Energy stocks might not have the appeal of high-profile tech names in Silicon Valley, but advancements in artificial intelligence (AI) are bringing the two sectors closer together.
The reason: AI data centres require a tremendous amount of energy to operate and stay cool—and they are expanding rapidly.
For example:
- Microsoft and OpenAI are reportedly planning to build an AI supercomputer that could cost more than $100 billion, which is 100 times the cost of a standard data centre, starting in 2028. A supercomputer of this size could require between three and five gigawatts of power compared to the 100 to 150 megawatts today’s data centres require.1
- In Canada, Hydro Québec anticipates that high-tech AI data centres will boost the demand for hydro power by 14% from 2023 to 2032.2
- Globally, AI energy consumption is expected to double by the end of 2026.3
The catch is that the expected demand for AI power in the future exceeds supply estimates.
Filling this gap could lead in a few different directions, all of which have implications for investors who own stocks in the energy sector, infrastructure and pipeline businesses, and the utilities that deliver electricity.
Canada’s Powerful Advantages
As the second-largest country in the world geographically, Canada is positioned well for this trend, with one of the largest and most diverse energy supplies in the world.
There are currently 239 data centres operating across the country, according to the Canada Energy Regulator.4 Most are in provinces with abundant supplies of hydroelectricity, including Ontario, Quebec, and British Columbia.
Stronger Demand for Natural Gas
Natural gas is one of the more accessible and cleaner-burning fossil fuels on the market. Canada stands to benefit from increased demand for both conventional and liquified natural gas (LNG).
If estimates about the power AI will demand in coming years are accurate, an additional 10% to 15% of natural gas supply could be needed in the United States alone. Canada is already a major exporter of natural gas to the U.S.; approximately 8 billion cubic feet of natural gas, or around 45% of total 2023 production, was delivered south of the border5. This dynamic is about to change as at least eight LNG export projects are either under construction or proposed in Canada, mainly in British Columbia, to serve primarily Asian markets.6
These forces have been contributing to substantially higher-than-normal expectations for natural gas prices reflected in today’s 2025+ financial futures market. Forward markets indicate that prices will average U.S. $3.20 per million British thermal units in 2025, compared to an average of $2.22 so far this year, according to data from LSEG.7
Higher futures prices could incentivize natural gas exploration and production companies to do more drilling, possibly generating new business for energy service and pipeline companies and potentially lifting their stock valuations.
The caveat is that this is all very much focused on future demand expectations. There appears to be more than enough supply capacity to meet the demand right now. Excess supply and relatively full inventory storage levels have been keeping prices low.
Advancements in Nuclear Fusion
Amazon recently purchased a Pennsylvania-based nuclear-powered data centre from Talen Energy, and other Big Tech companies are pursuing power purchase agreements with nuclear utilities.
But large-scale nuclear development faces significant restraints. Nuclear power generation for AI may not be a viable solution for years, and it might not be as reliable as wind or solar power.
As a result, many leaders in the AI field are investing in nuclear fusion, a technology that's still in its infancy but could hold tremendous potential.
The Broader Picture: Big Spenders
Four tech companies—Microsoft, Meta, Alphabet and Amazon—are planning to spend a total of $190 billion on capital improvements in 2024. That’s almost 50% more than they spent in 2023 and more than the combined capex budgets of 90 other technology and communication services companies in the S&P 500 Index.
At the same time, lower interest rates are reducing the cost of capital for projects, including new semiconductors, servers, networking gear and data storage, as well as the construction of new and larger data centres.
A good portion of that money will be spent on projects involving power generation, transmission, and distribution as AI technologies transform our lives.
We will be monitoring these developments as they unfold, looking for any investment opportunities and risks they may present.
Stay tuned.
Data Centres in Canada
Source: https://www.datacentermap.com/canada/
1. Reuters, Microsoft, OpenAI plan $100 billion data-center project, media report says, March 29, 2024.
2. Hydro Quebec, press release, November 3, 2022.
3. IEA, Electricity 2024, Analysis and forecast to 2026, January 2024.
4. Market Snapshot: Energy demand from data centres is steadily increasing, and AI development is a significant factor, October 2, 2024.
5. Canadian Association of Petroleum Producers; March, 2024
6. IISD, June 4, 2024.
7. Reuters, US natural gas markets point to steep price rise in 2025, September 10, 2024