Is the Artificial Intelligence Boom Also an Energy Play?

There is plenty of excitement about the potential of Artificial Intelligence (AI) to transform business. For technology companies driving the innovation and building the infrastructure, this excitement has been reflected in strong stock performance over the past year or so.¹

Generative AI—which is AI capable of generating text, images, or other media—could raise labor productivity growth by 1.5% over 10 years while increasing annual global GDP by 7+%. In dollar terms, growth estimates imply that AI could create $7 trillion of new economic value over the next decade. For context, $7 trillion is bigger than the third largest economy in the world, which is currently Japan.

Opportunity exists in many places. There will be a pressing need to revamp computing infrastructure with advanced semiconductors, data servers, AI models, and software. Downstream, companies that deploy generative AI to boost efficiency, productivity, and to provide more services at a lower cost stand to generate new sources of revenue and profit in the process.

A Better Way Forward for Passive Investors

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But there’s another industry that could benefit from the AI boom, and it does not have anything to do with the development of chatbots or large language models—it’s about the energy needed to power them.

Indeed, AI data centers require enormous amounts of power, and their proliferation means that more and more energy will be demanded from grids across the United States. Anecdotally (but importantly), consider that a ChatGPT request requires about 10 times the amount of electricity as a Google search query. As these models get larger and more ubiquitous, it’s easy to fathom how electricity grids could be maxed out in short order. According to the CEO of the chip-design company Arm, AI data centers could consume up to a quarter of America’s power within the next five years—compared to 4% today.

By some estimates, electricity demand tied just to AI data centers is expected to increase at a compound annual growth rate of 13% – 15% over the next six years. But investors should also consider that the Inflation Reduction Act included several provisions that encourage ‘electrification’ of everything from heating to transportation to cooking stoves. In short, the outlook for electricity demand is arguably high and rising.

From an investment standpoint, this could factor as a powerful tailwind for companies that are “net long power” – meaning they have more capacity to sell power versus an obligation to buy power. Companies that own and operate power plants could be among the biggest beneficiaries. As data centers proliferate, owners will need to enter power purchase agreements to run them, and companies providing power could benefit from this rising demand.

Bottom Line for Investors

Data shows that as of 2021, US and global private investment in AI totaled $53 billion and $94 billion, respectively. This level of investment marked a more than fivefold increase in real terms compared to the five years prior. Research also shows that capex spending could go as high as $1 trillion over the next 10 years.

Rapid development of AI could have profound effects on the business world and the economy, many of which are unknowable at present. But what does seem more assured is that an increasing amount of energy will be needed to power this growth, which could benefit companies and sectors providing it.

In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

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¹ Wall Street Journal. March 26, 2024.

² Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

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