The Tectonic Force that’s about to Strike Technomics

I recently had the privilege of attending a technomic scenario-based exercise held near Oxford in the UK. The conference was hosted at a private estate. It included participants from various Western governments and the private sector, the latter comprising primarily Wall Street, Silicon Valley, the North Carolina Research Triangle, and the City of London. “What is technomics?” you may ask, “And why does it matter to me?”

The term “technomic” is a combination of the terms “technology” and “economics.” The study of technomics assesses the impact of technology on business and economics. This particular scenario-based exercise, set in 2029, was designed to simulate the effects of technological change through several different lenses including economic growth, the evolution of societal norms, the role of technology companies in global governance, and many more. It also considered chronic and acute global challenges such as climate change and great power competition.

One theme emerged more prominently than any other in this year’s game – the near-term impact of business-driven energy demand.

“Businesses today tend to have two things in common,” says David Uberti in an article in the Wall Street Journal this past weekend. “One is that they represent a U.S. economy increasingly driven by advanced manufacturing, cloud computing, and artificial intelligence. The other is that they promise to hoover up huge amounts of electricity.” While the effect is most pronounced in the US, variations of the theme can be seen in every region and in every economy globally.

The Growing Energy Demand Driven by Business Innovation

Stated simply, global growth and innovation in renewable energy may not be sufficient and may not occur quickly enough to deliver the exponentially increasing AI-driven future electricity demand, especially when the relative recent (and projected) underinvestment in new fossil fuel sources is considered.

Let’s briefly examine each of the factors driving this dynamic.

First, is electricity demand. US power usage is projected to expand by 4.7% over the next five years, according to a review of federal filings by the consulting firm Grid Strategies. That is up from a previous estimate of 2.6%. The projections come after efficiency gains kept electricity demand roughly flat over the past 15 years, allowing the power sector to limit emissions in large part through coal-plant closures. This play is reaching its end game and probably understates the scale of the growth as it’s unlikely that the combined effect of AI chips and cyber-currency mining is fully priced in.

Second, is electricity supply from renewable sources. The Biden administration set a goal to install 30 gigawatts of offshore wind capacity by 2030, but recent estimates indicate that the actual number will be closer to half that according to the Center for Energy Innovation at UMass Lowell. Despite the $1.2 Tn in the 2021 Bipartisan Infrastructure Law (BIL), it is a similar picture elsewhere in the renewable energy space. These projects are complex, take time, and are subject to the verisimilitudes of a supply chain that continues to sustain shocks even post-COVID.

The third is, given the insufficiently robust growth in renewables, is the ability of so-called “transition fuels” to make up the difference. This point is far from obvious. To quote a recent study by consultancy Wood McKenzie, “The evolving balance between decarbonization and security of supply will act as a brake on investment decisions in gas and LNG for many companies. But COP28 has added new uncertainty to the outlook for gas. As a fossil fuel, it is one that the governments of the world aim to transition away from. But as the most widely accepted “transitional fuel”, it will still have a role to play in providing energy security for some time.

The CEO of one of the largest US domestic oil and gas private equity firms with whom I spoke recently was rather more direct. “We won’t invest in bringing additional capacity online until the political risk comes off the table. The energy shortage needs to become more acute before we’ll dip our toe in the water again.”

But it’s how this effect manifests itself at local level that should concern business leaders the most.

So what is the risk?

The primary concern is the geographic concentration risk. US electricity demand growth is accelerating, and businesses are seeking out inexpensive, stable, and plentiful areas of the grid in which to tap into this market. As the above diagram shows this growth is being realized in an increasingly small group of “nodes.”

This concentration effect is even more pronounced when we look at overall total power demand where Northern Virginia in particular stands out as a source of concentration risk, being by far the largest source of data center capacity in the world, AND with the greatest growth.

Closely related to the Concentration Risk is the Business Risk. Excessive reliance on any one location not only exposes a business to a potential operational disruption, but also to a litany of business risks related to the cost and availability of networks, electricity, and even the water necessary to cool the large data center server farms as we increase thermal design power (TDP) of GPUs and transition to high-density AI servers with liquid cooling.

The transition period from fossil fuels to renewable energy sources is proving to be far less straightforward than many had anticipated. Business leaders, especially those in the technology space, need to consider the cost, availability, and resilience of energy supplies as a matter of business and corporate strategy in a way that they haven’t in the past.

Technomic scenario-based exercises like then one that I attended last week are an excellent tool for identifying risks and establishing base-case, worst-case, and best-case business scenarios. Few companies engage in this type of planning, yet the future belongs to those that do.