Powering AI’s surging demand

CONTRIBUTORS

John Kohli

Portfolio Manager, Franklin Equity Group, United States

Preview

Executive summary:

Artificial intelligence (AI) computing and its significant energy demands have caused the power and utilities industry to reassess its own electricity demand projections and the resources required to fulfill future economic growth.
The power and utilities industry has been achieving its own energy transition goals over the past decade primarily in a simplistic manner, but continuation of this strategy is not accommodative of the needs of the current wave of technological growth.
The next stage of the energy transition will include technologies that may not yet be identifiable but have the support of federal and state legislative efforts.
The power industry should not sacrifice carbon reduction targets to meet the demands of growth expectations arising from AI computing needs.
We are encouraged that the power and utilities industry will be able to meet these challenges being faced today.

Tech advances demand the next stage of energy transition

“Energy transition” has been a theme that the US electric utility industry has focused on for more than a decade. A shift toward using more renewable energy resources, such as solar and wind, and less reliance on traditional energy forms, such as coal and nuclear, has characterized this theme. However, the recent, rapid growth in electricity demand forecasts—due to widespread adoption of AI technological advancements and the power requirements needed to support this level of computing—are challenging the power industry’s desire to shake its reliance on carbon intensive fuels. As the technology industry looks to usher in a new era of supercomputing capabilities, such as Microsoft's ambitious US$100 billion “Stargate” machine, the power industry finds itself at a crossroads. If it comes to fruition, the Stargate machine alone could demand a staggering five gigawatts (GW) of power,¹which, in our view, highlights a critical challenge that extends far beyond the realm of manufacturing capacity and algorithmic innovations: the monumental demand for power.

Download the full paper to learn more about power demand, whether coal and nuclear can meet power demands, the pressing need for energy innovation, and seeking the right solutions.

Endnotes:

Source: “Microsoft & OpenAI consider $100bn, 5GW 'Stargate' AI data center.” Data Center Dynamics. March 29, 2024.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Utility companies have been historically sensitive to interest-rate changes. When interest rates fall, utility securities prices tend to rise; when interest rates rise, their prices generally fall. Focusing investments in information technology (IT) and technology-related industries, carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Investment managers’ environmental, social and governance (ESG) strategies may limit the types and number of investments available and, as a result, may forgo favorable market opportunities or underperform strategies that are not subject to such criteria. There is no guarantee that the strategy's ESG directives will be successful or will result in better performance.

Franklin Templeton and our Specialist Investment Managers have certain environmental, sustainability and governance (ESG) goals or capabilities; however, not all strategies are managed to “ESG” oriented objectives.

Important Legal Information

This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Any views expressed are the views of the fund manager as of the date of this document and do not constitute investment advice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole.

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein.

The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.