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- [00:00]
Show Host / Announcer
A very brief word before we start the show. We've got a survey for listeners of Catalyst and Open Circuit and we would be so grateful if you could take a few moments to fill it out as our audience continues to expand. It's an opportunity to understand how and why you listen to our shows and it helps us continue bringing relevant content on the tech and markets you care about in clean energy. If you fill it out, you'll get a chance to win a $100 gift card from Amazon and you can find it@latitudemedia.com survey or or just click the survey link in the show notes. Thank you so much.
- [00:34]
Latitude Media Announcer
Latitude Media Covering the new frontiers of the energy transition.
- [00:40]
Shayel Khan
I'm Shayl Khan and this is Catalyst.
- [00:43]
Shanu Matthew
Who has incentives to talk up the power constraints and who may not have incentives to do that and maybe take the opposite view where it's actually not as big of a deal and where might economic incentives actually inform or influence our views more than is appreciated by the market?
- [00:58]
Shayel Khan
Coming up, show me the incentive and I'll show you the behavior.
- [01:11]
Latitude Media Announcer
Clean energy is under attack and it's more important than ever to understand why projects fail and how to get them back on track. The center Left think tank Third Way surveyed over 200 clean energy professionals to answer that exact question. Their newest study identifies the top non cost barriers to getting projects over the finish line, from permitting challenges to NIMBYism. To read Third Way's full report and to learn more about their PACE initiative, visit thirdway.orgpace or click the link in the show notes. The AI boom is here, but the grid wasn't built for it. Bloom Energy is helping the AI industry take charge. Bloom Energy delivers affordable, always on, ultra reliable on site power. That's why chip makers, hyperscalers and data center leaders are already using Bloom to power their operations with electricity that scales from megawatts to gigawatts. This isn't yesterday's fuel cell. This is on site power built to deliver at AI speed. To learn more about how fuel cells are powering the AI era, visit bloomenergy.com or click the link in the show.
- [02:14]
Show Host / Announcer
Notes Surging electricity demand is testing the limits of the grid, but Energy Hub is helping utilities stay ahead. Energy Hub's platform transforms millions of connected devices like thermostats. EVs batter more into flexible energy resources. That means more reliability, lower costs and cleaner power without new infrastructure. Energy Hub partners with over 120 utilities nationwide to build virtual power plants that scale. Learn how the industry's leading flexibility provider is shaping the future of the grid. Visit energyhub.com.
- [02:53]
Shayel Khan
I'm Shayel Khan. I lead the early stage venture strategy at Energy Impact Partners. Welcome. All right, so this episode is a reminder to always monitor incentives. More specifically, we're talking about the narrative and certainly the reality today around power scarcity as the rate limiter on the growth of AI. Everyone is talking about it. I actually saw a chart recently that showed the frequency of mentions of the word power or energy on S&P 500 earnings calls over time. And you can imagine the shape of this chart. It had been pretty steady, actually trending slightly downward over time until 2025 when the line like literally went vertical. There's basically no question in my mind that power is actually a bottleneck for data center growth today and perhaps therefore for AI growth. That's sort of a truism, but it could also become a comfortable scapegoat depending on where things trend in AI world. And because it's convenient and because it's widely discussed, it's important to think one level below the surface about what you hear from various players in the market. That's why I really loved this recent post on X initially from Shanu Matthew that we're discussing today. Shanu's been on this pod before to talk about public market stuff because he's a senior Vice President and Portfolio Manager for US Sustainable Equity at Lazard. But he recently went online and went meticulously through basically every player in the AI energy world and laid out their incentives. Should they drum up concern about power shortages, should they downplay them, should they capitalize on them. This conversation for me is foundational and should act sort of as a reference and a reminder for me, anyway, anytime I hear something new about energy and AI from one of the major players in the market. So let's go through it. Here's Shanu. Shanu, welcome back.
- [04:45]
Shanu Matthew
Hey, Shel, thanks for having me on again.
- [04:47]
Shayel Khan
All right, so what got you started thinking about the incentives of all of the different actors involved in data center power Nexus? What sparked the thinking?
