JP Morgan: Data center power demand forms early inflection point in early cycle

The growth outlook for electricity demand continues to be raised, and it is expected that there will be a full-fledged inflection point due to the expansion of data centers after 27. This is also confirmed by the fact that there is a large-scale GW-class pipeline that has not yet been reflected in the official forecast, and the size of the facility where electricity has actually been started is only a small part of the total expected demand. For example, according to ERCOT statistics, the actual load supplied by electricity is only about 5GW compared to the 205GW-sized large-load pipeline.
This trend puts pressure on the increase in Capex and is gradually concentrating on the power generation and transmission sectors, and both sectors are expected to grow in double digits. On the other hand, distribution capex is a trend that is generally sideways amid early single-digit growth. However, there is a possibility that the O&M budget will expand as expectations for sales growth increase due to increased power loads, and positive factors for related companies as the proportion of T&D expenditure is large.

Demand for electricity accelerates toward the end of the 20s, and data center demand is still in its early stages

Electricity demand has shifted from the past no-growth outlook to the current low-digit growth, and the growth rate is expected to accelerate further toward the end of the 20s. – Investments in electrification and manufacturing led to demand inflection points last year, but this year, the focus of the discussion has shifted completely to the data center. However, unlike the intensity of the discussion, the actual expansion of power demand in the data center is still in the early ramp-up stage.

Utilities Capex budgets continue to grow, driven by increased investment in power generation and upgrades to transmission systems, with the distribution sector mostly unchanged. Capex is forecast to grow 10% in 26 and 7% in 2027, a significant increase from the 5% to 6% forecast at the time of the preliminary forecast in early October.
In the power generation sector, storage can be a complementary solution in the short term, but in the long run, there is a widespread perception that securing gas and nuclear-based base load power is essential, which structurally pushes up the expansion of Capex. Data center customers have recently shifted to a more aggressive response to demand by reducing some AI assets in peak power segments, creating conditions for early inflow of more DC loads within five years and larger infrastructure in the long run.
This shows that power is still a key constraint on data center operation, while customers are creatively solving it and accepting phased operation. From the perspective of transmission and distribution, transmission is still superior to distribution, and short-term growth is expected to be double-digit for transmission and low to medium-single-digit for distribution. However, the expansion of O&M budget due to increased electricity sales is positive for T&D as a whole.

Utilities are introducing pricing plan for large-load customers, including:
1) Minimum usage agreement 75-80%, 2) 15-20 year long-term contract, 3) interim termination fee, 4) credit reinforcement clause
This is a structure to ensure that large-scale data center customers do not affect the burden of electricity bills on existing customers. Data center customers hardly hesitate to meet these conditions due to supply/demand conditions. Southern Company said customers who initially left the company recently returned and signed a contract, and Dominion explained that it now takes 3-7 years to connect to DC power (up from 2 to 4 years in the past). Nonetheless, demand is at an all-time high, and customers who leave can be replaced immediately.