Natural gas: Why U.S. operators are bullish on AI data centers

A growth in manufacturing investment and data centers for Artificial Intelligence (AI) applications could provide a significant boost to natural gas demand in the U.S. in coming years.

Source: Kinder Morgan April 2024 Presentation – Available via Evaluate Energy Documents

In 2023, natural gas met just over 43% of U.S. electricity demand. If a similar ratio (40%) of projected demand for AI data centers is served by natural gas, that would result in additional demand of 7 to 10 bcf/d in coming years, according to oil and gas pipeline firm Kinder Morgan.

Executive chair Rich Kinder recently noted that gas is well suited to meeting AI data center demand because of its low prices and uninterrupted supply profile. “Natural gas and nuclear still have an extremely important role to play in order to provide the uninterrupted power that AI and data centers will need,” he said.

Some estimates of future demand from data centers are even higher. In a recent interview with CNBC, EQT chief executive Toby Rice cited some estimates that AI data centers could add 16 bcf/d of demand in the U.S. before the end of the decade — equivalent to the current natural gas demand for LNG exports.

“There is a lot of excitement in the natural gas markets. We’ve talked a lot about LNG, but one market that is emerging that we are equally excited about is the AI boom that is taking place,” said Rice.

Growth spurt

This level of expected growth in gas demand comes from a part of the U.S. energy mix that has traditionally expanded slowly. Total electricity consumption in the U.S. rose from 3,700 terawatt hours (TWh) in 2002 to just 4,070 TWh in 2022, an average annual growth rate of 0.5%, according to the U.S. Energy Information Administration (EIA).

A year later, the forecast for U.S. electricity demand growth over the next five years has increased from 2.6% to 4.7%, according to a report from Grid Strategies at the end of 2023, “The Era of Flat Power Demand is Over.”

This would take total U.S. electricity demand to 4,261 TWh by 2027. Next year’s forecast is likely to show an even higher nationwide growth rate, according to the report. The report attributes the large increases in five-year growth expectations primarily to a surge in data center development and manufacturing facilities.

Similarly, Boston Consulting Group (BCG) expects electricity demand from data centers to grow from 126 TWh in 2022 to 335 TWh by 2030. Growth is being driven by new facilities being established for generative AI applications, which could be solely responsible for around 15% of U.S. electricity demand in 2030, according to BCG.

Chip and battery manufacture

A growth in domestic computer chip and EV battery manufacture — incentivized by the Biden administration’s Inflation Reduction Act and CHIPS and Science Act — is also likely to be a contributing factor to growing U.S. electricity demand.

Models of expected electricity demand for these sectors are in short supply. But the Taiwan Semiconductor Manufacturing Company (TSMC) facility in north Phoenix alone will need 200MW of power when it begins operations in 2025 — the equivalent of 80,000 homes.

If all battery manufacturing plants currently announced were constructed, they could have an electricity demand of 4,500 TWh per year collectively, according to the Centre for Strategic and International Studies (CSIS).

Together with data center demand, these additional loads will fall particularly heavily on certain regions. PJM Interconnection — which operates a wholesale power market in the Midwest and Northeast of the U.S., serving major data center locations in northern Virginia — has doubled its 15-year annual forecast for demand growth this year, estimating that demand in the region will increase by 300 TWh to 1,100 TWh by 2039.

Climate target compliance

Any new gas capacity to meet this growing demand from the power sector will have to be compliant with the federal goal of a net zero carbon electricity sector by 2035 — assuming that is not revoked by any new administration.

There are a number of pathways to meet the 2035 net zero carbon electricity sector goal modelled by the National Renewable Energy Laboratory (NREL), most of which involve a significant reduction in gas generation capacity. Some models, however, see an increased role for gas-fired generation, with the most bullish for gas seeing around 400-600 GW of capacity online in 2035, compared to around 270 GW currently.

These scenarios foresee plants running at lower utilization rates than today, primarily acting as bridging capacity at times of peak demand or outages. Combined Cycle Gas Turbine (CCGT) plants are well equipped to serve this purpose because they are highly efficient and can come online quickly.

The NREL scenarios showing gas capacity growth also foresee these plants being equipped with carbon capture and storage (CCS). In April, the Environmental Protection Agency (EPA) released final rules for new gas-fired capacity that requires plants to use CCS technology to capture 90% of their emissions by 2032. Plants compliant with the rules could still theoretically be built without causing the U.S. to overshoot the 2035 net zero carbon electricity sector goal.

Donald Trump has promised to “cancel” the Biden administration’s power sector decarbonization plans rules should he be elected, and to opt for the “cheapest” electricity generation possible.

But many gas firms believe that, even if the restrictions of the Biden administration’s decarbonization targets remain, short term demand for gas will grow because of the AI boom.