Investing in the Electrification Megacycle

AI and reindustrialization are accelerating power demand, igniting $7 trillion in upgrade and new investment across the electrification value chain. Investing in companies that are positioned to benefit from the electrification megacycle has the potential to be a significant opportunity for the coming decade.

Key Takeaways:

• AI and reindustrialization are accelerating power demand, that is set to grow for the first time in decades.
• Demand will soon outstrip supply igniting an estimated $7 trillion investment cycle.
• This transformative trend will impact the entire electrification value chain, from new generation, including the revival of nuclear power, to the critical upgrading of transmission and distribution infrastructure.
• Investing in electrification isn’t simply about utilities or industrial sectors but requires careful analysis of the trend’s beneficiaries.
• The Tema Electrification ETF (VOLT) is the first of its kind fund investing in companies that are positioned to benefit from the electrification megacycle.
  
  

What Is Electrification?

Electrification is a broad term encompassing everything related to powering devices or systems with electricity. It spans generation of power, transmission and distribution of this electricity and its uses. In investment terms it incorporates companies involved in this value chain, from producers of power, to those making equipment and providing services.

Source: Tema schematic

Power Demand

For a decade, US electricity demand did not grow, as higher economic activity was offset by efficiency gains. This is about to change. Major forces such as the rise of AI data centers, electric vehicle penetration, digitization and US reindustrialization are for the first time leading to growth in electricity demand.

US power demand (2010 – 2040)Source: McKinsey, Energy Solutions Global Energy Perspective 2023, EIA AEO 2023

Artificial Intelligence

The largest constraint on the scaling of artificial intelligence is power. The arms race for AI is leading to a vast build out of datacenters – with nearly $1 trillion being invested in the next five years. These data centers consume a lot of power – both for computing equipment and cooling. The energy efficiency of data centers, as measured by Power Usage Effectiveness (PUE), has plateaued adding to the constraint on electricity.

Average PUE of Large Data Centers

Average response of 567 survey respondents to
“What is the PUE of your largest data center?”Source: Uptime Institute

AI data centers are even more power hungry. A Chat GPT query uses 7x more power than a Google search.

Energy consumption per hour:
Google Search vs GPT vs LED Bulb

Source: Medium, "Is ChatGPT the next energy guzzler"

Together, this means that data centers alone will account for 8% of US power demand by 2030, nearly triple their use today. Data centers also need a lot of electrical equipment, from wiring to uninterrupted power supply (UPS), leading to strong demand for the companies that supply them.

Power demand from data centers (2015-2030)

Source: Masanet et al. (2020), Cisco, IEA, Goldman Sachs Research

The demand for power is so great that major AI cloud firms are contracting direct power hook ups for their data centers from power stations. This is called co-location. Talen Energy sold its “Cumulus Datacenter Park” to Amazon Web Services, so that the latter could be directly hooked up to Talens 2.5 GW nuclear plant along the Susquehanna river. Microsoft went as far as signing an agreement with Constellation Energy to restart the Three-Mile Island reactor to connect directly to their data centers.

Electric Vehicles

Electricity is also replacing other energy sources, most clearly in transportation fuels. As a sub-trend electric vehicles have had a rocky start, reliant on regulation and subsidies, buffered by global trade wars. Despite these setbacks, the direction of travel is clear. It is likely that in the next 10-15 years all new car sales will be electric, creating more demand for electricity. This is driven by the clear cost and environmental benefits of EVs over internal combustion engine cars.

Composition of new car sales (m)

Source: US Bureau of Transportation Statistics, Goldman Sachs Research – Years 2022 and later are projections

Reshoring and Reindustrialization

Industry is also another source of vast electrification demand through two primary vectors. First, the US reshoring trend is leading to a re-industrialization of the US. Construction of new manufacturing facilities is booming.

US manufacturing construction spending ($bn)

Source: FRED, Eaton

Eaton, a provider of electrical equipment, estimates that a typical large reshoring project in the US needs 3-5% of its value spent on electrical equipment and there are several hindered projects announced already representing nearly $1.3tn bn of investment.

Second, new factories also use modern automation and robotics, effectively replacing other sources of power with electricity. Schneider, a digital automation and energy management company, estimates that 80% of energy for industry will come from electricity by 2050.

Energy Supply Gap

Rising energy demand is expected to outstrip supply as soon as 2025. Both US utility regulators (PJM and ERCOT) estimate that demand growth and power plant retirements will lead to a 40 GW supply gap by 2030. To put that in perspective, 1 GW is equivalent to a brand new nuclear power plant or three conventional gas fired plants.

Supply/demand balance in US electricity

Notes: Demand forecast is an aggregate of multiple industry forecasts; historical numbers and generation forecast based on EIA data; historical gap between energy generation and consumption necessary to ensure sufficient load that accounts for some energy loss in transmission. Sources: EIA 2023–2025 Short-Term Energy Outlook (May 2024); EIA 2025–2028 Energy Outlook (March 2023); ISO reports (H2 2023 – H1 2024); FERC; Grid Strategies; Goldman Sachs and Bank of America analyst forecasts (April 2024); Bain analysis

Investing in Electricity Infrastructure

To meet increased demand Goldman Sachs estimates that nearly $7 trillion of investment is required across the electrification value chain – from generation, transmission, and distribution. This is creating some of the most exciting investment opportunities in the market today.

