AI – Who has the energy?

As we highlighted in last week’s Alpha Bites – Super Powers, according to AI chipmaker NVIDIA’s CEO Jensen Huang, ‘China is going to win the artificial intelligence (AI) race’.

Is he right?

The initial focus for investors in AI has been the availability of high-end computer chips. However, the focus now appears to be shifting towards energy costs.

This is due to the much greater power that AI requires. Indeed, the global use of electricity by datacentres is projected to more than double by 2030 and according to one research report, by 2040 will require the equivalent energy to power 150million homes in America! The price and availability of power is therefore likely to determine who wins the AI race. No wonder the US mega-tech companies are all now investing in long-term nuclear power projects to secure reliable energy supply.

The US has a problem in that wholesale electricity prices are rising.

Electricity demand is increasing according to the US Energy Information Administration (EIA) and prices, so far this year, have climbed 23% over 2024. Looking ahead, the IEA predicts wholesale prices rising a further 8.5% in 2026, driven by a 45% increase in the West South Central region, which includes Texas. This is specifically due to increased electricity demand from data centres and cryptocurrency mining facilities in that region.

Fossil fuels still account for over 50% of electricity generated and whilst coal is decreasing in importance, the US is reliant for over 40% of its energy needs from natural gas. Meanwhile, Trump has ended subsidies for wind and solar power in the US. By comparison, China has added a record amount of renewable energy capacity, bringing more than 356GW on-line, far exceeding total capacity in the US.

While NVIDIA’s H100 and Blackwell graphics processing units remain ahead of Chinese alternatives such as Huawei’s Ascend 910B in terms of performance and memory, China’s energy has started to scale faster than chip development. Why does this matter? Declining electricity costs increase the amount of computation that can be purchased from the same budget and expanding grid capacity allows AI models to be trained more frequently for longer durations.

A recent Department of Energy (DOE) report warned that power blackouts could increase by 100 times in some regions of the US by 2030 if the country continues to shut reliable, typically fossil fuelled, power sources and fails to urgently add additional reliable capacity. To this must be added the challenge of the ageing US power grid infrastructure.

The battle is not just a contest for AI chips, but also the energy to keep the AI models running and developing.

What have we been watching?

Markets remained volatile last week reflecting ongoing concerns about an AI investment bubble and that the Federal Reserve (Fed) would not have enough economic data available to cut interest rates in December. AI chipmaker NVIDIA which, on its own, dwarfs most European stock markets remained volatile as did many other global tech companies. The cautious mood was reflected in a sell-off in cryptocurrencies which are estimated to have lost over $1.4trillion in value from their recent high in October.

The recent US government shutdown, although now resolved for the time being, continued to overshadow markets. It was announced that the official US October payroll report will no longer be published, while the November data will not be released until mid-December and after the next Fed interest rate setting meeting. The lack of official jobs data may well make the Fed sit tight rather than cut interest rates. However, the recent turmoil in US tech shares has led investors to price in a stronger chance of a Fed December rate cut, with the chances rising from 43% the week before, to 63%.

Senior Pentagon officials visited Ukraine to ‘discuss efforts to end the war’ with Russia. Markets are now waiting to see Ukraine’s response to Trump’s ultimatum to accept the 28-point peace plan agreed with Russia, with an ultimatum set before Thanksgiving Day on Thursday. Over the weekend, the US seemed to indicate that there is some room for negotiation. Meanwhile Russia continues its aerial assault on Ukraine with at least 26 people killed in a missile and drone attack on a block of flats in Ternopil. Russia is also carrying on its hybrid war against European NATO members with a Russian spy ship using lasers for the first time to disrupt RAF pilots tracking its activity near UK waters. Meanwhile, Poland’s PM called an explosion on a railway line leading to the Ukraine border as an ‘unprecedented act of sabotage’.

In the US, investors are still waiting on a ruling from the US Supreme Court on Trump’s IEEPA tariffs. According to a report by CNBC, a ruling against Trump could force the federal government to return as much as $1trillion in tariff payments to American importers. This depends though on whether it would have to repay all tariffs collected so far or whether only those companies involved in the lawsuit would automatically receive refunds. All other importers might need to pursue a separate and complex legal process to recover tariff money. US Treasury Secretary Scott Bessent has already warned that the longer the Supreme Court takes to reach a decision, the larger the potential repayment burden becomes.’ A significant proportion of Federal tax receipts now come from tariffs so if this needs to be unwound, it would have significant implications for the US deficit without corresponding tax rises elsewhere.

In the UK, inflation fell a bit less than the market expected in October with headline inflation at 3.6%, with core CPI at 3.4%. That said, services inflation was a bit lower than expected at 4.5% and as a result market expectations for a 0.25% interest rate cut from the Bank of England in December increased to 87%. Budget uncertainty has clearly had an impact on economic activity with the ‘flash’ PMI business activity indicator for November dropping from 52.2 in the previous month to 50.5.

Investors will be focused upon the Budget this Wednesday. Following the PM and Chancellor’s U-turn on income tax, the concern remains that they will opt for a ‘smorgasbord’ approach of putting up lots of smaller taxes to fill the fiscal hole. This is disappointing as it suggests politics are back at the front of individual policy decisions rather than economics and the Budget may well get a lukewarm response from the bond market. While it is hoped that the Budget will prove a clearing event that can build some certainty around economic policy the risk remains that if it lands badly with the market and voters that speculation will mount of a leadership challenge to the PM, and in turn invite more policy uncertainty. The 10-year gilt yield climbed to 4.6%.

In Europe, the ‘flash’ PMI business activity indicator showed manufacturing slipping into contraction at 49.7 although this was countered by an improvement in services activity which improved to 53.1.

New PM Sanae Takaichi presented her fresh $135.5bn stimulus package which is more than 25% bigger than her predecessor. However, the size of the stimulus initiative has raised concerns about exacerbating Japan’s already substantial debt burden which resulted in Japanese 10- year bond yields hitting their highest level in 17-years.

Brent oil slipped to $62 on news of a potential Ukraine peace deal which might release Russian oil back onto the market .

Finally, the Scottish government is ‘on track to issue its first ever bonds in the next financial year, according to first minister John Swinney. UK government bonds are known as ‘gilts’, so no surprise that some fixed interest investors are already referring to Scotland’s potential bond launch as ‘kilts!’

Full version

Site by Lookhappy

AI – Who has the energy?

Alpha publications