Feeding the Beast: Datacenter Power Supply Uncertainty

Energy Markets Update

In this newsletter, we cover the factors you need to know impacting US energy markets as well as datacenter power supply issues, the Chevron doctrine's impact on energy policy, PJM capacity markets, and a look at hurricanes' affects on energy demand.

Table of Contents

• Gas & Power Update
• Feeding the Beast: Datacenter Power Supply Uncertainty
• Feeding the Beast: Datacenter Co-Location
• Hurricane Season - Effects on Energy Demand
• PJM Gets a New BRA
• When Law Becomes "Law": Reversal of the Chevron Doctrine Threatens Energy Policy

Weekly Natural Gas Inventories

Source: EIA

Source: EIA

US Energy Market Update

A summary of recent changes and important information about the US energy markets.

• The bears continue to dominate US natural gas markets. After surging by about 50% heading into early summer, gas prices have again bottomed out on fresh concerns of market oversupply. There is a story here. Spot prices crashed in Q1, supply contracted and therefore analysts anticipated a rebound, but the gas surplus has remained stronger and has lasted longer than most expected.
• The result is a continuation of the disconnect between spot @ $2.10 per MMBtu for NYMEX gas in August, and future prices, which average $3.35 in 2025.

• The key drivers are simply supply side excess: gas in storage remains well above the 5-year average and delays impacting the start of a large LNG project will likely keep a lid on attempts by the market to break out higher. More specifically, the Golden Pass LNG facility, consisting of three trains at ~2.6 bcf/d and located at the Sabine Pass LA, was recently pushed back by at least 6 months. This means that the first train originally expected later this year will not reach completion until June 2025 at the earliest.
• It’s been a hot summer so far and the heat shows no sign of abating. June and July to date are the warmest globally since 1950. July 21st was logged as the warmest global temperature ever, according to the European Union tracking agency. High temperatures have been driving the highest burn rate ever for the United States generation sector at 48.4 Bcf/d.
• We remain concerned about the price pressure that LNG export terminals will have next year but we expect prices to remain soft for the next 6-8 months, potentially creating some good hedging opportunities for the upcoming winter and into 2025. It may be wise to buy the pessimism before markets tighten.

Source: ISOs

Feeding the Beast: Datacenter power supply uncertainty 

The United States power demand is beginning a major cycle of growth and data centers and the advent of mainstream AI-use is a key player in this growth. 

• The number of data centers, physical locations that store computing machines and their related hardware equipment, has been rapidly growing in the United States since 2021 as a result of widespread adoption of cloud computing. As a result, conversations on the quantity and availability of power supply have been heating up.
• It is estimated that the total power generation demand in the United States will rise by 1.8- 2.4% per year throughout the end of the decade, of which at least half will come from new datacenters (+300-500 TWh). At the end of the decade it is estimated that data centers may increase from 6 to 9 or even 10% of total US power demand.  
• This would likely require an additional 2-3 bcf/d of additional gas supply and would be the largest expansion of the power supply system in US history.
• The density of the power requirements also presents significant challenges and uncertainties for power grids across the US. From investment decision to construction, datacenters can be 2-3 year projects whereas utility scale generation projects are typically five years at best. The mismatch makes it very difficult for utility planners to accommodate such rapid and unpredictable load growth.
• States like Virginia, which houses the world’s largest concentration of data centers, are increasingly scrutinizing the impact of these facilities on regional electric grid reliability and sustainability.
• Concerns are mounting over the potential disruptions to clean energy goals and the affordability of electricity for other consumers. For example, proposed mega data centers might gain priority access to carbon-free power sources like wind, solar, and more recently nuclear, potentially diverting these resources from other needs and impacting state climate objectives. This scenario underscores the current overall dilemma: balancing the economic benefits brought by modern tech investments against the substantial energy demands and environmental impacts they require.

Source: S&P Global

Feeding the Beast: Datacenter Co-Location 

FERC to rule on co-location of datacenter with nuclear power plant.

