Gas, power and AI’s role in the new age of energy addition
Gas, power and AI’s role in the new age of energy addition
Energy CEOs are reportedly stating that the previous narrative of a managed energy transition from fossil fuels to a cleaner system is no longer valid. Instead, they suggest a new era of "energy addition" where fossil fuels continue to play a significant role alongside renewable sources. This shift is potentially driven by factors such as the increasing energy demands of artificial intelligence and a renewed focus on energy security. (source: aljazeera.com)
Context & What Changed
The prevailing global energy paradigm for the past two decades has largely centered on a 'managed energy transition,' aiming for a systematic shift from fossil fuels to renewable energy sources to mitigate climate change. This framework, championed by international bodies like the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC), envisioned a gradual but determined phase-out of coal, oil, and natural gas, replaced by solar, wind, hydro, and other low-carbon technologies (source: iea.org, ipcc.ch). Policy instruments such as carbon pricing, renewable energy mandates, and fossil fuel subsidy reforms were designed to accelerate this transition, with significant public and private investment directed towards decarbonization. Infrastructure planning, regulatory frameworks, and public finance strategies were increasingly aligned with this long-term decarbonization trajectory.
The recent declaration by energy CEOs, as reported, suggests a fundamental re-evaluation of this narrative, positing that the era of a 'managed energy transition' is 'over' (source: aljazeera.com). Instead, a new paradigm of 'energy addition' is emerging. This concept implies that global energy demand, driven by factors such as economic growth, industrialization in developing nations, and critically, the burgeoning energy requirements of artificial intelligence (AI) and digital infrastructure, will necessitate the expansion of all energy sources. Under this 'addition' model, fossil fuels would not be phased out but would continue to play a significant, perhaps even growing, role alongside an expanding renewable energy sector. This shift is not merely an incremental adjustment but a potential strategic pivot, acknowledging the complexities of energy security, economic development, and the unforeseen demands of new technologies.
Key factors contributing to this potential shift include: (1) Geopolitical Instability and Energy Security: Recent global events have underscored the fragility of energy supply chains and the strategic importance of diversified, reliable energy sources, leading many nations to prioritize energy security over rapid decarbonization (source: imf.org). (2) Economic Growth and Industrialization: Developing economies continue to require vast amounts of affordable and reliable energy to lift populations out of poverty and fuel industrial expansion, often relying on readily available fossil fuels. (3) Intermittency and Grid Stability: The rapid integration of variable renewable energy sources (solar, wind) has exposed challenges in grid stability, requiring significant investment in grid modernization, energy storage, and reliable baseload power, often still provided by natural gas or nuclear. (4) The Rise of AI: The computational demands of AI, large language models, and data centers are projected to consume unprecedented amounts of electricity. Training and operating advanced AI models require immense processing power, translating directly into substantial energy consumption by data centers globally. This new, rapidly escalating demand adds a significant layer of complexity to energy planning, potentially pushing overall demand higher than previously anticipated (source: aljazeera.com).
Stakeholders
This potential paradigm shift profoundly impacts a diverse array of stakeholders:
Governments and Policymakers: National and sub-national governments face the immediate challenge of reconciling ambitious climate targets (e.g., Paris Agreement commitments) with the realities of energy security, economic competitiveness, and the new 'energy addition' narrative. This includes ministries of energy, environment, finance, and economic development. Policy frameworks related to carbon pricing, renewable energy incentives, fossil fuel regulation, and international climate diplomacy will require re-evaluation. Public finance decisions regarding subsidies, infrastructure investment, and sovereign debt will be directly affected.
Energy Companies: This includes International Oil Companies (IOCs), National Oil Companies (NOCs), independent power producers, utilities, and renewable energy developers. IOCs and NOCs may see a longer runway for their fossil fuel assets, potentially shifting investment strategies towards natural gas, carbon capture, utilization, and storage (CCUS) technologies, and hydrogen production from fossil fuels. Utilities will face increased pressure to ensure grid stability and reliability while managing a more complex energy mix. Renewable energy developers may see continued growth but within a broader, more competitive energy landscape.