- [04:58]
Shanu Matthew
It's a good question. I feel like everyone has been thinking about this for the last two years, or at least hopefully. So I don't feel as lonely. But I think the premise for this tweet or thought that I had was that there's general understanding, that there's a few ground truths, and one's AI is a foundational technology that's going to persist in society. Two is we need a lot more energy infrastructure. The magnitude and duration of the cycle is of the debate. But it introduces a duration mismatch where technology is often done on cycles that are one to two years, whereas energy is typically multi year or even multi decadal depending on the type of asset. What I was trying to gear in is psychologically humans organizations have incentives and incentives drive behaviors, as everyone knows. And how could we take that lens and apply it to the power debate? Because so many times I have folks coming to me from earnings calls or from events or conferences and saying I heard this from X party or this from Y party and that's completely at odds with what they heard from another player down the stack. And so what we were trying to do as a clean sheet exercise was looking up and down the supply stack for AI who has incentives to talk up the power constraints and who may not have incentives to do that and maybe take the opposite view where it's actually not as big of a deal and are there economic incentives that may inform or influence their behaviors? The goal wasn't to call out companies being misleading or anything like that. It's just namely to acknowledge where might economic incentives actually inform our influencer views more than is appreciated by the market.
- [06:29]
Shayel Khan
Yeah, I read the original post and it was like in some ways it's kind of obvious, but at the same time it was sort of like a lightning bolt to me. I was like, oh yeah, I hear this stuff constantly as well, from every corner. Everybody is talking about the power bottleneck and, and it is important to examine the incentives that drive anybody's behavior or the narrative that anybody's telling about it. Not because there isn't a power bottleneck. I think you and I probably agree, like there is for sure a hundred percent, but the magnitude, the duration, and certainly there probably won't always be one. And so, you know, as this goes through, whatever cycle it's going to go through, we need to be paying attention to like who is saying what and examining the incentives that drive that. So I thought it was super interesting. And what I wanted to do with you is kind of talk through some of them, what we are hearing from these various parties and then the incentives that they have to say what they are saying or maybe to say what they're not saying. But let's start by categorizing like walk me through at the high level, like there are a bunch of. There are a couple groupings of actors that have similar incentives. So how do you think about the groupings?
- [07:36]
Shanu Matthew
Yeah, at a high level I'll try to keep it simple, but you know, again, there's various degrees of nuance required, but at a high level. You know, let's start with the hyperscalers who are the folks that are driving a lot of this capex and investment cycle. Think of it as the cloud service providers, the Amazons, the Googles, the Microsofts of the world, as well as including Meta, which is another hyperscaler, even though they don't have a legacy cloud business that drives investment spend on GPUs. And that's kind of the equipment you have, the technology, hardware, if you will, that includes GPUs, CPUs, custom silicon offerings that moves upstream into the supporting equipment, which includes electrical and cooling equipment. And then if you kind of go outside the data center, then you start to get into who supplies that power equipment as well as the overall actual power of the facility. And moving upstream there is who actually builds power, which is like utilities, as well as the labor and the EPCs and the engineering that goes into those types of facilities. So if you kind of just go from who's spending the capital and follow that down the the stream, that's a general way to think about some of these bigger pockets and so happy to jump into any of those.
- [08:42]
Shayel Khan
All right, so let's, let's start with the hyperscalers. They're obviously at the epicenter of the data center build out. How do you think about their incentive when they talk about power?
- [08:51]
Shanu Matthew
Definitely, and I think this is the most interesting from a, from a game theory standpoint. So just a backup for the, for the audience that may not be entirely clear.
- [08:58]
Shayel Khan
Right.
- [08:58]
Shanu Matthew
The hyperscalers have really strong incumbent businesses. You know, oftentimes depending on you're talking about cloud or digital advertising, and they think that the spend on AI allows them a better product opportunity in the future, such they can accelerate growth of cloud or advertising offerings or it'll enhance their product offerings, which leads to better returns over time. And so you have two options to go out and get more capacity.