Generation

New power plants will need to be built to meet demand and replace existing, less clean sources. Renewable energy should continue to take share. New solar and wind projects will come online creating generation capacity that is highly variable. Storage and other types of grid management products will be needed to balance new intermittent supply.

Power generation by renewable energy source

Source: State policy scenario, 2010-2035, IEA 2024 World Energy Outlook

The Best Way to Invest in Nuclear Energy

One of the more  compelling parts of electrification is the nuclear renaissance. Nuclear power in the 1980s and 90s was burdened by the “not in my backyard” or NIMBY movement.  Nuclear accidents are infrequent but when they happen, they have devasting effects on lives and the environment as evidenced by melt downs at Three Mile Island in the US, Fukushima in Japan and Chernobyl in the Soviet Union.
 
The resulting anti-nuclear movement has meant nuclear power, as a component of global energy supply, decreased to 10% presently from 17% in 1996 . The current need for power has led to a resurgence of interest in using existing nuclear assets or recommissioning mothballed reactors. Nuclear has the advantage of being a stable and clean source of power.

The Biden Administration unveiled plans to triple nuclear power capacity by 2050, deploying 200 gigawatts of nuclear energy capacity. This is expected to come from building new reactors, upgrading existing facilities and restarting mothballed plants. A recent example is the Palisades nuclear power plant in Michigan, expected to restart by October 2025 following $2.8bn of government investment. The incoming Trump administration has telegraphed even more support for nuclear to supply electricity to data centers and factories. Nuclear power enjoys bipartisan support, following the enactment in July 2024 of the new powers for the US Nuclear Regulatory Commission to regulate everything from new technologies and fuels.

Aside from existing large scale nuclear reactors, technology has accelerated the development of smaller modular reactors (SMRs). SMRs are safer to operate, take up less real estate, and, most importantly, they can be turned on and off unlike conventional reactors. Companies like Okla, backed by Open AI pioneer Sam Altman, are building fast fission reactors that can generate 15 MW of power for a decade without refueling.
 
Moreover, while SMRs generate much less power than conventional large reactors do, they take less time to build and cost less to operate. Prototype SMR’s are being constructed and developed by Terra Power, founded by Microsoft founder, Bill Gates and NuScale (SMR), a subsidiary of Fluor. While commercial availability of SMR units is not expected for 10 years, the amount of investment and intellectual capital being committed in this area is likely to shrink this window. 

Energy Transmission and Energy Distribution

Even if generation capacity is increased there is a huge need to upgrade and improve infrastructure. New capacity will depend heavily on the availability of traditional, large-scale grid infrastructure — including transmission and distribution networks, switching stations, and transformers. The US grid is 40 years old. Investment is needed to modernize the grid, both before the meter and after the meter. Researchers at Princeton University estimate that In the United States, the electricity transmission system will need to expand by more than 60 percent by 2030.

The average age of regional power grids

Source: Nexans Presentation

Nexans, the global power transmission leader, estimates that 60% of transmission lines have exceeded their life expectancy. To meet demand, there is a critical need for a complete overhaul and acceleration of the of the typical ten-year capital project timeline.  We are looking at a century of work to do in less than a decade as the existing regional grids around the US have been cobbled together over several decades. The demand for investment vastly outpaces the industry’s speed and capacity to build, creating a positive backdrop for companies operating in this space. ABB, the global leader in medium voltage transformers, continues to signal it is sold out for the next two years.

Exploring Investment Opportunities in Electrification

Electrification is a broad trend benefitting multiple sectors from utilities to industrials. To get precise exposure to electrification requires a more targeted approach. Why? First, expert analysis is needed to dissect the landscape of firms to identify true electrification stocks. Second, the cross-sector nature of the electrification megacycle means analysis is needed to uncover “under the radar”  companies that stand to benefit.

Is There an Electrification ETF?

The Tema Electrification ETF (VOLT) is the first ETF solely focused on the electrification trend. VOLT seeks to provide long-term growth by investing in companies that are positioned to benefit from the electrification megacycle.

The Companies Benefitting from Electrification, and the Investment Opportunities They Present

The investment universe of electrification companies spans about 2,000 companies with a combined $5 trillion of market cap. VOLT seeks to invest in companies across three major areas – generation, including conventional and renewable power, grid management, both before and after the meter, and end-use products and services.

Why Should I Consider Investing in the Tema Electrification ETF in the Current Environment?

Meeting the oncoming wave of electricity demand will require an enormous increase in capital spending on both new generation capacity and the electric grid, all of which need to be delivered at an unprecedented pace. The accelerated time frame to implement this investment will likely be front loaded over the next decade and necessitate both public and private participation yielding attractive returns for companies and investors alike. The electrification trend is underpinned by already existing mega trends such as reshoring, AI, and energy transition.

What are the Risks Investing in Electrification?

There are several risks for investors to consider:
Regulation – Utilities as an industry are highly regulated. An example of this are rate cases where regulators determine the rate increases utilities can put in place to compensate for capital expenditure. There are currently 63 rate cases outstanding in the US. Utility capex is an important driver of the electrification trend.
Political risk – political change can impact the nature of electrification. For example whether green energy or fossil fuels are prioritized, will impact relative stock performance.

Bottom Line

Electrification, as an important secular trend and derivative of high growth disruptive innovation including AI and digitalization, is one of the most exciting investment opportunities.

Some of companies mentioned are holdings of the Tema Electrification ETF (VOLT). For a full up-to-date list of holdings, please visit www.temaetfs.com/volt. Subject to change.