Infrastructure Developers and Operators: Entities involved in building and maintaining energy infrastructure—such as grid operators, pipeline companies, LNG terminal developers, and data center builders—will experience significant shifts. Investment in gas infrastructure (pipelines, import/export terminals) may see renewed interest, while grid modernization and expansion to accommodate both growing demand and a diverse energy mix become paramount. The rapid build-out of data centers will necessitate new, dedicated energy supply infrastructure.
Public Finance Institutions: Sovereign wealth funds, national development banks, pension funds, and multilateral development banks (MDBs) will need to reassess their investment portfolios and lending criteria. Decisions on financing fossil fuel projects versus renewable energy projects, green bonds, and climate-resilient infrastructure will be directly influenced by the evolving energy narrative. The risk of stranded assets, both in fossil fuel investments and potentially in less resilient renewable projects, will need careful management.
Large-Cap Industry Actors: Industries with high energy consumption, such as manufacturing, heavy industry (steel, cement, chemicals), and increasingly, the technology sector (especially those building and operating AI infrastructure), will be directly impacted. Energy costs, security of supply, and the carbon footprint of their operations will remain critical concerns. Tech giants, in particular, will face pressure to power their energy-intensive AI operations with sustainable sources, potentially driving significant private investment in renewable energy projects or advanced nuclear solutions.
Consumers and the Public: Energy prices, reliability of supply, and environmental quality will remain key concerns. Public acceptance of different energy sources, particularly fossil fuels and nuclear power, will be crucial for policy implementation. The social equity implications of energy costs and access will also be significant.
Evidence & Data
The claim by energy CEOs of a shift to 'energy addition' is supported by several observable trends and projections, though the extent of the shift remains subject to debate among experts:
Global Energy Demand Growth: The IEA's World Energy Outlook consistently projects continued growth in global energy demand, particularly in non-OECD countries, driven by population growth, urbanization, and economic development (source: iea.org). While renewables are growing rapidly, they often struggle to meet the entirety of this new demand, leading to continued reliance on fossil fuels. For instance, global electricity demand is projected to grow significantly, with some estimates suggesting a substantial portion of this growth will come from emerging economies (source: iea.org).
AI's Energy Footprint: The energy consumption of AI is a rapidly escalating concern. Training a single large language model can consume as much electricity as multiple homes in a year, and the operational energy for inference (using the models) is even higher at scale. Data centers, which house AI infrastructure, already account for a significant and growing share of global electricity consumption, estimated to be around 1-1.5% globally (source: iea.org, author's assumption based on general industry reports). Projections indicate that this share could double or triple by the end of the decade, potentially reaching 4-6% of global electricity demand, driven largely by AI (author's assumption based on industry projections). This immense demand creates pressure for new, reliable, and often dispatchable energy sources.
Investment Trends: While investment in renewable energy has surged, reaching record levels, investment in fossil fuels, particularly natural gas, has also remained substantial. In 2023, global clean energy investment reached approximately $1.8 trillion, but fossil fuel investment also exceeded $1.1 trillion (source: iea.org). This dual investment trend supports the 'addition' narrative, indicating that capital is flowing into both traditional and new energy sources.
Natural Gas as a 'Bridge Fuel': Natural gas has long been considered a 'bridge fuel' in the energy transition due to its lower carbon emissions compared to coal and its flexibility for power generation. The 'energy addition' narrative suggests this 'bridge' may be significantly longer or even become a permanent part of the energy mix, especially with advancements in CCUS technologies. Global natural gas demand is projected to remain robust, particularly for industrial use and power generation (source: iea.org).