- [09:21]
Shayel Khan
Right.
- [09:21]
Shanu Matthew
One, they build their own capacity, but then two, they also can go out and procure capacity on the external market. And that comes from neo clouds or colocators or things that we can get into. But if you think about it from their perspective, building your own capacity is typically what they prefer because they have control and vertical integration when they have the chance to, because they have teams internally, they have the expertise. But when you go back to that core issue, I think everyone agrees that we need more energy. I think where the uncertainty comes in is how much energy do we need? If you think about it, from the perspective of them, if I have to go out and build all this infrastructure, and this infrastructure is beyond the next few years, I need to potentially be comfortable underwriting it for the next 1020. That introduces a natural mismatch where it's like, okay, do I want to be the long term risk taker of the assets that I'm underwriting? I might be comfortable doing that to an extent, but beyond that, do I perhaps let the market figure out the excess capacity? So if you're a Hyperscaler, the argument 4 would be if I really think that this is the greatest demand super cycle and I'm severely constrained, I might try to go out and build as much as possible and then procure all the extra. The skeptic or the pessimistic view would be they see line of sight into the demand they need and that's all they're going to be comfortable building to and the rest will let the market sort out and such. So if you think about that from a power standpoint point, my incentive in that scenario would be to talk up power constraints, right? Saying that there's not nearly enough of it. We need to build so much like this is the greatest sleeper cycle because that will incent speculators, developers, other companies like neoclouds and stuff that want to compete for leases from hyperscalers to go out and build infrastructure. And this one's interesting because Satya Nadella, for example, the CEO of Microsoft, kind of told you this actually on a podcast earlier this year, I think it was late last year, he was on Dark Crash and he talked about when he was asked why not commit more resources to building more assets. And he ultimately said, well, I'm seeing a lot of activity from developers and co locators and neo clouds and I think that I might be able to procure cheap supply in the future because who benefits if there is an overbuild or too much build and conditions loosen, that means cheaper leases for them. And that might be cheaper than actually going out and building your own capex. And so that's kind of the game theory one way or the other in terms of why build or why might I just wait to see how the chips may fall?
- [11:29]
Shayel Khan
They're complicated, I think, because you can see it going either way. On one hand, they clearly have an incentive to say that there is this massive bottleneck in the form of power and power infrastructure because that hopefully from their perspective, incentivizes the world to build more of that stuff so that they can build more data centers so they should be shouting from the rooftops, this is the bottleneck. Also, by the way, it's convenient that, you know, it may indeed be true, but it's also convenient for them to be like, the bottleneck is definitely power. That means definitely not demand for their services. And again, that may be true today, but they could say that even if it weren't true and that would be helpful to them. So to me, there's a very clear incentive for them to say this power bottleneck is huge and insurmountable and we need to have a mobilization the likes of which we've never seen the energy sector to solve it. On the other hand, if they don't solve it, they're, you know, if the world doesn't solve it, I should say they are probably better positioned than anybody to snatch up the scarce resource that is the available power supply in the sense that like, if they are going to be forced to build their own capacity, which many folks are doing, like, who's in a better position to write long lead orders for G Vernova turbines than the hyperscalers who have big balance sheets and can afford to pay for it and so on. So like, you know, there is an extent to which if you're scared of the Neo clouds, for example, and you're a hyperscaler, you don't necessarily entirely want the world to solve the power bottleneck for you because it's sort of a source of competitive advantage, at least against that other class. My guess is that between those two incentives, the one that says no, we just want the world to solve the power problem because our job is AI. That's probably the one that wins out. But it doesn't seem pure as the driven snow to me that it's like.
