European power sector abuzz with expected demand uptick from datacenters, AI

The buzz in the US power sector around datacenters and AI is quickly filtering across to Europe, where low-carbon power producers are relishing the prospect of an increase in electricity demand.

"We're excited about this, both because it's a very high growth in demand, but also because it is companies that generally are very committed to the transformation of the footprint, and that means that it will be a very targeted increase in renewables," Ørsted A/S CEO Mads Nipper said on the company's earnings call May 2.

Datacenters were mentioned 98 times on European utilities' first-quarter earnings calls, an increase from 26 mentions in the prior quarter and just two in the quarter before that, according to an analysis of call transcripts using S&P Global Market Intelligence's Trending Topics application.

Meanwhile, mentions of AI grew from two in the third quarter of 2023 to 28 in the most recent quarter.

At the same time, the role of datacenter owners in the market for clean power is not new, with Amazon.com Inc., Meta Platforms Inc., Microsoft Corp. and Google LLC among the most active buyers of renewable power in Europe.

Ørsted has already contracted 2 GW worth of offshore and onshore renewables with tech players, it said. "[Tech] lends itself particularly well also to offshore because if we can do these datacenters close to the node of the access point of offshore then this is something that can offer high loads of attractive power," Nipper said.

The market's enthusiasm is grounded in many years of stagnant power demand in Europe, according to Mark Freshney, head of utilities research at UBS.

"We've seen weak industrial demand for electricity for the last 15 years," Freshney said in an interview. "AI clearly offers the potential for growth."

Datacenters seeking stable supply

Analysts at UBS Investment Bank forecast demand from datacenters, including AI, growing to about 30 GW in Europe by 2030. Power demand in that scenario would be 255 TWh, equivalent to roughly 8.4% of overall demand, compared to about 2.8% in December 2023.

Executives and analysts expect the demand uptick in Europe to be concentrated in regions with large fleets of low-carbon baseload power like the Nordics, attractive corporate tax regimes like Ireland, or low electricity prices like Spain.

Amazon Web Services on May 22 announced a plan to invest €15.7 billion over the next decade to expand its datacenter footprint in Spain's Aragón region, which analysts at RBC Capital Markets said could imply 300 MW to 500 MW of power capacity and roughly 2% growth in Spanish electricity demand.

"In our view, Spain could be seen as an attractive market given the lowest [levelized cost of electricity] in solar [photovoltaic] and one of the lowest in onshore wind, availability of land and public support to speed up the process of some investments," the analysts said May 24.

Others see the Nordics as a major potential hub, given the cool climate, skilled workforces and large fleets of baseload nuclear and hydropower generation.

"I don't think that datacenters are going to be built where you have a lot of uncertainty of supply because datacenters need very, very stable generation," said Peter Kollmann, CFO at Austrian utility Verbund AG, on May 8.

"As a result of that, you can either have a combination of intermittent power generation combined with battery storage in order to create synthetic baseload, or you have datacenters where you have a lot of baseload generation like in some parts of Scandinavia," the executive said.

Efficiencies are significantly better in the Nordics than in Spain due to the reduced cooling requirements, said Filippo Bonanno, research analyst at S&P Global Market Intelligence division 451 Research.

"This is the great advantage of Nordic countries. Their cool climate throughout the year enables datacenters to minimize waste of electricity for the cooling system, meaning that they can offer highly competitive lease prices," Bonanno said.

Demand for stable power access will see datacenter players ask for baseload power purchase agreements, Kollmann said.

Such deals, where a power provider commits to supply a fixed amount of power, have fallen out of favor in recent years, especially for wind and solar projects. Sellers found themselves having to buy electricity at high spot market rates when generation dipped for any reason.

According to analysts at Goldman Sachs, the overall increase in datacenter power demand due to AI alone will grow around 200 TWh globally per year between 2023 and 2030. By 2028, AI will account for 19% of datacenter power demand, they said in a May 14 note.

Bigger impact on US power markets

European power producers with operations in the US are also eagerly awaiting an expected uptick of electricity demand from AI across the pond, where demand — like in Europe — has been stable since the early 2000s.

Power producers in the US will need to invest around $50 billion by 2030 in new capacity to supply datacenters, according to analysts at Goldman Sachs.

In the Electric Reliability Council of Texas Inc. region, power prices have been rising in recent months, which also upped prices for PPAs, according to RWE AG CFO Michael Müller. The company announced a 446-MW wind PPA with Microsoft in Texas on May 23.

Tech companies building out their datacenter footprint typically have strong environmental, social and governance standards for energy consumption.

RWE, alongside other peers with exposure to US renewables, such as Engie SA, Ørsted and EDP - Energias de Portugal SA, will benefit from this trend, according to analysts at Bloomberg Intelligence.

"The appetite for renewable power sales via PPAs could increase, lifting the earnings prospects of European developers in the US," the analysts wrote.

At the same time, demand peaks will still leave scope for new natural gas in the US, too. "Balancing the grid amid rising consumption from IT infrastructure will become increasingly challenging as battery-storage capacity gradually ramps up, leaving gas-fired production as the primary option to plug intraday demand peaks," Bloomberg Intelligence analysts said.

"In the US, there have been huge premiums for clean power," said Markus Rauramo, President and CEO of Finnish utility Fortum Oyj, on the company's earnings call April 30. "That seems to be different in the Nordics because there is actually a good supply of clean power and there's good supply of guarantees of origin."

Rauramo, who heads a business heavily skewed toward Nordic low-emissions baseload power, said the sector will demand deals for 24/7 energy supply.

Datacenter power demand will rise in two kinds of European countries, Goldman Sachs analysts say: those with cheap and abundant power from nuclear, hydro, wind, or solar sources, such as the Nordic nations, France and Spain. "The second kind will include countries with large financial services and tech companies, which offer tax breaks or other incentives to attract datacenters," they added, which includes Germany, Ireland and the UK.

For all the optimism around AI growth, the next step is to back up the forecasts with actual infrastructure, according to Freshney. Green hydrogen and before that bitcoin have also been in vogue in recent years as potential big drivers of power demand, only for the hype to die down.

"The datacenters still need to be built," Freshney said. "With demand [forecasts] further out, there are many more caveats."