• Next month the Federal Energy Regulatory Commission is expected to issue a decision on a proposal by Talen Energy, a nuclear power plant operator, to allow a direct connection from one of its nuclear power stations in Pennsylvania, to a planned Amazon datacenter adjacent to the plant. The datacenter could take as much as 480 MW from the power plant under the proposal, but this could eventually grow to 960 MW and become one of the largest in the world. 
• The proposal is the first formal request of its kind at a nuclear power station but a number of similar discussions are ongoing as the tech industry has warmed to the idea of co-location with nuclear power plants. There is a lot to like from the industry side:
  • Extremely reliable around the clock power supply that matches the steady demand from datacenters and with annualized capacity factors often exceeding 95%
  • Zero carbon profile and extremely small land use requirements, something that many state regulators have often chosen not to acknowledge. 
  • Nuclear power plant operators benefit most from guaranteed cash flows, and datacenters are happy to pay long term fixed rates. 
  • By co-locating, datacenters can bypass the transmission and distribution network, along with the 50%+ costs associated with typical power supply. 
• The last point will be highly contentious and regardless of the outcome of FERC near-term decision, you can count on FERC and lawmakers to take up the issue before too long. 
• At center stage are fundamental questions of fairness and these will become heated political discussions. Large tech firms, many with market capitalizations in the trillions of dollars, seek to lock up a public benefit at a substantially discounted rate. The fact is that despite co-location, additional T&D costs will be borne by other customers in order to serve datacenter customers. All other energy consumers will need to secure power supplies from a reduced supply stack, without the option to bypass T&D costs. The very simple conclusion is that the marginal costs of power will increase for all other customers connected to the grid and therefore it is hard to imagine the co-location “loophole” will remain open for long.

Hurricane Season - Effects on Energy Demand

As we are currently in the midst of hurricane season, and with the earliest Category 5 hurricane on record in the Atlantic occurring just a few weeks ago, it is important to understand how hurricanes and their effects impact the supply and demand of energy. The cliff notes: not as much as they used to.

• The United States coastline is expected to experience an increase in the number of major hurricanes due to a warming climate, resulting in warmer atmosphere and ocean water. The National Oceanic and Atmospheric Administration (NOAA) predicts a range of eight to thirteen hurricanes this season, up from an average of 7.2 for the 1991 to 2023 seasons. This increase in the number of weather events suggests a significant rise in the frequency and severity of power outages this summer.

Predictive Map of Hurricane-Induced Outages

Source: EPRI

• Regarding supply, power outages can affect offshore gas production as platforms shut down and evacuate due to extreme weather. However, as gas and oil production has increasingly moved onshore, these impacts are not as significant to the overall supply. Additionally, extreme weather can affect solar installations and wind assets, which have both grown significantly along the Gulf Coast. These renewable energy resources are vulnerable to wind-borne debris and damage.
• On the demand side, power outages naturally reduce power burn demand for potentially extended periods, as cities go off the grid. This significant drop in demand affects both gas and electricity prices. Furthermore, extreme weather events like hurricanes impact LNG facilities, primarily located along the Texas and Louisiana Gulf Coast. Exports of LNG are halted by these facilities due to rough seas and the inability to bring in tankers, potentially resulting in a significant amount of natural gas demand disappearing temporarily. This was witnessed earlier this month when Hurricane Beryl simultaneously knocked out native demand in Texas, and also temporarily shuttered the nation’s largest gas export terminal, resulting in upwards of an incremental 40 Bcf added to the national gas surplus.
• Notably, power outages affect both the supply and demand of energy. However, with more resilient infrastructure and the shift of offshore gas production inland, the increased frequency of power outages due to evolving hurricanes—driven by climate change— are now more likely to curtail demand than supply, driving both gas and power prices lower.

PJM Gets A New BRA

PJM to release results of forward capacity solicitation.