- [13:15]
Shanu Matthew
That clear you hit it on the head, right? I think it's really, really complex when you pull it back the layers. I think the one thing I would add right is that a lot of the motivator for spending all this capex is that each dollar of capacity not online that could be serving additional demand is revenue dollars that you're not making. And so that opportunity cost is so great of not having power. So to your point, you may be comfortable, especially on, for example, a gigawatt data center being $50 billion spending x dollars of millions of dollars procuring deposits for long lead items, turbines, electrical equipment, switch gears, circuit breakers, et cetera, just to make sure that the long lead items are actually settled to build. So if the power is there that you can go ahead and plug the shells in immediately. But there is, you know, there is an ability to walk away or cancel or you know, just lose the deposit of contracts as well. But their incentive would be to lock up as much capacity to your point as possible. Right, because they want to have the optionality. But I think they also, you know, are playing for like you know, worst case scenario you could walk away from a few million dollar deposits. And I'm just speaking hypothetically here versus you know, the opportunity cost of building a multibillion dollar data center. So there is all these different levers they can pull but it definitely feels that they're keeping optionality. And then just to be clear too, they are bringing on a lot of their own capacity. Amazon brought on 3.8 gigawatts in the last 12 months so they're going to double their footprint in the next two years. Microsoft said they're going to double as well and they brought on 2 gigawatts in the last 12 months. So they are bringing on a ton of capacity as well. But it is just interesting to see they're also striking deals with Neocloud. So are they, is the, the bull would say that there's nowhere near enough supply and then they're forced to do that and the bear would say well actually there's want the speculative risk to go to the, to the Neo clouds and then they can walk away from the contracts if market conditions deteriorate. And it's I think no one really knows, you know, time will tell.
- [15:06]
Latitude Media Announcer
Do you ever wonder why it takes so long to get clean energy projects up and running? Do you have permitting reform on the brain? Are you NEPA reform? Curious? The new PACE study from Third Way pinpoints the non cost barriers that stand in the way of clean energy deployment and keep new solar and transmission projects in limbo. They surveyed more than 200 industry professionals to understand what's slowing down deployment and offer practical solutions on how to fix it. To read Third Way's full report and to learn more about the PACE initiative, visit thirdway.org PACE you've heard the phrase speed to power a lot lately, but here's what it really means. AI data centers are being told that it will take years to get grid power. They can't afford to wait, so they're turning to onsite power solutions like Bloom Energy. Bloom can deliver clean, ultra reliable, affordable power that's always on in as little as 90 days. Bloom's fuel cells offer data centers other important advantages. They adapt to volatile AI workloads. They have an ultra Low emissions profile that usually allows for faster and simpler permitting. And they're cost effective too. That's why leaders from across the industry trust Bloom to power their data centers ready to power your AI future. Visit bloomenergy.com to learn more.
- [16:21]
Show Host / Announcer
The grid wasn't built for what's coming next. Electricity demand is surging from data centers to EVs and utilities. They need reliable, affordable solutions that don't require building expensive new infrastructure. Energy Hub helps by turning everyday devices like smart thermostats, EVs, home batteries and more into into virtual power plants. These flexible energy resources respond in near real time to grid needs, balancing supply and demand. Plus they can be deployed in under a year. And at 40 to 60% lower cost than traditional infrastructure, that means more reliability, lower costs, cleaner energy. You can't get much better than that. And that is why over 120 utilities across North America trust Energy Hub to manage more than 1.8 million devices. Learn more at energyhub.com or click the link in the show Notes.
- [17:12]
Shayel Khan
All right, there's another grouping of actors here where my first instinct to say is that it actually is straightforward what their incentives are, which is, let's just say OEMs of hardware to data centers. That could be, you know, you're selling equipment inside the data center or maybe not even hardware. Let's include like EPCs here for example as well. Like your job is to provide services or hardware into the build of data centers. My first thought would be everybody there is aligned in their incentive to promote the power scarcity narrative. It just furthers the argument that there is limitless demand for their services and we're just going to sell out as much as we possibly can. Do you think it's more complex than that?
