Artificial Intelligence (AI) requires tremendous amounts of computing power in the form of specialized chips to thrive. Those AI chips use a lot of energy. Many require up to five times the power of standard chips. So we're going to need a tremendous amount of electricity in the coming decades.
Powering the AI revolution will take an all-encompassing approach. While renewable energy will be vital to providing clean power to AI data centers, it can't meet the massive needs alone. That's opening the door for natural gas to play a crucial supporting role in fueling AI's growth.
This outlook bodes well for companies that operate extensive natural gas infrastructure, such as Energy Transfer (ET 0.05%). The leading midstream company believes it's in an optimal position to capitalize on AI-powered demand for energy. That makes it an exciting way for investors to cash in on the AI megatrend.
NYSE: ET
Key Data Points
A vital fuel
On the master limited partnership's (MLP) third-quarter conference call, Energy Transfer co-CEO Thomas Long framed the opportunity it's seeing ahead for gas power generation. "With forecasted AI and data center growth creating rising electrical needs, and the necessity for grid reliability becoming increasingly important, it is clear that natural gas will play a significant role in helping meet this demand," he said.
Data centers not only require a lot of power but also need it in a steady supply. AI data centers must have uninterrupted electricity 24 hours a day, seven days a week, 365 days a year. Natural gas can meet their needs for baseload power, which renewable energy can only deliver with expensive battery storage as a backup because of intermittency.
Energy Transfer is in an ideal position to capitalize on this trend and support the growth in natural gas demand. "Given Energy Transfer's extensive interstate and intrastate natural gas pipeline footprint, we are the best positioned to capitalize on the anticipated rise in natural gas demand for AI data centers, natural gas power plants, and industrial and onshore manufacturing for decades to come," Long stated on the call.
Accelerating demand
The MLP is already starting to see an acceleration in demand. Long stated on the call, "We have never seen this level of activity from a demand-pull standpoint, and these opportunities are truly spread across our natural gas footprint, from Arizona to Florida and from Texas to Michigan."
He then noted a couple of opportunities. Long reported that the company currently transports natural gas, directly and indirectly, by pipeline to about 185 power plants in 15 states. That number could grow significantly in the coming years. He stated:
We have had requests to connect to approximately 45 power plants that we do not currently serve in 11 states that in aggregate could consume gas loads up to 6 Bcf per day. In addition, we have had requests from over 40 prospective data centers in 10 states. These data centers in aggregate could consume gas loads up to 10 Bcf per day.
That's a lot of incremental gas demand. Last year, the U.S. consumed about 108 billion cubic feet (Bcf) per day of natural gas. Gas demand from power plants and data centers that Energy Transfer alone could service is more than 10% of the country's daily current usage.
The surge in gas demand would increase the utilization of its existing pipeline system. It should also allow the company to build additional pipeline capacity. Those growing volumes will increase its cash flow.
On top of that, the company has started constructing eight 10-megawatt natural gas power plants throughout Texas to "support our own operations and increase system reliability for Energy Transfer and our customers in Texas," Long said on the call. The company could build more of these smaller plants in the future to support its growing power needs and those of its customers. These plants will reduce its costs and enhance its cash flow.
Fueling the AI revolution
AI will need a lot of power in the future, which is driving accelerating demand for natural gas. Given its extensive gas infrastructure footprint, Energy Transfer believes it's in an optimal position to capitalize on this opportunity. It's currently experiencing demand well beyond what it has seen before, which should drive robust growth in the future. That should give the MLP lots of fuel to increase its lucrative distribution, which currently sits at a yield of around 7.5%. This combination of income and growth makes Energy Transfer an attractive investment opportunity for those comfortable with investing in an MLP that sends its investors a Schedule K-1 Federal Tax Form each year.
