Electric Storm

While most of the world is focused on the conversation around AI and the constrained supply of GPUs that has driven Nvidia to become one of the 3 largest companies in the world by market cap, the energy story happening behind the scenes has been less actively reported.

While the ESG/Climate Change/Green movements of the past decade+ have tried to rally support for new, cleaner forms of energy around a politically entangled message of saving the earth, economic incentives ultimately drive behavior. ATe energy dilemma created by these new technologies may finally be a catalyst to force the US and other nations to seek out new forms of energy supply. The demand for energy is set to outstrip supply, and supply will need to be asignificantly augmented with both traditional sources like natural gas and renewables, nuclear,and other sources.

Having spent the past few months examining this in the context of my role investing in blockchain startups, there’s an additional angle where I see an inevitable convergence of blockchain and energy playing a role in solving this problem over the coming years.

AI is not just changing how we work and live; it's fundamentally altering our energy landscape. The power demands of AI are staggering and growing at a pace that few anticipated.

Data centers accounted for about 4% of total U.S. electricity consumption in 2023, equivalent to 150 million megawatt-hours (MMWh). 80% of this consumption is coming from 15 states. For example, in 2023, data centers were estimated to comprise a quarter of Virginia's electric load.

According to Goldman Sachs Research, data center power demand is projected to grow by 160% by 2030 and AI expected to represent about 19% of data center power demand by 2028. This would imply data centers consuming as high as 6-9% of our energy supply in a short period of time. Let's look at this from a historical angle.

To fully appreciate the magnitude of the challenge posed by AI's energy demands, it's crucial to understand the historical trends in energy supply and demand.

1. Energy Supply Growth: U.S. primary energy production has been essentially flat since 2000, growing at an average of 1.7% annually.

2. Energy Demand Growth: The demand side has also been relatively stable, with a slightly negative annual growth rate based on data from the IEA.

The projected 160% growth in data center power demand by 2030 represents a significant departure from historical trends. This growth rate far outpaces both the long-term supply growth rate and the recent demand growth rate to where we could see a need for significantly more energy supply over the coming years. From the same Goldman report, then estimate that energy demand will grow by 2.4% from 2022-2030, with almost half of that coming from data center demand.

Beyond AI, we’re also contending with additional forces at work that are set to push the limits of our grid.

• In emerging economies, growing incomes mean a larger percentage of consumers in places like India can afford energy intensive appliances like air conditioners.

• Electric vehicles, which Bloomberg forecasts will add 5.2% to global electricity demand by 2040 as drivers start relying more on the electrical gris to power their cars than filling up at the pump.

• Climate change driving increased demand for energy, as more extreme temperatures (both hot and cold) are straining the grid and driving higher prices for home energy.

This unprecedented growth in energy demand presents both challenges and opportunities. It strains our current infrastructure and creates a pressing need for investment in new energy generation and distribution solutions.

The current energy infrastructure is ill-equipped to handle this surge in demand. The U.S. Department of Energy estimates that $50 billion is required for new generation capacity to meet data center demand by 2030. Additionally, the U.S. Energy Information Administration projects an increase of 3.3 billion cubic feet per day of new natural gas demand by 2030 for electricity generation.

Key challenges include:

• In some regions, like Northern Virginia's "Data Center Alley," new facilities are facing multi-year waits to connect to the grid.

• Countries like Ireland are seeing data centers consume up to a third of their total energy supply, surpassing the demand from the country’s home energy needs.

• The American Society of Civil Engineers reports that 700,000 miles of transmission lines need upgrades, and a total energy infrastructure investment of $637 billion is required by 2028.

The need for massive infrastructure upgrades is likely to drive up energy prices for both wholesale and retail customers. So while the narrative around energy has been muddied in recent years by those thinking this is just a climate change issue or a push by progressives towards a sustainable or green agenda, it is really rooted in practical economics. And this isn't just about building more of the same; it's about expanding and modernizing our entire energy ecosystem in a way that's more efficient and capable of meeting rapidly escalating demands.

While the surge in energy demand driven by AI and data centers may seem distant from everyday life, its effects are likely to ripple through to ordinary consumers in several significant ways:

1. Rising Electricity Prices: As utilities invest billions in new infrastructure to meet growing demand, these costs will likely be passed on to consumers. The U.S. Energy Information Administration projects that residential electricity prices could rise by 2.4% in 2024 alone, a trend that could accelerate as AI-driven demand increases.

2. Potential Grid Instability: The strain on existing grid infrastructure could lead to more frequent power outages or rolling blackouts, especially during peak usage times. This could affect everything from home appliances to electric vehicle charging.

3. Shift in Energy Usage Patterns: As utilities implement demand response programs to manage grid load, consumers may be incentivized or required to shift their energy usage to off-peak hours. This could mean running major appliances late at night or early in the morning.

4. Accelerated Adoption of Smart Home Technology: To manage energy consumption more efficiently, there may be a push towards smart home devices that can automatically adjust energy usage based on grid conditions and pricing.

5. Changes in Housing Markets: Areas with stable and abundant energy supplies could become more attractive for both residential and commercial real estate, potentially influencing property values and migration patterns.

6. Impact on Consumer Goods Prices: As energy costs rise for manufacturers and data-intensive services, these increases could be reflected in the prices of consumer goods and services, from electronics to cloud storage.

7. Job Market Shifts: The massive investment in energy infrastructure could create new job opportunities in the energy sector, while potentially leading to job losses in industries that struggle with higher energy costs.