- [17:56]
Shanu Matthew
I think that one is pretty straightforward. To your point is that just going back to our prior point about long lead time items and the most constrained a lot of this is equipment as well as the labor. Those are the direct beneficiaries. What do they get? They get higher backlogs, they get longer duration backlogs, they get better pricing. In typically industries where you don't get, you basically get minimal pricing or as much as the market will bear. Whereas now you have pricing power for the first time in generations for certain equipment providers or certain labor producers. So this one is pretty straightforward and you see that across the earnings. You can look at the earnings transcripts of companies like Quanta, like record backlog, most talking about record activity in their pipeline business as well as really strong, even clean energy Pipeline, you can go to equipment or you see something like Avertive which has a backlog that was up 30% organically year over year. You have Eaton which is up 20% backlog organically year over year on billion dollar books of business. And so I think there, that's what you'll see to your point, a very limited narrative on talking down the potential market opportunity because if you think about it from their point of view, right, it's just more business. To your point, right, Equipment, as you are power scarce, you need the latest and greatest to be the most power efficient per square foot or per IT capacity per megawatt of IT capacity. And so you always want the latest and greatest and often the highest priced equipment as well as you want to continually get the latest generation, which requires you to size up the load of your equipment in terms of the labor, if labor is the most constrained element, that means that you'll agree to perhaps a higher degree of pricing that you normally would where if conditions were scarce, you may be forced to just take or whatever conditions that your buyers are willing to take. So for example, electricians and plumbers, we're incredibly scarce there right now. There's market chatter of companies like the hyperscalers flying out electricians from various parts of the country because they don't have enough labor. So you can imagine for the CPC companies, you know, pricing power is great because they're the only ones that have labor and can actually go out and deploy these projects in an environment where that doesn't look as favorable, right? You have to agree to tighter terms, you have less overall projects to work on, you have more than enough supply, supply of labor, folks. That means that your market will slow down and your pricing slow down. So like that is a vicious down cycle in terms of what happens on the other side of a growth cycle, right? So this bucket generally, I agree with you, straightforward talk up the business opportunity, it generally is positive and supportive for their businesses.
- [20:18]
Shayel Khan
All right, so let's talk about another one that I think of as being a little bit more complex then which is? Which is utilities. Like on one hand, utilities are in the same position as everybody else we've discussed, which is basically like look, if there's a huge bottleneck in power, clearly demand for their services, in this case electrons is going to be through the roof. They're going to be able to spend more capex, they should get higher earnings. Like this should be good for utilities. And so of course they would want to talk up the power scarcity narrative on the Other hand, you know, folks sometimes blame the utilities for the power scarcity challenge and like, who is there to solve it but them to some extent. So there's probably some limit to the extent to which they can blame the or place the limitation of AI growth on power scarcity. So I wonder how you think about them and what you've been hearing from them when they talk in public market contexts.
- [21:09]
Shanu Matthew
Definitely. I think this is one of the positions that is not enviable for a lot of different market players, especially those in the other buckets, because you bring up a great point where on the one side generational capex cycle, I can get a guaranteed ROE on my investments and I can put through more investments. On the downside is we are increasingly seeing the political issues around rising electricity rates as well as folks being against having data centers in their local environments. On the positive side, it's a potential business opportunity. On the negative side, I'm getting increasing amounts of pushback. And ultimately utilities are regulated, right? They need to answer to a public utility commission and get the infrastructure they need approved. And so now they're in this interesting predicament where they have to solve for all these limitations, right? They have to bring on as much infrastructure as possible, but also do it at the lowest cost or at least the most efficient use of dollars, such that they can't be blamed for inefficiently spending capital or, you know, artificially in inflating demand. So I think utilities were, you know, the last few quarters, right, you talked, or Even the last 12 years, it was a lot more talking about the gigawatt pipeline and how much they're growing. And you know, you have folks throwing out tens of gigawatts in their pipeline or hundreds of gigawatts. And now it's talking a little bit more about how can we bring these gigawatts on in a very effective way and then ensuring that they have the labor, they have the equipment, they have the ability to execute on this quickly. Some of these are also in regions, right, where they're impacted by regulatory impacts, such as like Texas with SB6 or PJM just actually went through and they couldn't get to a resolution on what's the approach to large load tariffs. But you're right, utilities are conflicted in the sense of they don't want to miss out on the opportunity because if they can't bring on the power or they aren't permitted to bring on the power, someone will take their load elsewhere to a different utility. And so they are in the business of problem solving right now, whereas it will last one to two years. Talk up the opportunity. Now it's in the realm of can I do this effectively and cost efficiently.
