Infrastructure is currently navigating a unique landscape, trading at a discount to global equities while presenting a compelling case for investment, especially in the face of slowing growth and rising inflation. The global appetite for electricity is set to surge, driven by population growth, the relentless rise of artificial intelligence, precision manufacturing, and the broader electrification of our economy. This perfect storm of demand is not just a blip on the radar; it heralds a seismic shift in power consumption that hasn’t been seen in a generation.
For nearly two decades, power demand in the United States has been stagnant, but that trend is reversing. Projections indicate an average growth of about 2.5% per year through 2030, with some utilities potentially exceeding 5%. This isn’t just a statistic; it’s a clarion call for infrastructure companies to adapt and innovate. The rise of data centers is a significant player in this narrative. Goldman Sachs estimates that by 2030, data centers will account for a staggering 11.5% of total power demand, a leap from just 3% today. This shift necessitates over $50 billion in capital investment in US power generation capacity alone, not to mention the tens of billions earmarked for grid enhancements to ensure reliability and connectivity.
The competition among hyperscalers to build and monetize AI models is heating up. AI workloads demand far more computational power than traditional applications, and it’s estimated that the power needs of US hyperscalers will grow by over 50 GW by the early 2030s—enough to power around 50 million homes. This is not just about meeting demand; it’s about the ability of utilities and developers to keep pace with this explosive growth. The stakes are high, and the pressure is on.
But the increase in power consumption isn’t confined to the US; global power demand is expected to rise nearly 30% by the decade’s end. The burgeoning internet-of-things economy, along with the proliferation of electric vehicles, is driving this demand even higher and faster than the existing grid can support. Utilities are revising their demand forecasts upward, yet they face the daunting task of balancing the needs of residential customers with the burgeoning appetite of data centers. Concerns about rate designs are surfacing, with fears that residential customers might end up subsidizing the energy costs of data centers, a scenario regulators may find unacceptable.
The market currently views these challenges as manageable, buoyed by optimism surrounding data centers and lower interest rates. The S&P 500 Utilities index has seen nearly a 20% return this year, slightly outpacing the broader S&P 500. However, it’s essential to differentiate between independent power producers, fully regulated utilities, and integrated utilities—each facing unique challenges and opportunities.
Amidst this evolving landscape, nuclear power is making a comeback. Energy security concerns and the challenges of renewable intermittency are reinvigorating interest in nuclear as a clean and reliable energy source. The Inflation Reduction Act’s allocation of $6 billion for nuclear energy production underscores this shift. Yet, the road to new nuclear construction is fraught with hurdles, especially in developed economies where regulatory red tape can stifle progress. Existing nuclear plants are poised to see their operational lives extended, and innovative companies are exploring small modular reactors as a way to lower costs and streamline deployment.
In essence, the rising power demand paints a favorable backdrop for infrastructure investments. As the sector enters a macro environment that favors infrastructure, the current discount on infrastructure assets relative to global equities presents a rare opportunity. With historical precedents showing that infrastructure can deliver favorable returns during periods of economic slowdown and inflation, the case for investing in this sector is becoming increasingly compelling. The future is bright for those who can navigate the complexities of this evolving landscape, separating hype from reality and focusing on genuine opportunities for growth.
