Reshaping US Utility Stocks - The Battle for AI in Land and Energy

The AI boom has led to the rapid rise of data centers, resulting in a surge in electricity demand and increasingly scarce suitable land. The United States is now witnessing a land and electricity battle.

In a research report released by Barclays Bank on the 23rd, it is projected that by 2030, the electricity demand of data centers will account for more than 9% of the current electricity demand in the United States. The uncertainty in electricity supply and the availability of land for building data centers have become significant risks. This has led to a "land rush" as data center developers are all seeking large plots of suitable land.

Barclays Bank emphasizes that electricity and land have become the most critical factors in the site selection of data centers in North America, and has drawn several conclusions:

1. Data center site selection is shifting towards more remote areas, particularly in the Midwest.

2. The cost of electricity and risks surrounding the supply chain of data centers are increasing. Land with power access is more expensive, and the supply of transformers, server liquid cooling, and other related equipment is tightening, leading to longer delivery times and continuous cost escalation.

AI Boom Drives Surge in North American Data Centers and Energy Demand

Driven by the AI boom, the demand for supporting data centers has surged, including tech giants like Meta and Alphabet, which have accelerated the layout of data centers in the Midwest of the United States in recent years, hoping to gain first-mover advantages and scale-related benefits.

According to Barclays data, in 2021 and 2022, the total energy demand of data centers in the United States for Meta, Google, and Microsoft all grew by over 23%. By 2023, Microsoft and Google are expected to grow by 26% and 20% respectively.

For example, Google's data center expansion plans include investments of around $2.4 billion in Ohio, $2 billion in Indiana, $1.2 billion in Nebraska, $1 billion in Missouri, and $600 million each in Texas and Arizona.

Microsoft's data center expansion plans include investments of around $1 billion in Indiana, $3.3 billion by 2026 in Wisconsin, $1 billion in North Carolina for the construction of 3 data centers, 3 data centers in Ohio, and 2 data centers in California.

Meta, on the other hand, is set to break ground on a new data center in Alabama with an investment of over $800 million this year, and will also invest $800 million in Indiana and Minnesota respectively

Everyone wants suitable land to build data centers

With the development of AI, the scale of data centers is getting larger and larger, with a demand for electricity capacity exceeding 4000+ megawatts and occupying an area of ​​over 1000 acres. Now, industry participants all want to obtain a large piece of land with sufficient electricity capacity to build data centers.

Research by Cushman & Wakefield shows that electricity and suitable land have become key factors in the site selection of data centers in North America.

A high-quality data center site selection includes multiple factors: electricity supply (and cooperative utilities), relatively low land costs, low risk of natural disasters, network connections, water supply for cooling systems, and local subsidies for site selection.

Meeting all these conditions is very difficult.

Moreover, many US utilities have indicated that the current waiting time for queuing and networking for new large data centers is about 2-3 years, or even longer. The expansion of high-capacity power grids also requires waiting for 5-10 years. Therefore, data center developers believe that the uncertainty of obtaining electricity is their biggest risk.

Taking all factors into consideration, many data center developers are starting to consider acquiring land and building data centers in "non-mainstream" states to reduce the difficulty.

Mainstream Data Center Clusters vs. Emerging Data Center Clusters

Currently, the mainstream data center market in the United States is mainly concentrated in six major regions: Virginia, Atlanta, Georgia, Phoenix, Arizona, Dallas, Texas, Columbus, Ohio, and Chicago, Illinois.

According to data from Barclays Bank, Northern Virginia is currently the largest data center cluster in the United States, with data center capacity accounting for over 20% of the US data center capacity. The state's utilities have disclosed that, according to contracts, the data center electricity demand in Northern Virginia will increase from about 4 gigawatts in 2023 to over 15 gigawatts by 2030.

However, due to increasing saturation in these mainstream data center clusters, rising leasing and land costs, limited electricity capacity, opposition from community residents, and stricter regulations, the cost of building and using data centers in these six major regions is becoming increasingly high. According to data from Cushman & Wakefield, data center leasing prices in mainstream regions have risen by 15% in the past 18 months In places like Columbus, Ohio, where data centers and heavy manufacturing account for about 14,000 megawatts of electricity demand, signs of tight power capacity have emerged.

Cushman & Wakefield also pointed out that in counties with clusters of data centers, industrial electricity prices have soared, causing newly developed data center projects to hesitate in areas like Silicon Valley.

As a result, many data center operators have started building data centers in other "non-mainstream" states, such as Kansas City, Missouri, Charleston, South Carolina, Nashville, Tennessee, Des Moines, Iowa, Minneapolis, Minnesota, Austin, Texas, Salt Lake City, Utah, Indianapolis, Indiana, and Denver, Colorado, which have become "emerging markets" for data center construction.

However, building data centers in "non-mainstream" states also poses significant challenges.

Data center developers generally believe that the uncertainty of power supply is their biggest risk.

Many data center developers hope to secure power supply at new sites within the next 2-3 years, but many non-mainstream regions lack qualified power infrastructure, grid capacity, etc., making it impossible to meet power demand in a timely manner, which poses the greatest risk. Data center developers even need to engage with local public utility companies to support the development of the local power grid.

Furthermore, they must have a deep understanding of the operations of relevant state and regional public utility companies, as land prices vary greatly in different states and regions, and large plots of land with power facilities still come at a high cost premium.

Data Centers Springing Up, Benefiting Local Public Utilities

Barclays believes that the frenzied expansion of data centers is reshaping the core of American utilities and driving the capital expenditure cycle of American utility companies, prompting public utility companies to revise their capital expenditures for the period 2025-2030. For example, the Edison Electric Institute recently raised its capital expenditures for 2024-2026 to $186-202 billion per year.

We have observed that the entire utility industry has doubled its 5-year electricity demand forecast since August 2023, and the data center site selection in certain states may imply significant revisions to capital expenditures Public utility companies like NiSource (NI) and Ameren (AEE) will benefit from the relocation of data centers to the "emerging market" states in the United States.

From a fundamental perspective, Barclays Bank points out that companies benefiting the most from the rapid development of the data center industry have three main characteristics: 1) a constructive regulatory framework, 2) the ability to provide services, and 3) a smaller scale.

Compared to large established market power companies, some small power companies in "emerging markets" may offer better growth opportunities and investment returns because they have greater room for growth and potential, and may benefit from new capital investments in infrastructure and expansion.