Clearing Out America’s Energy Backlog

By Joel Litman, chief investment strategist, Altimetry

Less than 4 milliseconds made Ronan Ryan the most important nobody on Wall Street…

Ryan grew up in Ireland and moved to the U.S. at 16. After graduating from college, he had one goal… to work with the financial pros. But the banks showed no interest in him.

So he had to find another way in…

By 2005, Ryan found himself working at BT Radianz – basically an early form of a cloud-storage business. It was born after the 9/11 attacks took down a lot of Wall Street’s communication lines.

The company could “co-locate” an investment firm’s computers at its data centers in Nutley, New Jersey. That way, the firm had another line of communication open to the stock exchanges… just in case.

Ryan didn’t realize it at the time, but Wall Street was on the cusp of a transformation. And as I’ll explain, we’re seeing a similar shift almost two decades later…

Traders started noticing a disconnect between what they saw on their screens and what was available by the time they entered a trade…

They wanted to do something about it.

That’s when Ryan got a call from a trader working at Bountiful Trust. The trader complained that by the time he put in a buy order, the stock in question was no longer available.

He blamed it on “latency time,” or the time from when a data signal is sent to when it’s received.

Because Bountiful’s office was in Kansas City, it took too long for trade data to reach stock exchanges on the East Coast. Ryan moved the firm’s computers to Radianz’s data center in New Jersey.

And Bountiful’s latency time plunged from 43 milliseconds… to 3.8 milliseconds.

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Before long, Ryan and Radianz had set off a chain reaction in the investment world. All the top traders and hedge funds wanted space in Radianz’s facility.

Not only that, but they wanted their computers as close to the stock exchanges as possible. “Flash traders” would pay hundreds of thousands of dollars to move their servers nearer to the cable that exited the facility… or to shorten their own fiber-optic cable routes by a few feet.

From 2005 to 2008, Radianz made roughly $80 million on co-locating services. It was a game of millimeters. That tiny change in proximity could give a trader a multimillion-dollar edge.

And more than 15 years later, data centers are still at the center of a real estate grab. Only this time, it’s the data centers themselves that are fighting for the best space…

AI is driving data-center demand way higher… and all those data centers are causing a minor power panic in the U.S.

Data centers account for between 1% and 3% of the world’s current total electricity consumption. Advanced computing could boost that number to as much as 21% by 2030.

And data-center power demand is projected to rise 160% in the same time frame.

Northern Virginia is home to the largest data center market in the world… with nearly 300 offerings in the region. Google, Amazon, and Microsoft all have data centers there. Microsoft recently spent $466 million to buy 124 acres of land for new centers.

Keep in mind, that same plot of land sold for $46.9 million just four years ago. Tech companies are desperate. They’re running out of room in Northern Virginia. They’ll pay almost anything for the right spot.

And this isn’t only about physical space, to be clear. This is about power room.

Northern Virginia’s power plants have just 0.2% availability remaining. Once they reach capacity, companies will turn to new regions with existing plants. And the biggest companies will rush to break ground on new centers.

Part of the reason for skyrocketing demand has to do with backlog…

The wait to hook up a new power plant to the U.S. utility network is more than three years, on average.

Hybrid plants, such as solar and battery, are holding slots for new power plant connections to the grid. A lot of these projects have been on hold… because high interest rates made it tougher to secure the financing needed to get connected.

This is creating a bottleneck for new power projects. And the Federal Energy Regulatory Commission (“FERC”) is in the process of cleaning up that backlog under “Order 2023.”

Over the past decade, more than 70% of power-generation projects that joined the queue ended up withdrawing… which wasted a lot of time.

Order 2023 has stricter rules for power projects. It’s supposed to weed out the ones that don’t have a real chance of connecting to the grid.

Companies joining the queue now have to be fully prepared to connect. This should reduce the number of withdrawals… and increase the speed at which we add more capacity.

Power plant operators and utilities will enjoy constant demand for their energy for years…

One of the immediate results of Order 2023 will be more natural gas-based power. Natural gas infrastructure is more mature than many renewables. So these companies will be ready to connect before many others.

And energy prices will rise as demand outpaces production.

Power infrastructure companies are already amongst this year’s top-performing stocks. Eaton (ETN), a power-management company, is up 35% year to date. Power infrastructure builder Quanta Services (PWR) is up 28%.

That’s far more than the S&P 500’s gain in the same time frame.

In short, there will be plenty of new power infrastructure in the coming years… and plenty of improvements to what we already have.

Keep an eye out for opportunities in this industry.

Regards,

Joel Litman
with Rob Spivey
June 20, 2024

P.S. The U.S. is dedicating trillions of dollars to improving our infrastructure… and that includes a lot more than the power grid.

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