Grid Stability Challenges: The integration of high shares of intermittent renewables (solar, wind) into electricity grids has highlighted challenges related to stability, reliability, and transmission infrastructure. Many grids require significant upgrades and flexible generation capacity (often gas-fired power plants or advanced storage solutions) to maintain balance. This operational reality often necessitates the continued presence of dispatchable power sources, which currently include a significant fossil fuel component. (source: iea.org).
Scenarios
Three plausible scenarios emerge from this evolving energy narrative, each with distinct implications:
1. Scenario 1: Persistent Addition (Probability: 55%)
Description: The 'energy addition' narrative gains widespread acceptance among policymakers and industry. Global energy demand continues to grow robustly, driven by economic development and AI. Fossil fuels, particularly natural gas, maintain a significant share of the energy mix, with increased investment in CCUS and other emissions reduction technologies for these sources. Renewable energy deployment also continues to accelerate, but overall demand growth means both expand. Energy security and affordability become primary policy drivers, potentially leading to a slower pace of absolute decarbonization but a focus on 'decarbonizing growth.'
Implications: Sustained investment in gas infrastructure, CCUS, and grid modernization. Public finance institutions may re-evaluate restrictions on fossil fuel financing, emphasizing emissions intensity rather than outright exclusion. Large-cap energy companies with diversified portfolios are well-positioned. Climate targets may be met through technological solutions rather than demand reduction or immediate fossil fuel phase-out.
2. Scenario 2: Accelerated Transition with Resilience (Probability: 35%)
Description: The initial shift to 'energy addition' is recognized as a temporary response to immediate energy security and demand pressures. While fossil fuels may see a short-term resurgence, sustained policy pressure, rapid technological advancements (e.g., long-duration energy storage, advanced nuclear, green hydrogen at scale), and significant public and private investment accelerate the energy transition. The focus remains on decarbonization, but with an explicit and robust emphasis on grid resilience, energy security, and affordability. AI's energy demand is met predominantly by new, dedicated renewable or nuclear capacity.
Implications: Massive investment in next-generation clean energy technologies and grid infrastructure. Public finance strongly prioritizes green investments. Fossil fuel companies face renewed pressure to diversify or risk stranded assets. Policy frameworks become more agile, adapting to rapid technological change while maintaining climate ambition.
3. Scenario 3: Stagnant Transition, High Volatility (Probability: 10%)
Description: A lack of clear, consistent policy direction emerges, caught between conflicting narratives of 'transition' and 'addition.' This leads to underinvestment in both fossil fuel infrastructure (due to transition fears) and renewable energy (due to perceived grid challenges or insufficient incentives). Energy demand continues to rise, exacerbated by AI, resulting in chronic energy shortages, extreme price volatility, and increased geopolitical competition for limited resources. Climate goals are largely missed, and economic growth is hampered by unreliable and expensive energy.
Implications: Significant economic instability, increased inflation, and potential social unrest. Public finance institutions face high risks of stranded assets across the energy spectrum. Large-cap industry actors struggle with energy supply and cost certainty, impacting profitability and investment decisions. Infrastructure development becomes fragmented and reactive.
Timelines
Short-term (0-2 years): Immediate policy re-evaluation in response to energy security concerns and AI demand. Investment decisions for new gas infrastructure (e.g., LNG terminals, pipelines) and data center energy supply will be critical. Regulatory bodies may expedite permitting for certain energy projects. Public finance institutions will face pressure to adapt investment criteria.
Medium-term (3-10 years): Significant infrastructure development will occur, reflecting the chosen energy pathway. This includes large-scale renewable energy projects, grid modernization, potential CCUS deployment, and new data center campuses. Energy markets may undergo restructuring to accommodate a more diversified and complex energy mix. Technology adoption, particularly in AI and energy storage, will accelerate.
Long-term (10+ years): The global energy mix will have substantially evolved, with the long-term implications for climate change becoming clearer. The success or failure of meeting climate targets will largely depend on the strategies adopted in the medium term. The role of AI in both energy demand and potentially in optimizing energy systems will be fully realized.
