AI Demand Fuels Natural Gas Stocks: Key Players to Watch

As the global demand for electricity surges this year, driven by advancements in technology and growing energy needs, various energy sources are responding in kind. From nuclear power to renewables, all are experiencing an uplift. However, one energy source notably positioned to benefit in the near term is natural gas. Utilities and electricity generating companies are ramping up their orders for natural gas turbines, thereby enhancing the fortunes of firms that supply this equipment, as well as those involved in producing and transporting natural gas.

Natural Gas Turbines: The Engines of Growth

The turbines responsible for converting natural gas into mechanical energy are manufactured by major industry players including GE Vernova, Siemens Energy, and Mitsubishi Heavy Industries. Natural gas producers such as EQT Corporation, Expand Energy, and Antero Resources are also positioned to gain from this increased demand, albeit indirectly.

One prominent driver behind this shift is the escalating electricity demand from data centers that power artificial intelligence applications. According to Jeremy Knop, CFO of EQT, the perception around gas power generation for data centers has shifted dramatically: “Over the course of this year, we have witnessed a reluctance to entertain the idea of gas power generation for data centers evolve into widespread acceptance of natural gas as critical.”

Unprecedented Opportunities in Natural Gas Power Generation

This year is set to witness a historic surge in announced natural gas power generation projects, with expectations that it will exceed any prior year since the Sierra Club initiated tracking in 2017. As it stands, about 183 gigawatts of new natural gas power plans are underway in the U.S., where the total electricity capacity hovers around 1,200 gigawatts. Impressively, natural gas remains the primary source for electricity generation in the U.S., contributing about 40% to 45% of total power—more than double that of coal.

While renewable sources of energy are growing, firms like Microsoft are making sizeable investments in wind and solar farms, utilities are increasingly opting for natural gas to meet current electricity demands. A notable development includes proposals for a natural-gas power plant consisting of 15 turbines in Virginia, intended to supply electricity to over 70 data center buildings. Additionally, a pipeline acquisition by EQT is expected to support this initiative.

Investment Firms Eye Natural Gas

In a recent announcement, private investment firms KKR and Energy Capital Partners emphasized that natural gas remains a cornerstone for a planned $50 billion investment strategy in data centers and associated power generation over the forthcoming years. Manufacturing giants are reaping substantial rewards from this trend, with GE Vernova reporting that turbine orders have nearly doubled over the past year, reaching 14 gigawatts. Consequently, the stock of GE Vernova has more than doubled since its spinoff in April, largely attributing this growth to the increase in turbine orders.

Impact on Natural Gas Producers

Although the advantages for natural gas producers are less direct, the increase in electricity demand is likely to have a significant impact. S&P Global Ratings projects that the rising demand from data centers could elevate U.S. natural gas consumption by between 3 and 6 billion cubic feet daily by 2030. Meanwhile, EQT anticipates a much larger increase of approximately 10 billion cubic feet daily, attributing this to heightened data center demand and the anticipated closure of coal plants.

Currently, the U.S. consumes approximately 80 billion cubic feet daily in summer, while winter demands rise to about 120 billion cubic feet due to heating requirements. Advocates of natural gas emphasize its reliability compared to renewable sources, arguing that its adoption can aid in climate initiatives when it displaces coal generation.

Environmental Concerns

Despite the advantages, the environmental implications of increased natural gas usage cannot be ignored. While natural gas is cleaner-burning than coal, its extraction and transportation can still pose significant climate risks. According to the Sierra Club, the push for gas generation contradicts efforts to achieve climate goals. Methane—the principal component of natural gas—is a highly potent greenhouse gas, being about 80 times more impactful than carbon dioxide for the first two decades after emission.

Major tech firms constructing data centers assert their commitment towards clean power, but they risk undermining their pledges by contributing to elevated natural gas consumption. For instance, WEC Energy Group in Wisconsin faced criticism for plans to add 3 gigawatts of gas generation; however, company representatives state these new plants would be quick-start, non-baseload units intended to support reliability when renewable sources are insufficient.

Conclusion

The growing reliance on natural gas as a vital energy source to meet electricity demands, especially from burgeoning data centers, presents a unique opportunity for both equipment suppliers and producers. However, navigating the environmental challenges while pursuing commercial gains will be imperative as energy policies evolve in response to climate goals.