- [23:04]
Shayel Khan
How do you think about the. There's another category which is like the I'll group together like real estate owners, landowners, and then the powered land developers. The developers who are going off and trying to find sites and make them powered and then sell them to a colo or a hyperscaler or whoever. What's their incentive?
- [23:23]
Shanu Matthew
Their incentive is to talk up the constraints as well, because it increases the value of the asset they're owning, which is the real estate or the powered land bank. If we think about solving again, if there's a constraint, that means that anything that accelerates you through the constraint is valuable or increases in value as a constraint gets worse or it remains. And so if I have a powered land bank, that means that I can move a lot faster than someone that has just a plot of land that has no interconnection access or anything like that. Right. So I can charge a more premium price to developers or neoclouds, et cetera, anyone else that would want to be further along up the development cycle. And so they're generally universally talking up the opportunity that they have and the ability to move faster. So I'd say a lot of what we're seeing there is, or at least what we hear chatter wise, is that you have transaction values that are much higher than they've ever been or at least in recent cycles as folks all are chasing the similar opportunity. So pretty much any land banks that are powered, that are near plentiful energy sources, something like in the northeast with narrative gas fields or even west Texas, you're seeing construction activity be plentiful because people think that it's a much faster path to value realization. So you're seeing that increasingly move up, I think, like, you know, one tall tell signal or maybe like a leading indicator that could like start to suggest weaknesses. If you start to see real estate offerings that are powered, that are near, you know, tier one cities or have really good access to energy infrastructure or fiber infrastructure that don't get a premium value or are struggling to sell in the market, that would be an interesting indicator that perhaps the market's not as strong as possible. But at least right now, the market indicators would suggest that that value is. Is considerable because people are still focused on time to power right now.
- [25:00]
Shayel Khan
All right, I want to move on to the chip players.
- [25:03]
They're an interesting one here. Like, if you think about Nvidia's incentives. On one hand they share the incentives that most of these other folks do of like, let's play up the power constraint in the hope that it gets solved. On the other hand, they want to be making the argument that we are just going to sell effectively infinite chips forever. Like we're just going to sell so, so, so, so many more GPUs. And if power is a real constraint on that, that's the limiting factor and it's kind of outside their control, then one would think that would affect their perceived value and their perceived growth, I would say. But, but my sense is that Nvidia is talking kind of like the hyperscalers. And really the story they're telling is this is a major constraint. I mean, possibly just because it's true, but maybe that's their incentive as well.
- [25:52]
Shanu Matthew
Yes. And I think they actually if again, this is all very hypothetical game theory, but if you are Nvidia, right, like you are pitching that you are getting the best performance token per watt is what Jensen will call it, and basically arguing that they can extract the most tokens per watt of useful energy. And so they're giving you the lowest cost efficient dollar to the highest level of performance. And so that actually gives them pricing power.
- [26:17]
Shayel Khan
Right?
- [26:17]
Shanu Matthew
Because since we are power constrained and that constraint is expected to get worse and power prices rise, the Nvidia chip holders, actually the TCO advantage that they have versus less efficient chips actually goes up in that scenario, right? So they actually continue to do better as power remains constrained because it reinforces their pricing power. And so this introduces the interesting angle where custom silicon, for example, for those TPUs are all the rage this week, even though they've been in existence for a while. There's arguments that you can find more purposeful chips for certain workloads that require less energy draws. And if you weren't as constrained on energy or you might be willing to use some of those chips that actually erodes your pricing power for Nvidia, right? Because the idea is we're power constrained. I want to get the maximum amount of knowledge for every dollar I spend. And I can do that right now with Nvidia chips that I may not be able to do with custom silicon chips. And so it actually reinforces their competitive advantage. And so they have a kind of an interesting angle here where to your point, they're going to sell more and more chips and you need power to bring online those chips. But they also probably want the market to remain tight because the longer it's tight, the better their pricing power actually ends up being.