Quantified Ranges
While precise future figures are subject to scenario-based assumptions, several ranges illustrate the scale of impact:
Global Electricity Demand Growth: Projections suggest global electricity demand could increase by 50-60% by 2050 under current policies, with AI potentially adding 10-20% to this growth in the next decade alone (author's assumption based on IEA and industry forecasts). This translates to an additional 2,000-4,000 TWh of electricity demand specifically from AI and data centers by 2030 (author's assumption).
Investment Needs: Trillions of dollars will be required for energy infrastructure globally. The IEA estimates that annual clean energy investment needs to reach over $4.5 trillion by 2030 to meet climate goals, but significant additional investment will be needed for grid resilience, fossil fuel infrastructure (if the 'addition' scenario prevails), and AI-specific energy supply (source: iea.org).
Carbon Emissions: Under a 'Persistent Addition' scenario, global CO2 emissions may plateau or decline more slowly than required to meet the 1.5°C target, potentially leading to a 2.0-2.5°C warming pathway. Under an 'Accelerated Transition' scenario, the 1.5°C target remains within reach, albeit with significant effort and innovation (source: ipcc.ch, author's assumption).
Risks & Mitigations
Risks:
Failure to Meet Climate Goals: A prolonged 'energy addition' approach without aggressive decarbonization of fossil fuels (e.g., through CCUS) risks exceeding global carbon budgets and accelerating climate change impacts (source: ipcc.ch).
Energy Price Volatility: A complex and potentially fragmented energy mix, coupled with geopolitical instability, could lead to continued high energy price volatility, impacting consumers and industrial competitiveness.
Geopolitical Instability: Increased competition for fossil fuel resources or critical minerals for renewables could exacerbate international tensions.
Stranded Assets: Both fossil fuel assets (if a rapid transition eventually occurs) and poorly planned renewable projects (if grid integration fails) face the risk of becoming economically unviable.
Grid Instability and Blackouts: Inadequate investment in grid modernization and energy storage, especially with growing intermittent renewables and surging AI demand, could lead to increased grid instability and power outages.
Public Backlash: Discrepancies between climate commitments and energy realities could lead to public distrust and opposition to energy policies.
Mitigations:
Diversified Energy Mix: Strategically investing in a broad portfolio of energy sources, including renewables, natural gas (with CCUS), nuclear, and advanced storage, to enhance energy security and resilience.
Investment in Grid Modernization: Prioritizing significant public and private investment in smart grids, transmission infrastructure, and distributed energy resources to manage a complex energy mix and accommodate new demand from AI.
R&D and Deployment of Decarbonization Technologies: Accelerating research, development, and commercial deployment of CCUS, green hydrogen, advanced nuclear reactors, and long-duration energy storage to enable decarbonization across all energy sources.
Robust Carbon Pricing Mechanisms: Implementing or strengthening carbon pricing mechanisms (e.g., carbon taxes, cap-and-trade) to internalize the cost of emissions, incentivize cleaner technologies, and generate revenue for public finance.
International Cooperation: Fostering global collaboration on energy security, technology transfer, and climate policy to ensure a coordinated and effective response to global energy challenges.
Demand-Side Management and Efficiency: Implementing policies and technologies that promote energy efficiency across all sectors, including industrial processes, buildings, and data centers, to manage overall demand growth.
Sector/Region Impacts
Energy Sector: Oil and gas companies may re-evaluate divestment strategies, potentially increasing investment in natural gas production, LNG infrastructure, and CCUS projects. Utilities will face immense pressure to balance reliability, affordability, and sustainability, necessitating significant grid upgrades and a flexible generation portfolio. Renewable energy developers will continue to see growth, but potentially with greater competition from other energy sources and a stronger emphasis on firm, dispatchable power solutions.
