The forecasted growth for US power demand has shifted investor interest in natural gas-fired assets, putting them in a more favorable light compared to four years ago, investment bankers told audience members at the S&P Global Financing US Power Conference in Houston.
Sentiment around natural gas-fired assets in the power sector has changed from four or five years ago, panelists told conference attendees on Oct. 24. Investors were weary of acquiring gas-fired plants believing the US was on the path to phase out those assets by the end of the decade. Now, with forecasts for increased demand from datacenters and artificial intelligence, in parts of the country, such as PJM and ERCOT, there is renewed interest in these generation assets.
Demand growth
Utility datacenter load forecast continue to push higher, Douglas Giuffre, Executive Director at S&P Global Commodity Insights, told audience members in a conference presentation.
Load growth from datacenters has been "the topic of the day," Giuffre said, noting that datacenters were only sporadically mentioned by utility company in earnings calls until late 2023. Since then, utility company load forecasts for 2030 have jumped in parts of the country. For example, Dominion’s 2030 load forecast increased 42% in 2024 compared to its 2030 forecast published in 2022.
The caveat is that the industry has a history of over-forecasting power demand, and data center growth is not a one-to-one growth in power demand, Giuffre said. Expansion in artificial intelligence and datacenters may offset power consumption in other areas.
The growth in data centers is real though, Giuffre said. Vacancy rates of data centers in Northern Virginia have dropped 62% from their peak in 2019. S&P Global Commodity Insights estimates a 2% annual average growth rate in US electricity consumption from 2025 to 2035, representing about a 10-year growth of about 400 TWh.
In the US, there has been a little bit of a deprioritization of environmental social and governance (ESG) and more acceptance of the longevity of natural gas compared to five years ago, Gregory Hort, managing director at Lazard, told conference attendees during a separate panel discussion on US power market M&A dynamics.
Existing Natural Gas Assets
"Four or five years ago, the sentiment was we were going to wake up in 2030 and not have any gas left," Hort said. "I think that's completely not the case anymore."
"We're seeing a robust increase in our investors interest," Andrew Brennan, managing director at ArcLight said. "It’s early stage; we're seeing the underlying investor sentiment, but we're not seeing a lot of new market participants, and I think that's got to change."
This turnaround in sentiment is true both of investors that have traditionally been fossil fuel friendly, as well as those that have not. If the demand growth projections pan out, the assumption is that the current project pipeline of renewable generation sources and battery storage will not be enough to meet that demand and some form of traditional power generation source will be needed to fill that gap.
If natural gas-fired generation will fill in demand gap, that leads to broader growth in the gas industry, extending to natural gas pipelines and the upstream side of the industry, J.B. Oldenburg, managing director Quantum Capital Group, said.
"What we're seeing now is over the last three years, the gas fleet in the US has crept up above 40% utilization rate, which is an all-time high," Oldenburg said. "We’re pulling more gas. What our L[imited] P[artnership]s are looking at, which are still very much fossil fuel friendly LPs, is how does this react throughout the entire chain, and what is the longevity of it?"
If the predicted electricity demand growth materializes, those operating existing assets should have a higher value tomorrow than they do today, Oldenburg said.
"I think the question is, ‘When is that tomorrow,’" Oldenburg said. "It's the energy addition, not transition, mantra that I think folks are really starting to buy into."
Even limited partnerships that are not very fossil friendly have shifted their views, Matthew Willis, partner at Hull Street Energy said.
"We have a LP base that is actually not very fossil fuel friendly," Willis said. "In 2020, it was very much all about renewables and a lot of uncertainty, a little bit of gas exposure. That's totally changed now even in the endowment community, which is the leading edge of ESG. The LPs have developed a much more nuanced, reasonable, realistic view of how the power sector is going to change going forward."
Not all the change in investment sentiment is just because of demand growth, Willis said. There was also realization that the energy transition is difficult and will take a lot of investment.
"There are all kind of uncertainties tied to that investment," Willis said. "The use of farmland for solar, all the issues around battery safety, noise, things like that really disenchanted, as well as educated, parts of the investment."
New Assets
While the power demand outlook has renewed interest in existing natural gas assets, there are still high hurdles for new assets, namely the expense and long interconnection queues to hook new generation to the electric grid, panelists said.
Long-term load forecasts vary by location. Some forecasts for Northern Virginia predict that by 2028, the data center load will be roughly equivalent to New York ISO zone J, the pricing zone for generation located in New York City.
"You're going have New York City in like two suburban counties in Northern Virginia," Willis said. "It's a huge transmission challenge, and it's a huge generation challenge. "Even if we wanted to build a plant, we put an interconnection application today, we're not even sure when we find out 2027, 2028? It’s just really hard."
From a sustainability standpoint, the technology sector’s desire for carbon free baseload power and its need for a substantial increase in firm power could make the economic pressure that actually gets carbon capture and storage off the ground, Hort said.
Conference Highlights
Load growth from data centers was the topic of the day, as other panel discussions also touched on demand growth nationally for power and, what that means for generation- particularly natural gas-fired generation. The conference kicked off with a one-on-one conversation with Bobby Tudor, founder and CEO of Artemis Energy Partners. Tudor highlighted the trillions of investment dollars needed to fully realize the energy transition and the central role natural gas will play not only bridging to that transition but will also play in meeting data center demand.
A second one-on-one conversation was held with Thomas Jordan, chairman, president and CEO of Coterra Energy. Jordan touched on a number of topics, including Coterra’s decision to electrify its gas production operations in the Permian Basin.
Another panel discussion focused on power demand and the electrification outlook in the US. S&P Global Research Analyst Dan Thompson, who specializes in data center growth, was joined by other industry experts such as Roger Kranenburg, vice-president of energy strategy and policy at Eversource and Adam Dewolf, vice-president of energy strategy at Tract, a company that work on datacenter infrastructure development. The panelists explained nuances to the overarching trend of increased data center load.
In addition to high level panel discussions on meeting demand growth, which is fueling investor interest in all types of generation, there were also panels that took a deeper dive into power finance, such as two panels on day two of the conference- "Innovations in Energy Financing: The New Capital" and "Navigating the Complex Landscape of Tax Equity in US Power Finance."