• Last week, PJM, the Regional Transmission Operator (RTO) tasked to secure the energy resources across its 13-state footprint, opened their Base Residual Auction (BRA) for the delivery year 2025/2026. If that seems like short notice – it's because it is.
• PJM typically holds their BRAs about 3 years ahead of the delivery period. The delayed event and subsequent uncertainty about the outcome stem from modifications to PJM’s planning methodology which was approved by FERC earlier this year. The modifications expand the Effective Load Carry Capability (ELCC) methodology to better assess each resource type's reliability value to the grid. According to PJM, the updated approach aims to more accurately account for the intermittent nature of renewable resources and the energy limitations of storage technologies. This will result in steep deration factors and less capacity revenue for solar projects
• While the last few auctions have cleared at notably lower prices than the previous part of the decade, our analysis indicates that the results of this auction will likely have an upward effect on clearing prices due to the implementation of ELCC.
• The BRA clearing summary table below lists the base price for the entire RTO. Within PJM’s footprint there are the 20 Locational Deliverability Areas (LDAs) that vary in the amounts of renewable and storage deployed or preexisting capacity constraints. Locational variances are likely to cause some LDAs to clear at even higher levels next week. We covered a similar auction in May in MISO - which also recently underwent a revision to their auction methodology -  causing prices to surge over 500% in Zone 5 (Ameren Missouri).

RPM Base Residual Auction Resource Clearing Price Results in the RTO

Source: PJM

• The results of the BRA will be posted next week on July 30th. The magnitude of the cost impact of the new ELCC methodology remains uncertain and will depend on the specific resource mix and bids received in each constrained area. In our next newsletter, we'll cover the implications of the BRA results, which will very likely set the pricing direction for the BRAs to come in subsequent delivery years. 

When Law Becomes “Law”: Reversal of the Chevron Doctrine Threatens Energy Policy

A look at how the reversal of the Chevron doctrine may affect energy policy in the future.

• On June 28th the US Supreme Court issued a decision overturning the Chevron Doctrine, a decades old legal precedent by which courts defer to federal agencies for rulings that fell under their jurisdiction. The Chevron Doctrine in one of the linchpins that gives administrative agencies authority to interpret law, establish regulations, and perform many core responsibilities such as establishing pollution limits, administrative procedures, and most practically provide definitions around how laws are enacted.
• Without this doctrine in place there is concern that many policies relying on agency regulations to function, are now subject to legal challenge. One such policy is the Inflation Reduction Act (IRA), the Biden Administration’s foremost victory in the realm of climate policy. Laws such as the IRA rely on interpretation from agencies such as the Treasury Department and Internal Revenue Service to establish tax and rebate mechanisms. These agency clarifications are now subject to legal challenge and “re-interpretation” by courts.
• This has fundamentally increased the risk for renewable development, which relies on clarity of these policies before investment capital is committed. 
  The reversal of the Chevron Doctrine has also challenged the fundamental authority of the Federal Energy Regulatory Commission (FERC) over wholesale energy markets. After its decision on the Chevron doctrine, the Supreme Court remanded a case to a lower court to rule on FERC’s interpretation of the Public Utility Regulatory Policies Act (PURPA).
• PURPA requires utilities to purchase power from qualifying small power production facilities (QFs), which are facilities under 80 MW of wind, solar, geothermal, or cogeneration resources, at a cost equal to what they’d purchase the power at from another facility or the cost to generate it themselves. This case came from an initial ruling by FERC that the Broadview IV Solar Project in Montana was not a QF. FERC would not hear an appeal on the subject, which led to a lawsuit.
• FERC is also facing a challenge from a number of Public Utilities Commissions (PUCs) about FERC Order 1920, a recent decision which sets requirements for regional transmission planning and development. It requires utilities to consider their infrastructure and the grid mix 20 years into the future and select resources based on their economics and reliability. This order is meant to increase wider access to renewable energy and green up the US grid at large.
• The PUCs have stated that they think this order would lead to higher costs to ratepayers and the state, which is why they’ve challenged the order. With the Supreme Court’s recent ruling, the interpretation of this order will now be up to 5th US Circuit Court of Appeals, generally regarded as the most conservative court in the nation.
• Mississippi and Louisiana are not the only ones challenging FERC Order 1920. Ohio’s PUC has also filed a case in the 6th US Circuit Court of Appeals. There are also pending challenges from advocacy groups in the 1st, 2nd, 9th, and 4th Circuits of Appeal. Many expect a flood of challenges to pop up over the coming months or years, which could challenge anything from jurisdiction to enact new policy to whether a company should be liable for fines or penalties.
• There may be some hope for Order 1920 however, as FERC has generally stopped relying on the Chevron doctrine recently in anticipation of a Supreme Court ruling on the doctrine. Many expect to see a dissent by FERC Commissioner and Republican Mark Christie used as a key piece of evidence in challenges to the order.

Market Data

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