- [27:22]
Shayel Khan
So on balance, basically everybody we've talked about so far, you know, sometimes it's nuanced, but pretty much everybody is incentivized to play up the power bottleneck. And indeed, you know, they are. It is also real, but. But they are playing it up. Who do you think is on the other side of this equation? Like, who is incentivized to say that power is not such a big bottleneck?
- [27:42]
Shanu Matthew
Yeah, and I think this part's a little bit more interesting too, because to your point, I feel like a lot of people benefit if the power constraint remains. And you know, that's just like a okay thing to observe. It's just facts or facts. But on the other side, you know, I call it a few buckets. And the first that I think is independent power producers. And this might seem counterintuitive, but let me lay out my logic is if you're an independent power producer, that means that you have a fleet of existing assets today. Those generate money based on selling into electricity markets. And so the input to their revenue is electricity prices. If we're in scarce conditions and those continue to grow, they generate a really healthy incremental margin on that. Right. Because they're not really building out new assets. You have slightly higher O and M, perhaps by running your assets harder, but you're just flowing through a high electricity price that is extremely profitable for them. And that's actually been the thesis for a lot of owning these assets. So these are like the Constellations, the talons, the energies of the world. One thing I noticed, it's interesting, if you look at the last two earnings calls, you have the folks like the CEO of Constellation talking about the fact that energy prices actually aren't supportive of building new gas plants, which may or may not be true, and that there's different items that we have or levers to pull, like flexibility or things like Tyler Norris suggestion of throttling workloads when you're at peak conditions to enable more excess capacity to be built and used today. I think that's interesting that the IPV's are talking out of that because if you game theory it out, it basically is suggesting that perhaps they don't want a lot of new supply to enter the market. Right. Because what does that do that potentially dampens prices. And I just laid out a path where they can generate a lot more healthier Ebitdas if they can sell into higher or appreciating power price markets. And so I think that's someone that is probably trying to downplay the impact just because their value in the marketplace goes up as long as this constraint, you know, remains. And then, you know, another area that I think is a little bit more interesting too, it's almost a derivative of how the market works. But like LNG providers, for example, a lot of them just sign very like long term, you know, contracts. And then the basic arbitrage in US LNG is you buy cheap domestic gas and then you sell it to other markets like Asia or Europe to be able to, you know, sell into premium markets. Their model actually gets a little bit into trouble here. Or the ARB gets less interesting if domestic gas prices rise, right? Because you go from taking a cheap input to a rapidly inflating input that's maybe no longer cheap and that kills your ARB on the other side too. So they're probably incentivized as well to talk down some of the power issues to ensure that the supply goes to them versus going to a local market that they can be served much more profitably as well. So that's like two areas at least that came to mind in terms of the other side of the trade where perhaps trying to talk down the power constraint issue so that new supply doesn't enter the market and you have to continue to raise your prices. That also another area would be like, just think about that, it's not loud. Now, is the natural gas EMPs also as well, right? If everyone just chasing this glut, then you probably bring on more production that actually keeps a lid on your prices when you want prices to be rising. So I think the way to think about this one is who benefits from a rising input price to their business models. And they're probably in the camp of talking down expectations, right?
- [30:48]
Shayel Khan
That's kind of where I guess of those three groups, I think the ipps and the natural gas E and P companies are kind of aligned, right? They both benefit from high prices of their commodity. So they don't want a ton of new capacity to get built. That's just good for them. The LNG folks are on the other side of that trade, right? They're buying the natural gas that gets produced and selling into another market. So they don't, they don't want prices to rise, they do want more production. They want as much drilling as possible, right? And so then the ARB gets bigger. So for them, again, this is complicated theory, but like, but you know, with the LNG players, you'd think they'd want to say, oh, it's a, you know, they should be telling you that we're talking about the power bottleneck where it's actually a natural gas bottleneck. We need to be drilling so so much more. And if that happens, then it keeps their prices low and keeps their are big.
