Energy sector companies navigate surge in electricity demand

The North American energy landscape is undergoing a significant transformation, driven by a surge in electricity demand far greater than what the region has seen in decades. This increase is due to multiple factors, including rising data center demand, electrification, electric vehicle adoption and new energy technologies like green hydrogen. Rising demand, combined with the emphasis on clean energy sources to help companies meet environmental, social and governance goals and qualify for tax incentives, is reshaping the industry. Here we explore the trend in more detail, including the growth drivers, constraints and potential solutions.

Drivers of electricity demand

A recent report from the U.S. Energy Information Administration (EIA) forecasts a 2.4% increase in electricity consumption this year. This growth is 12 times higher than utilities experienced from 2010 to 2020. Simply put, growth percentages that may seem low are significant compared to what utilities are used to, and utilities are feeling the stretch.

Data center load growth is a major contributor, as data centers increase in number, size and density across the country. The International Energy Agency forecasts data center electricity consumption to grow to 6% of total U.S. demand by 2026, an increase from 4% in 2022. Currently, 80% of the national data center load is concentrated in just 15 states, according to the Electric Power Research Institute. This has created a disproportionate strain in certain regions—Virginia takes the lead, with data centers constituting an estimated 25% of the state's total electricity load in 2023.

Electrification of residential and commercial heating, along with certain industrial processes, is also increasing power demand as traditional oil- and gas-based heating systems are replaced by electric heat pumps and other electric solutions in pursuit of decarbonization. The proliferation of EVs is further driving demand growth. The EIA estimated that annual EV electricity consumption in 2023 grew to almost five times the 2018 level, as EV adoption continues to grow rapidly.

The emergence of green hydrogen—a viable energy source for emissions reduction in hard-to-abate, energy-intensive industrial sectors—also promises to contribute to rising electricity demand, as green hydrogen production requires renewable energy sources. The U.S. goal of 10 million tons of green hydrogen production capacity by 2030 would account for 12% of the forecast for U.S. electricity demand in 2030, eclipsing data center demand.

Grid constraints slow capacity growth

While the demand for electricity grows, the capacity of the power grid to transport it is a major constraint. The U.S. and Canadian electricity transmission and distribution infrastructure, designed for slower growth rates, is struggling to keep up. The interconnection queues for new energy projects have lengthened considerably, growing over 30% in 2023. As a result, for instance, the average time to approve new power plants has grown from under two years to at least three or four years. 

Drivers for this backlog include more requests for projects seeking transmission connections—seven times more last year compared to 10 years ago—and difficulty clearing various administrative and permitting hurdles. These delays make the project economics less attractive given the environment of higher interest rates carried over a longer time. The Federal Energy Regulatory Commission is working to address the problem, announcing new rules in the last year to help streamline some regulatory processes. 

Meeting growing demand

Addressing rising electricity demand requires a multifaceted approach incorporating a variety of energy sources and optimization of electricity generation and distribution.

Renewable energy sources like solar and wind are central to U.S. plans to meet demand growth, with solar forecast to grow by 41% in 2024 and solar, wind and hydropower combined forecast to meet 22% of U.S. energy demand in 2024, according to the IEA. Yet their intermittent nature requires an even faster rise in battery storage to ensure a stable power supply during periods when renewable sources are not generating electricity. Advances in battery technology and increased storage capacity will be critical to managing this intermittency, and research and installation of battery power are already seen as key outcomes of the Inflation Reduction Act.

Nuclear power is also seeing a resurgence, given its low-carbon footprint and consistent output (especially compared to renewables). It is particularly well suited for applications with consistently high power demand like data centers, leading to interest in new technologies like small modular reactors. SMRs are appealing for supplying direct power to data centers due to their lower cost and shorter construction times than traditional reactors. Power purchase agreements from major tech companies for the data centers they own or use provide the backbone of dependable demand to justify the investment in nuclear power. There is also overall renewed interest and incentives to grow utility-scale nuclear power, with 22 countries, including the United States and Canada, committing to tripling nuclear energy capacity by 2050.

Alongside all these cleaner energy sources, natural gas-powered generation will continue to play an important role in providing baseload power generation capacity for decades to come, given its reliability, flexibility and lower carbon footprint compared to coal. In fact, the EIA projects that natural gas will remain the largest source of U.S. electricity generation through 2050.

While artificial intelligence is creating new challenges for energy demand, it also has the potential to yield solutions. AI-driven smart grid technologies can optimize power distribution and reduce peak demand through intelligent load shedding that reduces some of the strain on the grid during peak periods. By leveraging AI for demand response and grid management, utilities are improving the efficiency and reliability of the electricity supply​​. Further, AI solutions are identifying areas to create efficiencies in processes and design that may ultimately reduce electricity demand.

Takeaway

The escalating electricity demand driven by data centers, electrification and emerging energy technologies like green hydrogen presents both challenges and opportunities. As we embrace these transformative technologies, the energy sector must innovate and invest in diverse solutions to ensure a reliable, sustainable power supply. Industry leaders, investors, governments and regulators must collaborate to address grid constraints, invest in infrastructure build-out, enhance energy efficiency and integrate advanced technologies that support the evolving energy landscape. By doing so, they can not only meet rising demand but also capitalize on opportunities for growth and sustainability in the energy sector.