AI Data Center Boom Pushes U.S. Power Equipment to the Breaking Point

Big Tech is betting trillions of dollars on artificial intelligence, with a lot of that to be spent on building the data centers that would power large language models. Stock markets are reflecting this in Big Tech stocks, but that’s not the only industry riding the artificial intelligence wave. Because that wave runs on electricity and the equipment that brings it from generator to consumer.There have been reports about a chip shortage caused by the AI rush, and higher compute prices overall resulting from AI-related demand growth in electronics. But a more serious shortage is unfolding in power equipment, as the companies pledging hundreds of billions in AI investments want everything ready yesterday if possible. Alas, it is not.Transformers, a vital component of the grid, have been in increasingly short supply for at least two years. The shortage has been driven by the fast growth in electricity demand, mostly coming from the tech sector, and the inability to respond to that growth with equally fast grid expansion. Transformers are used to convert the high-voltage electricity that runs from power plants to substations along transmission lines to a lower-voltage electric current that can be used by end consumers, including data centers. According to Wood Mackenzie, the shortfall in transformers this year is 15%. Yet there is also a shortage of substations, highlighting the essential nature of power equipment. Per Wood Mackenzie estimates, the substation deficit is 8%. This situation will be aggravated further by a recent executive order by President Trump that banned imports of bulk power equipment from China.“Outside the industry circle, people are talking about (graphics processing units), but within the circle, people most certainly question you about the lead time for generators and transformers,” the chief executive of a digital infrastructure service provider told Reuters.The publication went on to report order books stretching ahead for years for the world’s biggest transformer makers. “We currently have an order backlog covering more than three years, with a substantial portion of production capacity for major power equipment secured for the coming three years,” South Korea’s Hyundai Electric told Reuters, noting that its order backlog went up by 23% over the first half of the year, hitting $8.5 billion.In other words, power equipment makers are enjoying the same trends as gas turbine makers, both driven by Big Tech’s race to outdo rivals in artificial intelligence. Both the gas turbine tightness and the transformer/substation squeeze will affect the pace of what many call the AI revolution because both gas turbines and transformers take time to manufacture. So do cooling systems.“Power and cooling basically go hand in hand; so basically the more power you use, the more cooling you need to use because you generate heat,” a senior Bank of America analyst told Reuters. Cooling systems are the third industry that is set to enjoy a surge in demand thanks to Big Tech’s artificial intelligence ambitions, according to a recent McKinsey report. That surge in demand, however, will likely lead to further tightness in supply, again due to physical constraints that make it impossible for manufacturers to respond to clients as fast as Big Tech clients would like.These clients, according to Wood Mackenzie, will absorb as much as 40% of power equipment supply in the U.S. over the next few years. This, the consultancy warned earlier this year, could create a supply chain crisis, simply because the demand is urgent, but the supply cannot be rushed—especially when manufacturers cannot be certain the current rate of demand can be sustained over a longer period of time.By Irina Slav for Oilprice.comMore Top Reads From Oilprice.comAsian Oil Buying Spree Sends Dubai Crude Toward $100Chevron Bets $7 Billion on Venezuela Oil ExpansionRussia Doubles Dark Fleet to Ship LNG to Asia