These impacts underscore the far-reaching consequences of the AI-driven energy demand surge. They also highlight potential areas for innovation and investment, from energy-efficient consumer technologies to grid management solutions that can help mitigate these effects.

The integration of blockchain technology with the energy sector is paving the way for innovative solutions to longstanding challenges in energy distribution, trading, and sustainability. Several startups are at the forefront of this revolution, each addressing different aspects of the energy ecosystem. Jasmine Energy* is transforming the way Energy Attribute Certificates (EACs) are traded and managed. By leveraging blockchain technology, Jasmine enables 24/7 live trading of EACs with unprecedented efficiency. Their platform streamlines due diligence processes, offers rapid 9-second settlements, and provides a one-click retirement process for EACs. This approach not only accelerates cash flow for energy producers but also simplifies the process for climate-conscious actors to support high-impact, current vintage solar and wind projects.

Additionally Neutral* is introducing a new order book exchange for these energy assets, innovating in a market that’s overwhelmingly been run through inefficient brokerage models with over the counter trading.

While Jasmine and Neutral focus on certificate trading, Plural* is democratizing access to clean energy investments. Their platform allows individuals to purchase shares in solar projects and receive dividends from the energy sold. This model of fractional ownership opens up opportunities for a broader range of investors to participate in the clean energy transition, potentially accelerating the deployment of new solar installations. Beyond financing, we can envision a world where solar projects financed on Plural can lead to forms of community owned solar, where equity owners in the facilities directly draw from the facilities rather than sell into the grid, when it makes financial sense.

These types of Virtual power plants are being explored by companies like Daylight who is building a decentralized protocol that aims to revolutionize how the energy grid is programmed and managed. By leveraging distributed energy resources (DERs) such as solar panels, batteries, and smart thermostats, Daylight is creating a system where anyone could potentially build and operate a virtual power plant. Their initial focus on selling DER data to traditional energy companies for grid optimization represents a crucial step towards a more flexible and responsive energy grid.

Glow introduces a novel "recursive subsidy" mechanism designed to rapidly scale solar energy production. Their cryptoeconomic system produces high additionality carbon credits from cost-effective solar farms. By requiring participating solar farms to contribute 100% of their gross electricity revenue to the Glow incentive pool, they ensure that incentives are directed towards projects that truly need financial assistance. This approach, combined with their dual-token system (GLW and GCC), creates a powerful economic engine for accelerating solar deployment while also providing verifiable carbon credits.

These startups collectively represent a shift towards a more decentralized, transparent, and efficient energy ecosystem. Jasmine Energy's EAC trading platform could significantly increase liquidity and accessibility in the renewable energy certificate market. Plural's fractional ownership model could unlock new sources of capital for solar projects. Daylight's decentralized grid management protocol could lead to more resilient and responsive energy systems. And Glow's innovative incentive structure could dramatically accelerate the deployment of solar energy.

By leveraging blockchain technology, these companies are not just digitizing existing processes, but fundamentally reimagining how energy is produced, distributed, traded, and consumed. Their innovations have the potential to accelerate the transition to clean energy, improve grid stability, and create new economic opportunities in the energy sector.

As these technologies mature and integrate, we could see a future where energy systems are more democratic, responsive, and sustainable. Consumers might become prosumers, actively participating in energy markets. Grid operators could have real-time, granular control over distributed resources. And investors of all sizes could directly support and benefit from the clean energy transition. While challenges remain, particularly in terms of regulatory alignment and large-scale adoption, these blockchain-based solutions represent a promising path towards a more sustainable and efficient energy future.

For investors, the convergence of AI and the resulting energy demands presents a unique opportunity. The demand driver is clear and accelerating: the global appetite for energy isn't going away. The need for solutions is urgent, with current energy infrastructure straining under growing demands.

This convergence creates opportunities for several types of investments:

1. New Energy Generation: Companies involved in developing and deploying new energy generation capacity, including traditional and renewable sources.

2. Grid Infrastructure and Modernization: Firms focused on upgrading and expanding the grid to accommodate increased energy demands.

3. Energy Efficiency Solutions: Technologies and services that help measure reductions in energy consumption and improve efficiency in data centers and other AI-powered facilities.

4. Energy Trading and Management Platforms: Creating more efficient and transparent markets for energy trading.

5. Innovative Financing Models: Developing new ways to fund and incentivize energy projects.

However, success in this space requires more than just identifying promising technologies. Investors must also consider factors such as regulatory compliance, integration with existing systems, and scalability.

This intersection of cypto and energy has been a consistent investment theme for us at Factor, as we look for non-consensus ways to invest in AI and fund blockchain applications with mainstream impact. The energy sector is on the verge of a fundamental reshaping, driven primarily by the escalating energy needs of AI and growth in emerging market economies. This transformation presents both enormous challenges and unprecedented opportunities.

For entrepreneurs and companies operating in this space, the task is to create solutions that can be practically implemented to meet the rapidly growing energy demands. The examples of Jasmine Energy, Plural, Daylight, Glow and many others demonstrate that there's significant innovation already happening, but there's still ample room for new ideas and approaches.

For investors, the key lies in identifying those innovations that not only offer technological advancement but also demonstrate a clear path to real-world implementation and value creation, driven by the fundamental supply-demand imbalance in the energy market.

In conclusion, the convergence of AI and the resulting energy demands represents a rare alignment of urgent need and transformative potential. While the challenges are significant, so too are the potential rewards.

* Factor Portfolio company