Heavy Industry and Manufacturing: These sectors, which are highly energy-intensive, will prioritize secure and affordable energy supply. This could lead to increased investment in on-site generation (e.g., gas-fired cogeneration, small modular reactors), energy efficiency improvements, and potentially the adoption of CCUS or hydrogen for industrial processes.
Technology and Data Centers: The tech sector, particularly companies involved in AI, will become a major driver of electricity demand. This will create pressure for these companies to secure vast amounts of clean, reliable power, potentially leading to direct investment in renewable energy projects, power purchase agreements, and even the development of dedicated energy infrastructure for their data centers. The location of new data centers will increasingly be dictated by access to abundant and affordable power.
Public Finance: Governments will need to reassess energy subsidy programs, carbon tax revenues, and infrastructure funding models. There may be renewed debate over public financing for fossil fuel projects, particularly those paired with CCUS. Sovereign wealth funds and pension funds will need to navigate complex investment decisions, balancing financial returns with climate risk and energy security mandates.
Regions: Energy-exporting nations (e.g., Middle East, North America) may see sustained demand for their fossil fuel resources, potentially extending their revenue streams and allowing for greater investment in diversification. Energy-importing nations (e.g., Europe, parts of Asia) will intensify efforts to diversify supply sources and enhance energy independence, potentially through a mix of domestic renewables, nuclear, and diversified fossil fuel imports. Developing economies will face the critical challenge of balancing rapid economic growth and energy access with environmental sustainability, potentially relying on a pragmatic mix of all available energy sources.
Recommendations & Outlook
For STÆR's clients—ministers, agency heads, CFOs, and boards—the shift towards an 'energy addition' narrative necessitates a strategic recalibration of long-term plans. We recommend the following actions:
1. Develop Integrated Energy Strategies: Governments and large-cap energy actors should move beyond siloed planning for renewables or fossil fuels. Instead, adopt holistic energy strategies that integrate all available sources, focusing on energy security, affordability, and emissions reduction through technology. This requires robust scenario planning that accounts for varying rates of demand growth and technological advancement.
2. Prioritize Grid Modernization and Resilience: Significant investment in smart grid technologies, transmission infrastructure, and diverse energy storage solutions is paramount. This will ensure grid stability and reliability, which are critical for integrating intermittent renewables and meeting the surging demands of digitalization and AI.
3. Invest in Decarbonization Technologies for All Energy Sources: For fossil fuels, this means accelerating R&D and deployment of Carbon Capture, Utilization, and Storage (CCUS). For renewables, it means investing in long-duration storage and grid-friendly integration solutions. For nuclear, it means supporting advanced reactor technologies. Public finance mechanisms should incentivize these technologies across the board.
4. Re-evaluate Public Finance Frameworks: Public finance institutions should review their investment policies to ensure they are agile enough to support a diversified energy portfolio that balances climate goals with energy security. This may involve developing new financing instruments for hybrid projects (e.g., gas-to-power with CCUS) or for dedicated energy infrastructure for AI data centers.
5. Foster International Collaboration on Energy Security: Given the global nature of energy markets and climate change, international cooperation on energy supply diversification, technology sharing, and harmonized carbon pricing mechanisms will be crucial to manage risks and accelerate sustainable development.
Outlook (scenario-based assumptions): The global energy landscape is likely entering a more pragmatic and multi-faceted era. While the long-term goal of decarbonization remains, the path to achieving it will likely be more complex and less linear than previously envisioned. We anticipate a period of 'energy addition' where both fossil fuels (especially natural gas with CCUS) and renewables expand to meet surging global demand, particularly from AI and industrialization. This will likely lead to a slower overall pace of absolute decarbonization in the short to medium term but with a stronger emphasis on energy security and reliability. The success of this approach in meeting climate targets will hinge on rapid technological advancements in decarbonization and robust policy frameworks that incentivize sustainable growth across all energy vectors. (scenario-based assumption)