Where does gas stand at the AI-energy nexus?
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Scott Clavenna |?With each passing week, it’s getting harder to square the discourse around gas as a generation source for the AI data center market. There’s a lot of rhetoric about gas being central to the expansion of AI, but there are also many opposing forces at work. It’s hard to come to a single rational “take.” Just in the past week we’ve witnessed the following:
The Trump Administration is also trying to put its thumb on the scale for the gas industry — from executive orders streamlining permitting processes, to reopening federal lands and waters to exploration and extraction, and the removal of restrictions on LNG exports to non-free trade agreement countries. The consultancy Rystad Energy sees enough tailwind here to say “natural gas emerges as a critical power source to supply firm and flexible power within an immediate time frame.”
Yet anyone paying attention to the power industry can be forgiven for feeling gaslit. For 2025, the EIA forecasts that of the 63 GW of total capacity additions on the grid this year, 93% will be wind, solar, and battery storage. Gas is left with only 4%, while also facing retirements, rising equipment costs with limited inventories, volatile fuel prices exposed to geopolitics, constrained pipelines, and unevenly distributed supply across the U.S. In markets like ERCOT, solar and batteries are helping meet a rising peak while lowering wholesale and retail prices, and are being deployed much faster than gas.?
Katherine Hamilton, speaking on a recent episode of Open Circuit, isn’t feeling sanguine at all about the prospect for gas. “They’re doing [gas] in the name of dispatchability and flexibility, but that is exactly what wind and solar and batteries provide. Even the CEO of NextEra says, look, you can build a wind project in 12 months, a storage facility in 15 and a solar project in 18 months. Gas plants take years to build, and so why not use what we already have? And it’s working, it’s working really well.”
In Texas, Engie recently withdrew two gas projects from consideration that would have been supported by the Texas Energy Fund, citing equipment procurement constraints. Increasing costs are a factor for others, as is access to supply.?
“And so this is a train wreck,” said Jigar Shah on Open Circuit. “I don’t exactly know where this is going to go but forcing everyone to do natural gas when it’s coming in at such expensive prices and nobody wants to build merchant natural gas. You see that in Texas. You see that in lots of places.”
Where does this leave gas at the AI-energy nexus? Today it feels like a favored player, the team owner’s son who starts every game regardless of performance or disadvantage. Speaking at a recent ACORE Forum, Andrew Wheeler, former leader of the EPA during Trump’s first term, suggested that the interconnection queue could be “reordered” based on system needs, clearly favoring gas over renewables.?
Policy support is consistent and ubiquitous, and appears at every roadblock the gas industry may face. Yet contradictions abound. Executive orders link the support for gas with energy affordability, while recently imposed import tariffs on Canadian energy (even at a lower rate of 10%) will drive prices up. Thus, we’re not in a marketplace where the outlook can be forecast by understanding the economics or regulatory constraints in isolation from an administration whose north star is making fossil fuels supreme. Gas will follow two paths in supporting AI data centers: one into utilities meeting load growth and the other into data center developers bringing gas generation on site. This is already well underway, only the pace and price (in dollars and emissions) is unknown.
Bianca Giacobone | Over the past few months, major global investors have turned their attention to AI Infrastructure as an emerging asset class, with billions in partnerships announced by Blackrock, KKR, and Energy Capital Partners.
Yet smaller investors are also positioning themselves to ride AI's tailwinds. My recent conversation with the managing partners at first-time fund AI Infrastructure Partners reveals what AI infrastructure might look like in the lower-middle market.
Jason Frank and Bill Woodruff launched their fund last fall as AIIP Fund. They originally planned to name it AI Infrastructure Partners, but discovered the name had just been claimed by a coalition including Blackrock and Microsoft — something Woodruff found both "kind of fun" and "validating." While the Blackrock coalition aims to raise $30 billion, AIIP targets a more modest $75 million (capped at $145 million) to invest in companies occupying the middle of the AI infrastructure pyramid: not venture-backed AI software startups nor major infrastructure asset owners, but the power distribution, storage, and semiconductor companies poised to benefit from the AI revolution despite being too small for acquisition by major funds.
"We're looking to buy generally profitable and established businesses," Woodruff explained, "which distinguishes us from the massive number of AI venture-funded entities with substantial valuations. We're not interested in businesses that aren't established or profitable, and we're avoiding the AI-linked premium on transactions." Their focus: businesses "that exist today in this essential layer of AI infrastructure" but "are too small or not ready to be acquired by a $30 billion fund."
The strategy builds on Frank's experience as CEO of semiconductor sub-system supplier HIS Innovations Group, which he grew from an $11 million valuation to $120 million before its 2023 acquisition. For small investors with operational expertise like AIIP, the opportunity lies in "taking a business and enhancing or repositioning its capabilities to benefit from the massive tailwinds" of AI, targeting 30% net annual returns.
AIIP expects to finalize its first investments and complete its final close in the coming months, putting its strategy to the test.
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BIANCA GIACOBONE | The Electric Power Research Institute is expanding its data center flexibility demonstration project outside the U.S. — and has already signed on new European participants.?
The project, known as DCFlex, explores how data centers can be leveraged as flexibility assets for the grid. First launched in October 2024 with around 15 utility companies, independent power producers, and data center operators, it now counts nearly 40 participants, including Dominion Energy, ERCOT, PJM, Google, Microsoft, and Nvidia. The latest joiners are the French transmission system operator RTE, the French equipment supplier, the Dutch financial services company ING, and the Greek utility PPC Group.
Tom Wilson, EPRI’s principal technical executive in the integrated grid and energy systems division, told Latitude Media that while those demonstrations haven’t yet begun, “the airplane is taking off now,” and that members have started submitting proposals. EPRI hopes to have some projects underway “by the second half of the year.”?
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New York Times | TSMC, the Chip Giant, Is to Spend $100 Billion in U.S. Over the Next 4 Years — “TSMC’s expansion comes after years of work to rev up domestic manufacturing of semiconductors. For more than five years, Washington officials have been concerned that TSMC’s dominance of the chip industry had created a national security risk.”??
Axios | Nvidia tops earnings expectations on revenue and profit — “The AI chips giant posted revenue of $39.3 billion in the quarter ended Jan. 26, up 78% from a year earlier.”?
*Wall Street Journal | AI Fever in Power Stocks Moves From Nuclear to Plain Natural Gas — “Tech companies might find it easier to put net-zero ambitions on the back burner under the current administration.”?
E&E News | State lawmakers grapple with energy demand for data centers — The way lawmakers are looking to find ways to regulate data centers’ access to power “marks a shift after years of states offering incentives to lure big companies.”
Reuters | US utility PSEG hikes up spending plan as data center pipeline jumps — “The company's pipeline of potential new very large power customers, including data centers, in New Jersey has jumped to 4,700 megawatts from about 400 MW in early 2024.”?
Utility Dive | Last Energy plans to deploy 600 MW of microreactors to power Texas data centers — “The company is exploring front-of-the-meter and behind-the-meter options for a phased deployment that would eventually add 600 MW of nuclear capacity to the ERCOT grid.”?
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CHART OF THE WEEK
This chart shows the distribution of new retail electric customers that have requested transmission-level electric service from PG&E in 2023 and 2024. It was included in PG&E’s application for approval of Electric Rule 30, which aims to streamline the interconnection process, and was filed at the California Public Utilities Commission in November 2024.
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