US utilities will face a “significant” challenge as power demand surges for the first time since the 1990s, according to a new report by energy research firm Wood Mackenzie. Thanks to data centre development, energy-intensive manufacturing and growing electrification of transport and heating; some regions in the US will see 15% electricity demand growth through 2029.
Released on Oct 17, the “Gridlock: the demand dilemma facing the US power industry” report claims US electricity demand growth will be between 4% and 15% through 2029, depending on the region.
According to Wood Mackenzie, demand growth rates for individual utilities may be much higher as the demand being added to the grid is “not evenly spread” and one large load can have a “significant” impact on the growth of individual utilities.
Today’s ecosystem players are not prepared for an environment of growing power demand. “In most industries, demand growth of 2% to 3% per year would be easily managed and welcomed,” says Chris Seiple, vice-chairman of power and renewables with Wood Mackenzie. “In the power sector, however, new infrastructure planning takes five to 10 years, and the industry is only now starting to plan for growth.”
The problem extends even to regulators; Seiple adds that most state public utility commissioners have “little experience” of regulating in a growth environment. “As technology C-suites realise that energy may be the largest constraint on their growth, they are shocked as businesses that move at light speed learn about the pace at which electric utilities move.”
Demand drivers
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Data centres and the burgeoning artificial intelligence industry have become main drivers of activity, with Wood Mackenzie identifying 51 gigawatts (GW) of new data centre capacity announcements since January 2023.
In the report, Wood Mackenzie has considered a scenario in which electricity demand from data centres grows by a “mid-range” estimate of 15% per year over the next five years, which is about 25GW of new data centre capacity.
Data centres will be competing with a resurgence in US manufacturing, particularly in the areas of battery, solar wafers and cells and semiconductors, which are projected to add up to 15,000 megawatts (MW) of high-load-factor demand over the next few years, says Wood Mackenzie.
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Lastly, the wider electrification of the economy will drive demand, says the firm, with electric vehicle use continuing to grow and electrolysers connecting to the grid — potentially adding another 7,000MW of demand through 2030.
2024-2029 gigawatt-hours (GWh) demand growth as a percentage of 2024 GWh demand
Capacity constraints
On the other hand, many supply constraints are impacting the system’s ability to meet this demand growth, such as coal plant retirements; the lack of transformers and breakers needed to interconnect new plants and large loads; and the slow pace at which interconnection studies are completed and transmission capacity is added to the grid.
From now to 2030, Wood Mackenzie forecasts annual utility-scale renewable additions to grow from around 29GW to 40GW per year.
“The constraint is not the demand for renewables, but the ability to get through permitting, interconnection and building out the transmission system accordingly,” says Seiple. “All things being equal, our renewable forecast additions would accommodate electricity demand growth of about 2% per year. If renewables are only able to barely match the pace of demand growth, it means we won’t be decarbonising the power sector.”
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Price pressures
For now, little demand growth over the last 15 years in the US, coupled with “some” new supply from renewables, has kept wholesale power prices lower, says Wood Mackenzie. However, this may change.
With new demand growth comes “a new era”, says Seiple. “Electricity prices will be under upward pressure. Valuations of fossil and nuclear assets are increasing as the market absorbs this new paradigm.”
More announcements of deferred coal plant retirements and efforts to reopen previously-closed nuclear plants may follow, says Seiple. “What will be most interesting is how this plays out in markets where there is no retail choice versus markets where it does exist.”
The report concludes that transmission planning, permitting and construction are the biggest bottlenecks to meeting future demand growth. It will take an integrated approach from utilities, regulators and policymakers to meet this challenge and buildout needed to protect US national security, boost strategic economic growth and decarbonise the power sector to address climate change.
“This will be a major challenge. The last time the US electricity industry saw unexpected new demand growth like this was during World War II,” says Seiple. “Between 1939 and 1944, manufacturing output tripled, and electricity demand rose 60%. It was a closely coordinated national effort that brought together industry and policymakers to address the challenge and find innovation along the way. A similar effort is needed now.”
Chart: Wood Mackenzie
