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- Electrifying growth
These days, it is a rare earnings announcement from a utility company that fails to mention data centers. Most U.S. and European utilities see them as key growth opportunities for electricity, while grid operators fret over the need to upgrade and expend aging electricity grids for the 21st century.[1]There is much to this logic, as we previously pointed out.[2] Data storage, processing and retrieval are extremely energy intensive. These, in turn underpin cloud computing, artificial intelligence and related digital services, including, for example, for sequencing genomes and bioinformatic applications, as well as crypto ecosystems and quantum computing. Quite plausible estimates suggest that electricity demand for AI alone could increase tenfold by 2026 compared to 2023.[3]
Our Chart of the Week shows how electricity usage is expected to grow in the U.S., China and the European Union (EU). These are rough estimates, with fairly wide ranges depending on the source and the methodology used, but they give an indication of what the utility companies are talking about. According to the latest IEA forecasts, electricity consumption from data centers for AI and the cryptocurrency sector could double to more than 1,000 TWh by 2026.
Rapid growth in data center electricity consumption, but with big differences among EU members
Sources: International Energy Agency, DWS Investment GmbH as of 7/30/24
For the European Union, data center electricity consumption is estimated at slightly below 100 TWh in 2022, almost 4% of total EU electricity demand, and is expected to reach almost 150 TWh by 2026.[4] More interesting still, we are already seeing plenty of variation among EU members, as the right side of the chart shows. Ireland and Denmark already had a far larger share of data centers in national electricity usage then, say, Germany, and the gap with other members is expected to grow further.[5]
Up until now, Northern European member countries have had the triple advantage of digitalization friendly policies, ample supplies of cheap renewable energy and a cold climate. The latter reduces the need for costly and energy-intensive cooling of data centers. With the growth in off-shore wind production, these advantages enabled innovative clusters to emerge. While demand for digital services is growing rapidly, rapid improvements in energy efficiency in data centers and data transmission networks have moderated the need for additional electricity capacity growth. More subtly, these countries – along with a few others, such as Sweden and Estonia – have put in place digital management systems to efficiently match electricity generation and consumption. To fulfil the potential of intermittent renewable energy sources requires real-time data at various points in the electric grid. And once agglomeration and innovation start in some particular place for whatever reason, positive feedback loops tend to emerge.
Can other members, especially in Southern Europe, catch up? Potentially yes, not least given the rapid fall in the costs of solar generation.[6] Spain, in particular, has plenty of potential, not just due to having a lot of sun, but also plenty of relatively cheap space to build data centers in less populated areas.[7] To unlock this potential, however, it will need to put in place not just physical but also technical, legal and commercial "infrastructure" – not an easy task in a politically polarized country. One way or the other, renewables are already reshaping Europe’s economic geography, beyond Europe’s old industrial belts. Investors better pay attention.
