Can AI Chip Demand Outrun the Power Crunch?

Tom Wigg (0:00)

Welcome to Thoughts on the Market. I'm Tom Wigg from Morgan Stanley's TMT Specialty Sales. I'm joined by Joe Moore, US. Semiconductors Analyst, and Stephen Byrd, Global Head of Thematic Research. Today, the disconnect between the AI power gigawatt shortfall, especially post midterms, and a bullish outlook on AI semiconductors. It's Friday, November 13th at 10 a.m. in New York.

Morgan Stanley already estimated a 30 gigawatt shortfall between now and 2028, and you revised that higher after the midterms. Maybe talk about our estimates, where they've gone now, and how you're thinking about this whole question around, really Texas is kind of the ground zero for this conversation, but it kind of happened in Ohio and other places as well.

Stephen Byrd (0:44)

Absolutely. Yeah. I mean, obviously the election caused a lot of investors to focus on the political challenges, but this is not new per se. We've been talking about people, power, and politics being real bottlenecks on the ability to build out data centers in the United States. Now, that creates a lot of incentive elsewhere around the world to build, but in the US., we have a lot of challenges in terms of the build out. The election really underscored the importance of addressing data center concerns. A bunch of voters expressed concerns with data center development. To be fair, I think that's warranted in some cases because some of these data centers really are developed in ways that may not work for local communities. I understand the concern. Mathematically, what we essentially are looking at is that bottleneck getting larger in 2028 because of a couple of gubernatorial outcomes, Texas and Ohio being specific, where we think it's a delay. It's not a cancellation. We actually think there's a path getting these data centers built. It's just going to take a little bit longer because of the processes that those new governors are going to want data center developers to go through.

We go from 30 gigawatts up into the mid-30s in terms of the shortage. But then in 2029, the deployment is much, much bigger.

It is a relief valve and in some ways, something Joe and I talk a lot about, helpful in some ways because this elongates that growth cycle as well.

Tom Wigg (2:03)

What are the offsets that we can get? Because some clients will talk about Louisiana now became the new Texas that everyone is excited about, still a red state. Some clients are talking about Asia, particularly Malaysia as a region where labor is cheaper, there's no permitting. Maybe we can get a lot more gigawatts online. Google recently signed a deal there.

Behind the meter, still an option.

Grid optimization, probably not something I understand, but I know you've been a power exec, so maybe you do.

Do you think we can kind of cobble together enough power in other ways where maybe your shortfall is too conservative?

Stephen Byrd (2:41)

Yeah, I think there's a path where the shortfall is less than what we laid out. So let's go through all the options, but where there's a will and lots and lots of money and lots of innovation, there's often a solution. So let's go through the categories. Off-grid, we like a lot, and we put in a forecast of what we think can be done in the United States. The challenge is time in the sense that engineering those solutions, getting the labor, getting the permits, all of that takes time. An example, my home state of Virginia essentially outlawed on-site gas generation in anticipation that folks will go down this off-grid path, and they don't want to see those kinds of emissions. So we are running to challenges. When we tally that up, it's not as much power as I think many bulls would like.

It's not a question of demand, it's a question of all those challenges that I just mentioned, but there could be bigger solutions over time. We have really good teams around the world that assess incremental demand and deployment. Just as you mentioned, Tom, Malaysia's one of those opportunities, though I would point to India, Thailand, a little bit in Japan, China. On the other hand, we have issues in other parts of the world. So Norway now has a moratorium on data center. We're running into some problems in Australia. We're running into some problems in the United Kingdom, where a big proposed UK project was terminated because the utility couldn't provide grid access fast enough. So it's a lot of puts and takes. When we add all this up as of now, it's not enough to address the US shortfall, but I would expect over time just more and more emphasis on getting solutions. Now, one thing I do want to say where I'm not bullish is grid optimization. So it's a cool idea. Let me just briefly explain why I think there's more hype than reality this.