and added that “higher power prices for consumers could become politicized, impacting data center development.”
A separate panelist said that “higher utility bills could also become a political problem, leading to unprecedented involvement from regional governments while creating regulatory uncertainty.”
And there are increasing indications that data center construction is running up against political and community pushback, even in typically business-friendly areas like Texas and Georgia.
Of course, that doesn’t mean the data center boom will screech to a halt completely.
Data centers are increasingly aiming to locate in less densely populated areas with relatively unstrained power grids, though that can bring them into conflict with farmers over different issues, like water consumption.
But it does mean that perhaps we’re getting closer to the point when the heady announcements of hundreds of billions of dollars in AI investment — which pretty much everyone seems to love on paper — will be increasingly running into a more resource-restricted reality.