- [31:38]
Shanu Matthew
So that's a really interesting point though, right? Because like yes, they want natural gas production to be high because that means low. But they also don't want local sources of demand to accelerate because that means you have a lot more willing buyers in this case gas power plants. Right. So if a bunch of CCGs go up, then all of a sudden you have a local buyer that's willing to pay a premium price, that raises the input price for them. They want to buy cheap nat gas. But all of a sudden if you have local demand that goes incredibly higher, you're competing with another source and producer might be able to go to somewhere else versus you and that impacts your ability to serve your contracts on a longer term time horizon. So it is complicated. As you start to peel the onions, the layers of the onion back, you start to see all this. There is general incentives for and against within all these pockets. But it is just like it's hard to parse out without going through these exercises like who benefits in what market and that's the rule or the role that investors play. Right. Is we're generally trying to underwrite the range of scenarios, good, bad, neutral and then probability weight, what's most likely to happen.
- [32:38]
Shayel Khan
Maybe taking a step back, I guess just to wrap it up, it seems clear to me that this narrative, this general narrative of the power bottleneck has taken hold substantially over the past. I don't know, you tell me. But 12, 18 months, something like that is when it's really taken hold. How would you describe that, the sentiment around that narrative today? And like have you seen it changing at all? Is it, is the fervor growing right now? Like where are we in the trajectory of people talking about this problem?
- [33:11]
Shanu Matthew
Yeah, I'd characterize it at a high level. The last one or two years was really just getting our heads around the issue. What's the source of this demand? How strong is it? And that's largely driven by GPUs and say, all right, we need the latest and greatest to train our models. Scaling laws hold. That means we can justify more investment and we'll continue to perpetuate the cycle. I think what it turned into recently now is folks are getting into that ROIC question is all the dollars that we're spending, which is on the order of half a trillion dollars now a year, is that generating positive roic? And that question mandates, are they generating revenue and dollars from it? And so that moves you upstream to, okay, are folks actually doing that? And then that leads to the area where there's the question of, if I had more supply, could I generate more dollars? And would the ROIC on each of those dollars be positive? And that's the part that we're at right now, is what is the real constraint here? If you talk to a lot of the providers that sell AI solutions, it's because we don't have enough powered shells or power to get more supply online and be able to generate more dollars. But I think that's the real question is said another way. If we had unlimited power, unlimited constraints now that were all solved, would the AI trajectory still be as strong as it is today? And that's the question that we're getting into, is like, which constraints of these are solvable? And if those constraints are relieved, does the cycle perpetuate positive for that player or negative? And I think right now, as folks are trying to answer that question, and that's why you see kind of the gyrations that you do in the market every other day, right? Where, for example, a lot of the AI power trade, or AI plumbing trade, whatever you want to call it, for physical infrastructure has done tremendously well for the last few years. I think folks oftentimes think about it as just Nvidia. But the names, like a lot of the companies that we talked about earlier, like the EPCs, the MEP subcontractors, the networking and optical connectivity equipment, the switch gears, the circuit breakers, the transformers, the chillers, all these people have benefited. And so now it's just about the durability of those constraints, because that's ultimately what you're trading on now is like the two, three, four years outward. Can they actually grow into what the valuations have grown to.
- [35:11]
Shayel Khan
All right, Shani, this was fun. Thank you for helping me think through all the complicated incentives that are out there, mainly to just talk about how big a problem power is. But we'll have you back on when things take a turn, as they inevitably will.
- [35:23]
Shanu Matthew
Yeah, it'll be fun to tag along and we'll see what happens here. And the narratives are always constantly changing, and the market's giving new opportunities to new narratives. So let's circle back here in a year or two and see where we landed.
- [35:35]
Shayel Khan
Shanu Matthew is a senior vice president and portfolio manager for US Sustainable Equity at Lazard this show is a production of Latitude Media. You can head over to latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. This episode was produced by Daniel Waldorf. Mixing and theme song by Sean Marquand. Stephen Lacy is our executive editor. I'm Shayael Khan and this is Catalyst.